Both Health Insurers and Consumers will Cherry Pick under Reform

Published by clickbroker.blogspot.com.

The Washington Post’s “Discrimination by Insurers Likely Even With Reform, Experts Say” subtitled “Economic Pressure Could Give Rise to New Biases Against Prior Conditions” sites many distinguished academics warning of cherry picking continuing under health reform. The professors predict that private insurers will employ a series of creative carrots and sticks to achieve the most favorable risk pool composition within the umbrella of guaranteed issue and no exclusions for preexisting conditions. I will argue that these practices might actually benefit the astute consumer.

Insurers are currently paid between approximately $800 and $2000 per month for Medicare Advantage seniors according to discussions in the recent Senate Finance Committee healthcare markup. Insurers are reimbursed the most for chronically ill seniors, but they cannot turn any senior away. The insurers maintain profitability charging a premium seniors are willing to pay by maximizing reimbursements and minimizing their actuarial risk. Humana (HUM) said during its most recent earnings call that they have to do a better job of identifying seniors in their risk pools that qualify for higher government reimbursements.

The professors predict that by offering gym memberships and limiting network doctors that specialize in high cost oncology and cardiology, insurers are able to encourage and discourage participants in their risk pools. In Florida, all Medicare Advantage recruitment events are in drive-to locations. The insurers never visit senior communities or nursing homes. The insurers recruitment skills honed in Medicare Advantage will now be applied to the general public.

The key to survival of the private insurers is to create generally affordable products and avoid or limit high cost consumers. If their risk pools are too high, the premiums will be unaffordable. So even though the goal of healthcare reform is to spread risk, the goal of the insurers is still to segregate risk. Karen Ignagni, president of the insurer lobbying group America’s Health Insurance Plans, is trying to promote a diversity of benefit products to segregate the population into multiple risk pools.

The next step is for the insurers to market to the best risks. This is the most subtle form of cherry picking. The consumer’s job is to buy insurance from the lowest actuarial risk pool and secure the lowest premium. The maximum out of pocket will be held to between $5000 and $6000 per individual and double that for families. But the composition of network providers, deductibles and co-pays will drive the risk pool for each plan.

The premiums within each product can vary by only by age, location and a few other criteria; not the medical condition of applicants. However, there are no limits to premium differential between products. Consumers who were previously either rejected or up-charged for minor infractions such as slightly elevated cholesterol or blood pressure will now be able to buy their way into the lowest risk pools and pay the lowest premiums.

Whether the government tightly controls benefit packages or not, consumers can seek out products marketed to the healthiest applicants. Insurers won’t be able to turn them away. This is where the cat and mouse games begin.

Obviously, lower deductible plans would be more appealing to sicker patients as would more compressive networks. To avoid gaming the system, consumers might be limited to changing products only during open enrollment periods like Medicare and Medicare Advantage. But given that the maximum out of pocket risk would be relatively low in all products, consumers can buy cheap now and switch when they need to.

The biggest risk to consumers is balance billing for out of network providers. This is where an out of network provider charges consumers the difference between their retail rate and whatever the consumer’s insurer chooses to reimburse. A limited network increases the risk of needing such a provider and there are no government plans to limit balance billing. This is why a government option for all based on the Medicare model is best. Medicare forbids balance billing.

I think the insurers will be pretty good at estimating the risk pools of each of their products. But outliers such as a high deductible consumers costing over $100K in medical expenses will exist.

In summary, both sides will be cherry picking. With guaranteed issue consumers are close to but not quite being equal warriors. Let the games begin.

No disclosures.

Sphere: Related Content