Friday, January 13, 2017

Fixing Health Insurance Reform is a Zero Sum Game: The Only Way Republicans Can Lower Costs is to Provide Less Coverage––Wrong!

Don't Underestimate the Value of Rearranging the Deck Chairs

Anna Wilde Mathews and Louise Radnofsky have a well-done story in yesterday's Wall Street Journal. They point out that a relatively few sicker people account for most of the cost of care:
Congress has begun the work of replacing the Affordable Care Act, and that means lawmakers will soon face the thorny dilemma that confronts every effort to overhaul health insurance: Sick people are expensive to cover, and someone has to pay.
That is right.

But, this statement would seem to infer, as I have observed the general discussion about fixing Obamacare has often inferred, that there is a certain cost to health insurance and that Republicans can rearrange the deck chairs any way they want but the cost will be the same.

Wrong!

What I think this story, and the general discussion about how to cover people in the future is missing, is that Obamacare is so flawed that by itself it is manufacturing plan premium levels that are at least 30% to 40% higher than they need to be.
Readers of this blog are probably tired of hearing me point out that the Obamacare insurance exchanges cover only about 40% of those that are subsidy eligible, when the longstanding insurance industry underwriting rule calls for 75% of an eligible group to be covered in order to have enough healthy people enrolled to pay the costs of the sick. But again it is this critical point that is being missed.

What would happen if the plans were more attractive––if people saw value in them? And, if we had 75% of the eligible group signing up as a result, what impact would that have on current premiums?

I have asked a number of health plan actuaries that hypothetical question. Hypothetical because the health plans don't have the flexibility to rearrange the product pieces so as to make the insurance plans more attractive.

Their answer has consistently been that prices could come down at least 30% to 40% from 2018 prices. Said another way, the anti-selection load the current Obamacare exchange plans are carrying is worth at least 30% to 40%. And, that makes sense. When Obamacare launched for 2014, the carriers conservatively priced for an acceptable claim level. The reality was much higher––2018 prices are now about 30% to 40% higher after adjusting for baseline trend.

Here is the bottom line: Obamacare's insurance exchange scheme is so poorly designed that it is literally an anti-selection machine.

Here is a hard concept to grasp but one that is real––fix the plan designs and we can reduce the medical loss ratios by encouraging an influx of relatively healthy people that can pay the claims of these same sick people from the extra premiums that come from more relatively healthier people signing up. With a better enrollment, we can pay for these same sick people, and the claim costs of the new enrollees, and charge premiums that are substantially less than today's.

In other words, it's not so much the numerator of the medical loss ratio that has to change (the claims), it is the denominator (the total premium). The premium problem can be fixed in two ways. First, we could raise the plan prices––which is what has been painfully going on for three years. Or, we could increase the denominator by getting more healthy people into the pool.

As we fix, or replace, Obamacare this is what we need to be focused on. That is why it is wrong to conclude that this is all a zero sum game and Republicans will eventually learn they have these sick people to cover and no amount of rearranging the deck chairs can bring the premiums down.

This may be the one place rearranging the deck chairs––in the form of more flexibility in plan design––will actually work.
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