Tuesday, March 27, 2007

Pay It Now or Pay More Later

It seems like whenever I write about the need for universal health care coverage, a commenter will add a legitimate gripe about the problems with mandating health coverage.

If someone doesn't want it, why should she or he be forced to have it? An answer to that can be found in a LA Times article that appears today.

It's been well documented how some insurance companies -- if state law doesn't preclude it -- will find a way to cancel an individual health policy if that policy starts to get too expensive. In fact, in California, the state's largest insurer, Blue Cross Blue Shield, was recently fined $1 million for unjustifiably canceling the policies held by the chronically ill and those who were pregnant.

Apparently Blue Cross had an entire department dedicated to searching out expensive policies that it could manufacture some loophole -- for instance, claiming applications for coverage were incorrectly filled out -- to justify ending. State regulators in California are in the process of investigating other insurers for similar practices.

But what the LA Times article from today highlights is the somewhat more recent trend of group policies for the self-employed -- often offered through trade associations -- being canceled due to their growing cost.

This is how it happens. The healthier -- often the young -- are encouraged not to participate in the association health plan and instead either get cheaper bare bones coverage on their own in the individual policy market or opt for no coverage at all.

That leaves the less healthy and unhealthy -- often older people and families -- in the association health plan. But since the healthy are no longer there to disburse the risk, the policy costs skyrocket to the point that it becomes unaffordable for the participants and/or not profitable enough for the insurer.

And once on the individual policy market, the less healthy face an uphill battle in getting coverage that could be considered affordable, while the unhealthy have virtually no shot at all.

Targeting the healthy is a conscious trend in the insurance market across the country that mirrors the conscious trend by payers to cater to those who have insurance. And at the crux of those trends is the core of the growing American health care crisis.

A recent Journal Sentinel article highlighted a similar trend taking place here in Wisconsin. As older, and thereby more risky to insure, people have found themselves booted from group coverage, they discovered how much the individual policy market isn't designed for them these days.

This is one of the major problems with the Bush health care tax proposal (I discuss the other in the update of this post). By instituting a $15,000 standard deduction, it encourages the healthy to either get a cheap bare bones policy or leave the insurance market altogether and net the entire value of the deduction. This, of course, works to centralize the risks and the costs on the less healthy and unhealthy who are left in the insurance market.

The only way to keep policy costs down is to disburse the risk amongst the healthy, less healthy, and unhealthy. And the more you group these populations together, the more the risk is disbursed and the flatter the costs become.

And while it may not seem right to some observers that healthy individuals are forced into plans for the purpose of disbursing risk and flattening costs, the fact is it's worse to let a growing segment of the less healthy and unhealthy population languish without access to affordable health care.

What's more, while a cheap bare bones policy or no policy at all may seem advantageous to the healthy while they're, well, healthy, the reality is that the vast majority of the population will not always be healthy (or have dependents who are always healthy).

By participating in the system while they're healthy, they're ensuring that they'll be able to continue participating in an affordable system when they or one of their dependents are not so healthy.


Side-Note: I should add that it seems reasonable to allow for a religious waiver for those whose beliefs are not in line with the use of modern medicine. Of course, it's assumed that these people wouldn't want to participate whether they were healthy, less healthy, or unhealthy.

Also, for those concerned that the healthy will be helping those who are less healthy and unhealthy because the latter two groups didn't take care of themselves, there are ways to implement a universal system that uses risk pooling and has significant financial incentives for staying as healthy as possible.

The Wisconsin Health Plan, for instance, is designed in a way that pools everyone together in the same private health plans, but the out-of-pocket costs that are incurred after a certain amount of coverage ($500 for adults) would encourage healthy behaviors.

The out-of-pocket annual maximum for families would be $3000 -- or $250 per month -- which is enough to encourage people to be as healthy as possible without making care unaffordable for those who need it (state assistance would be available for the poor).



Blogger Dad29 said...

"Chronically pregnant"???

I think I know what you mean...

March 27, 2007  
Blogger Seth Zlotocha said...

