Thursday, November 20, 2008

Eight Reasons Why the Health Insurers Are Agreeing to Community Rating & What It Means to Disease Management

Why would the nation’s health insurers - represented by AHIP and Blue Cross Blue Shield - trade an agreement to submit to community rating (i.e. law that would require them to accept all customers) in exchange for a universal mandate (i.e., law requiring everyone to play in the insurance pool or pay a fine or tax)?

As the Disease Management Care Blog understands it, community rating is an actuarial insurance concept. Recall that the purpose of insurance is to ‘transfer risk.” Party A has the risk (of illness, a crushed car fender or a house fire) and pays Party B to assume that risk during a set period of time (a year) in exchange for some money (a premium). In a regulated insurance market, it’s possible to require that the pricing of the risk for any individual be based on the average risk within a large population within a ‘community’ i.e., region or state. Because the risk (and cost) is spread over a larger pool of individuals, the risk/cost is not only smaller per person but more predictable. In health insurance, the few persons with high risk are balanced by a high number of healthy persons. It’s all smoothed out.

Why would insurers be opposed to such a fair minded system? The problem is that while the average price of a health insurance policy in community rated systems is fairly priced at the ‘macro’ community/regional/state level, that’s not how the policies are bought and sold. Instead, the community is broken up into employer-groups and individuals. Some groups/individuals have high risk and some have low risk. This is spread unevenly over counties or an industry. As a result, insurers have a stake in assessing and pricing risk transfer at the level that it is being bought or sold. This is known as ‘experience rating.’ This is what makes selling insurance to persons pre-existing conditions a money loser – even if it is heart breaking and a public relations nightmare.

Why are insurers willing to abandon the certainty and control of experience rating in favor of community rating? The DMCB has several theories:

1. Insurers are betting (remember, these guys know risk) that the income from all persons being forced by play (buy insurance) - rather than pay an onerous tax - will be greater than any losses from community rating. Margins will be lower but millions more will be buying their product.

2. If health care reform passes, community rating is likely to be included anyway. Might as well try to trade rather than have it imposed.

3. Opposing community rating during heightened national scrutiny over health care only worsens the insurers’ already bad image.

4. Community rating only applies to traditional ‘fully insured’ insurance policies. More and more employers are fleeing to self-insured ERISA-protected plans, which, absent their reform also, are immunized against community rating. In that situation, the employer owns the risk, not the insurance company. However, many health insurance companies still provide ‘back office’ functions such as claims processing, network development etc. for a fee. The point is that traditional experience-rated insurance is shrinking anyway and ERISA plan administrative fees will be unaffected.

5. The economy is taking its toll on health insurers too. Growth in the gross domestic product is likely to remain languid for many years. As a result, there will be more unemployed and part-time uninsured, leading to a decreased head count for the insurers. In addition, income from the insurers’ investments of their reserves and surplus will be down. This will add to the stress on their bottom lines, making alternative business plans even more attractive.

6. And, absent any government intervention, who will be forced to continue to buy experience rated insurance policies in the face of an economic downturn? Persons who really need it. On the other hand, persons who are healthy will drop their insurance. Since only persons with high risk will be continue to buy insurance with a decreasing risk pool, the result will be the classic death sprail.

7. Remember administrative costs? Insurers don’t want lay offs any more than any other company. As head count declines, fixed administrative costs will occupy an even bigger part of the total premium. An insurance mandate could reverse that.

8. Last but not least, community rating and the increased regulation that accompanies it will paradoxically assure their short and long term existence in the face of otherwise stressful market forces. Toss in tax credits and other sources of public financing and they’ll be getting the same kind of taxpayer support – though not as obvious – as the banks.

The DMCB has two long term predictions:

1. Smaller insurers will go out of business or be absorbed into larger insurance companies. Community rating is a game of large risk pools numbered in the millions. Community rating in a 20 county area involving a few hundred thousand people is generally not feasible.

2. Innovative approaches to reducing the impact of risk in community rated plans will appear more attractive. Since insurers will no long be able to 'duck' risk with experience rating, they’ll find approaches like disease management to be an important option in managing their book of business. As an aside, if a competing government program doesn’t have disease management, this may be one way for private insurers to reduce their risk 'burden,' ultimately charge a lower premium and stay in business.

No comments: