My first post in this series starts with the question of access. When it comes to the issue of access, the health reform bill has focused on access to insurance and government programs for paying for healthcare rather than on access to healthcare itself. Since so much of the reform effort has been in the area of insurance reform, it is important to understand how some of the changes called for by the bill in the name of improving access have ultimately led to government mandates that are likely to be ineffective in improving access and may actually drive up the cost of insurance for everyone.
We will start with a basic insurance concept known as “adverse selection”. The Insurance Information Institute defines adverse selection as “the tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk.” Adverse selection in an insurance market has a tendency to drive insurance premiums higher since it results in a risk pool that tends to use more healthcare. In the most extreme scenarios, adverse selection could even lead to the collapse of insurance markets.
There are several ways to avoid adverse selection:
1) Waiting periods and exclusions for pre-existing conditions
2) Charging higher premiums for greater coverage
3) Adjusting premiums based on information about an individual or population of individuals
4) Mandating that everyone purchase health insurance
Let’s consider what happens when we take away the insurer’s ability to exclude based on pre-existing conditions. Without these exclusions, individuals may choose not to purchase insurance until they are actually sick and need it. If I am healthy and I know that I can purchase insurance when I happen to get sick, I am likely to determine that it does not make sense for me to purchase insurance until I do get sick. If I later find out that I have developed a heart condition, I am now more likely to consider purchasing insurance to protect myself from the risk posed by that condition.
An insurer can offset this to some extent by charging higher premiums for greater coverage or greater risk. The idea here is that there is a correlation between an individual’s health (or anticipated healthcare needs) and the amount of insurance he/she will purchase. Sicker people tend to want more coverage because they anticipate a need for it. Healthy people want to purchase less because they do not expect to benefit as much from having more insurance. They are more likely to choose a plan with a lower premium and higher out-of-pocket costs for care (high deductible plans, HSAs, etc…) since they do not expect to need as much healthcare or simply not purchase health insurance at all.
To a more limited degree, insurers can also offset this by adjusting premiums based in information about the health of an individual or a group of individuals. Take insurance policies that protect against specific diseases (cancer) as an example. These plans tend to have much higher costs to purchase. It makes sense. If, for example, I have a strong family history of cancer, a cancer policy is much more appealing to me than if I am completely healthy and have no family history of the disease. My strong family history of cancer means that it is more likely that I will actually need to use the insurance. With these types of policies, the insurer has adjusted the price based on the increased risk associated with the population that is being covered.
The first three options I covered above for combating adverse selection are solutions that have come out of a free-market approach to insurance and healthcare. The current healthcare reform bill essentially takes most of these free-market solutions off the table as options for preventing adverse selection. It takes away the ability of insurers to exclude on pre-existing conditions, limits the ability of the health insurers to adjust premiums based on factors such as age and gender, and actually requires insurers to submit justification before any premium increases. In addition, it requires that insurers must accept every individual or employer that applies for coverage (guaranteed issue). http://bit.ly/b0UkCw
So, let’s think about what happens now. Without any significant mechanisms for preventing adverse selection, some of the healthiest individuals begin to make the decision to cancel or simply not purchase health insurance. The perceived benefit of insurance for these individuals is no longer worth the cost of the premiums. Now, the risk is spread over a smaller, sicker population of individuals. This will cause insurers to raise premiums. The higher premiums will cause yet more of the healthy, low-risk individuals to cancel or choose not to purchase health insurance. This leads the insurers to again raise premiums. Again, healthy people drop out of the risk pool. The cycle continues until healthy people no longer have any incentive to purchase insurance and the sick and unhealthy can no longer afford the premiums to purchase insurance.
The scenario I have described assumes that the insurer is actually able to increase premiums to adjust for the higher risk. If they are not able to adjust their premiums adequately based on reforms, the insurance market will still collapse as insurers determine they can no longer cover the risk of the covered population with their current premiums.
To fill the void left when the free-market solutions for avoiding adverse selection have been taken away or limited, the government has chosen to implement the fourth option I mentioned above for preventing adverse selection. The health reform bill mandates that all individuals obtain health insurance coverage or face a penalty. http://bit.ly/cvsWiP Assuming the mandate is enforceable, the healthy, low-risk individuals are now re-introduced into the risk pool, and the adverse selection spiral is prevented.
This assumes that compliance with the mandate is high. Some individuals could still decide that it is more cost effective to pay the penalty rather than purchase insurance. If this happens, we still could see adverse selection driving premiums up. Non-compliance rates for government mandates have historically been around 14 – 15%. Hawaii is an example of a state that actually has had mandated health insurance since the 1970s. While there are penalties for non-compliance, the state of Hawaii still experiences a non-compliance rate of roughly 10%. http://bit.ly/bnyQ7C
So, has the reform bill truly addressed the issue of “access”? Not really… If you think about it, the current healthcare reform bill only serves as a vehicle for increasing access to health insurance and government programs that pay for healthcare, not to the actual healthcare services themselves. In fact, we are introducing millions of new people into the system without a similar increase in the supply of providers and healthcare delivery organizations (a topic for a future post). While individuals could potentially have more access to insurance and government programs to pay for their care, it is likely that there will be less care to go around as the demand for care outstrips the supply. In addition, the expected success of a government mandate in increasing access to insurance itself is at best questionable given the historically high non-compliance rates with other mandates.