Chronically ill and pregnant policyholders. I suppose you could read that to mean both conditions combined as opposed to one or the other.

I made a change...hopefully it's more clear now. Thanks for pointing it out.

March 27, 2007  
Anonymous m.z. forrest said...

Selection bias is the short term to describe what you are saying. I'll probably do my own post on it to flesh out the details, but I think part of the issue is the insistence of treating this as an insurance issue. In reality what we are seeing is a subsidization problem. The allocation of the subsidy is the greater problem. In short, chronic care is not really an insurable event. Throughout a person's life, the odds of them having a $25000+ health event are certain. In the most troubling portion of private sector coverage, those aged 50-60, the odds are significantly greater than in other privately insured demographics. In essence, younger insureds are asked to prepay for future health services, but this doesn't happen. They subsidize elder care. There isn't anything wrong with this per se, but it isn't insurance.

It is much like tuition. Artificial demand is created when subsidization is present. (Not new demand necessarily, just more expensive demand.)

March 27, 2007  
Blogger Seth Zlotocha said...

Call it whatever you want, but the fact is risk pooling is an essential component of any successful universal care plan. And you can't have viable risk pooling without somehow making sure the healthy don't leave the pool.

And while the old tend to have more health problems, young people -- along with the children of young people -- can also have significantly costly health issues. A complicated pregnancy is one example, and juvenile diabetes is another. And many of these health issues can come out of nowhere for young people and their families.

March 27, 2007  
Anonymous Terence said...

Good afternoon Seth.
You wrote: "...will find a way to cancel an individual health policy if that policy starts to get too expensive..."

An insurance policy is rescinded when the evidence establish that there was a lie.

Problem is that some companies have a very loose deifinition of a "LIE". More responsible companies will have solid facts prior to concluding that there was a lie.

Every company that underwrites a life or health insurance contract has the option to rescind IF they discover a BIG LIE within the first two years of the contract.

Nuances are sorted out during the claims investigation to determine: "Was this a Big Lie?"

If not, claim is paid. If it is a lie, then policy is rescinded.

March 27, 2007  
Blogger Seth Zlotocha said...

Right. And Blue Cross of California was found to have stretched the definition of "lie" way too far -- and done so "routinely," according to the state's Dept. of Managed Health Care -- so it was fined $1 million (although considering the insurer's parent company rakes in $3.1 billion in profit off $57 billion in revenue each year, I don't imagine it will hit them too hard).

In all 90 randomly selected cases that state regulators reviewed, an illegal cancellation was found. According to the LA Times, "The state investigation found that Blue Cross used computer programs and a dedicated department to systematically investigate and cancel the policies of pregnant women and the chronically ill regardless of whether they intentionally lied on their applications to cover up preexisting medical conditions — a standard required by state law for canceling individual policies."

As I note in the post, state regulators in CA are looking into other cases.

Perhaps Blue Cross -- the biggest insurer in CA -- is just a bad seed, but I'm skeptical of that line. I think what they do is what all insurers do, which is seek out the least risky and, thereby, cheapest participants to maximize profits, even if that means stretching the definition of what constitutes a "lie."

And maybe I skipped a step when I said policies get cancelled because they start to get expensive, but my guess is that not too many policies are retroactively cancelled as long as the money is just flowing in.

March 27, 2007  
Blogger Seth Zlotocha said...

Reflecting on it a bit more, I can see why only policies that cost money get reviewed. If a claim doesn't come in, there's no way to know if a participant lied about a pre-existing condition.

But there seems to be something systematic about the Blue Cross review that made it more of an investigation with a pre-determined end than just a simple check. Again, perhaps Blue Cross is just a bad seed. A state review of the health insurer cancellation policies in Wisconsin should be done to see.

And the bottom line is that risk pooling is an essential part of any successful health care system, but that feature is not part of the preferred business model of insurers in our existing fragmented system. Either insurers need to change within our current system, or our current system needs to change. Although neither are givens, it's pretty clear which one is the bigger long shot.

March 28, 2007  

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