Should the reform bill move forward as-is, we may very well see a future where efforts to increase access to insurance and government programs have failed, and access to affordable, high-quality healthcare services has simply never been addressed.
We will start with a basic insurance concept known as “adverse selection”. The Insurance Information Institute defines adverse selection as “the tendency of those exposed to a higher risk to seek more insurance coverage than those at a lower risk.” Adverse selection in an insurance market has a tendency to drive insurance premiums higher since it results in a risk pool that tends to use more healthcare. In the most extreme scenarios, adverse selection could even lead to the collapse of insurance markets.
There are several ways to avoid adverse selection:
1) Waiting periods and exclusions for pre-existing conditions
2) Charging higher premiums for greater coverage
3) Adjusting premiums based on information about an individual or population of individuals
4) Mandating that everyone purchase health insurance
Let’s consider what happens when we take away the insurer’s ability to exclude based on pre-existing conditions. Without these exclusions, individuals may choose not to purchase insurance until they are actually sick and need it. If I am healthy and I know that I can purchase insurance when I happen to get sick, I am likely to determine that it does not make sense for me to purchase insurance until I do get sick. If I later find out that I have developed a heart condition, I am now more likely to consider purchasing insurance to protect myself from the risk posed by that condition.
An insurer can offset this to some extent by charging higher premiums for greater coverage or greater risk. The idea here is that there is a correlation between an individual’s health (or anticipated healthcare needs) and the amount of insurance he/she will purchase. Sicker people tend to want more coverage because they anticipate a need for it. Healthy people want to purchase less because they do not expect to benefit as much from having more insurance. They are more likely to choose a plan with a lower premium and higher out-of-pocket costs for care (high deductible plans, HSAs, etc…) since they do not expect to need as much healthcare or simply not purchase health insurance at all.
To a more limited degree, insurers can also offset this by adjusting premiums based in information about the health of an individual or a group of individuals. Take insurance policies that protect against specific diseases (cancer) as an example. These plans tend to have much higher costs to purchase. It makes sense. If, for example, I have a strong family history of cancer, a cancer policy is much more appealing to me than if I am completely healthy and have no family history of the disease. My strong family history of cancer means that it is more likely that I will actually need to use the insurance. With these types of policies, the insurer has adjusted the price based on the increased risk associated with the population that is being covered.
The first three options I covered above for combating adverse selection are solutions that have come out of a free-market approach to insurance and healthcare. The current healthcare reform bill essentially takes most of these free-market solutions off the table as options for preventing adverse selection. It takes away the ability of insurers to exclude on pre-existing conditions, limits the ability of the health insurers to adjust premiums based on factors such as age and gender, and actually requires insurers to submit justification before any premium increases. In addition, it requires that insurers must accept every individual or employer that applies for coverage (guaranteed issue). http://bit.ly/b0UkCw
So, let’s think about what happens now. Without any significant mechanisms for preventing adverse selection, some of the healthiest individuals begin to make the decision to cancel or simply not purchase health insurance. The perceived benefit of insurance for these individuals is no longer worth the cost of the premiums. Now, the risk is spread over a smaller, sicker population of individuals. This will cause insurers to raise premiums. The higher premiums will cause yet more of the healthy, low-risk individuals to cancel or choose not to purchase health insurance. This leads the insurers to again raise premiums. Again, healthy people drop out of the risk pool. The cycle continues until healthy people no longer have any incentive to purchase insurance and the sick and unhealthy can no longer afford the premiums to purchase insurance.
The scenario I have described assumes that the insurer is actually able to increase premiums to adjust for the higher risk. If they are not able to adjust their premiums adequately based on reforms, the insurance market will still collapse as insurers determine they can no longer cover the risk of the covered population with their current premiums.
To fill the void left when the free-market solutions for avoiding adverse selection have been taken away or limited, the government has chosen to implement the fourth option I mentioned above for preventing adverse selection. The health reform bill mandates that all individuals obtain health insurance coverage or face a penalty. http://bit.ly/cvsWiP Assuming the mandate is enforceable, the healthy, low-risk individuals are now re-introduced into the risk pool, and the adverse selection spiral is prevented.
This assumes that compliance with the mandate is high. Some individuals could still decide that it is more cost effective to pay the penalty rather than purchase insurance. If this happens, we still could see adverse selection driving premiums up. Non-compliance rates for government mandates have historically been around 14 – 15%. Hawaii is an example of a state that actually has had mandated health insurance since the 1970s. While there are penalties for non-compliance, the state of Hawaii still experiences a non-compliance rate of roughly 10%. http://bit.ly/bnyQ7C
So, has the reform bill truly addressed the issue of “access”? Not really… If you think about it, the current healthcare reform bill only serves as a vehicle for increasing access to health insurance and government programs that pay for healthcare, not to the actual healthcare services themselves. In fact, we are introducing millions of new people into the system without a similar increase in the supply of providers and healthcare delivery organizations (a topic for a future post). While individuals could potentially have more access to insurance and government programs to pay for their care, it is likely that there will be less care to go around as the demand for care outstrips the supply. In addition, the expected success of a government mandate in increasing access to insurance itself is at best questionable given the historically high non-compliance rates with other mandates.
Should the reform bill move forward as-is, we may very well see a future where efforts to increase access to insurance and government programs have failed, and access to affordable, high-quality healthcare services has simply never been addressed.
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