Transcript Managing Health Insurance Risk Patrick Ryan, F.S.A., M.A.A.A. Sr. Actuary Wellmark Blue Cross Blue Shield of Iowa.

Managing Health Insurance Risk
Patrick Ryan, F.S.A., M.A.A.A.
Sr. Actuary
Wellmark Blue Cross Blue Shield of Iowa
Managing Health Insurance Risk: Basics
» It’s critical to maintain random mix of risks:
• 1% of individuals generate 20% of costs
• 5% of individuals generate 50% of costs
• 20% of individuals generate 80% of costs
» Attraction of disproportionate share of high risk will raise
average costs – higher premiums for everyone
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Managing Health Insurance Risk: Basics
» Different risks have different incentives to purchase
coverage
Higher risks:
• Sicker individuals, or individuals vulnerable to illness (i.e., older)
1) Are less sensitive to price
2) Tend to select policies with broad benefits, lower cost sharing
Lower risks:
• Younger, healthier individuals
1) Are highly price sensitive
2) Are less interested in broader benefits
3) Are less concerned about a higher level of medical management
(i.e., an HMO)
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Managing Health Insurance Risk:
Avoiding Adverse Selection
» Disproportionate share of high risks lead to the most
problematic and most predictable insurance problem:
Adverse Selection
– As more high risks enroll, the average per member cost increases
so premiums increase
– The premium increases (triggered by the enrollment of relatively
higher risks) triggers dropping of coverage – or a decision not to
purchase – by younger, highly price sensitive enrollees
– Loss of or failure to enroll younger, healthier risks results in a
further increase in the average per member cost and further
premium increases
– This continuing set of dynamics – referred to as an Adverse
Selection Spiral – leads to increasingly higher average per member
costs –– and higher premiums for everyone
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Managing Health Insurance Risk:
Avoiding Adverse Selection
» Insurers are constantly sensitive to the need to avoid
triggering an adverse selection spiral
» Insurers try to avoid triggering the adverse selection
process by:
1) Trying to attract young healthy enrollees (to moderate overall
costs) by adjusting premiums for younger healthy enrollees to
reflect their predictably lower health care expenses (i.e., lower
premiums)
• Strategies that keep prices affordable by adjusting premiums for
risk
2) Underwriting (e.g., turn down highest risk) and relying on
broader-based funding (high risk pools) than just individual
market enrollees to subsidize highest risk
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Managing Health Insurance Risk: Making
Coverage as Affordable as Possible
Greatest challenge health insurers face: attracting balanced pool
of risks to keep healthcare as affordable as possible
Key Challenge: How to convince healthy
individuals to buy insurance coverage?
• Many healthy individuals: “Insurance is expensive and
unnecessary”
• Older and sicker individuals very motivated to buy
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Managing Health Insurance Risk:
Using Age Rating
Age Rating in Individual Market: Insurers offer lower
premiums to younger individuals
Community Rating (CR): All ages charged same premium
Age
Monthly Age
Rated
Premium
Monthly
Community
Rate
CR if
Youngest
20% Leave
CR if
Youngest
40% Leave
19-24
$149
$267
$301
$354
25-34
$169
$267
$301
$354
35-44
$218
$267
$301
$354
45-54
$268
$267
$301
$354
55+
$350
$267
$301
$354
C/R Increases Premiums by 79%
for 19-24 Year Olds
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Managing Health Insurance Risk:
State Experience w/Community Rating
Guaranteed issue and community rating can have
unintended consequences:
• Fewer Insured: Maine/New Jersey 50% of individual
enrollees dropped coverage
• High Premiums: Premium for a 25 year-old is:
– $1,269/month in New Jersey
– $924/month in Maine
• Reduced Choice:
Underwritten
Iowa premium:
$169/month
– Lowest deductibles in NJ and Maine: $1,000;
– The majority of insurers have left these states
Guarantee issue encourages individuals to delay
purchase until they become sick
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Managing Health Insurance Risk:
Pooling
» Pooling protects individuals and small groups
purchasing coverage from the extraordinarily high costs
of highest risk enrollees
» States have recognized this and have required all
insurers to pool their small group market
• States require health plans to pool all small firms and cannot
vary premiums by more than a specified amount (e.g., 25% in
most states) from average due to health status
• A large claim for a small firm is spread over the entire pool – not
just the small employer
• Premiums cannot increase based on claims experience more than
specified amount (e.g., 15%)
• Result: In the small group market, low-risk firms pay higher
premiums to subsidize high-risk firms
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Managing Health Insurance Risk:
Pooling
» Some states have tried to build on the value of pooling
by establishing state purchasing pools
» Experience with state purchasing pools shows:
• No additional pooling occurs; pooling is still at the
insurer level not at the state purchasing pool level
• Average per enrollee – premiums – costs in any
purchasing pool is determined by health status of
enrollee
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Managing Health Insurance Risk:
Effect of Pooling Arrangements
State purchasing pools do not address cost drivers for premiums
Provider
Payment
Rates
Utilization
Enrollees’
Health
Status
Benefit
Package
Administrative
Costs
Risk/Cost of Care (83-90%)
Health plans negotiate
on behalf of all
members
Risk Selection Issues:
– 5% enrollees = 50% costs
– 20% enrollees = 80% costs
– Small employer risk volatility
Marketing
Agents/Brokers
Billing
Claims Processing
Disease Management
Customer Service
Network Management
Risk/Profit
Taxes
Compliance Costs
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Managing Health Insurance Risk:
Pooling Small Employers
Health Plans Required to Pool All Small Employers
• Health plans required to pool all small firms; cannot
vary premiums by more than 25% from average due to
health status
• A large claim for a small firm is spread over the entire pool – not just
the small employer
– Premiums cannot increase by more than 15% due to claims experience
Community Rating Would Increase Premiums by 30% for
healthy groups
Health Status
NAIC Rules
Community
Rating
Community Rate
if 20% Drop
Tier 1
$346
$454
$476
Tier 2
$399
$454
$476
Tier 3
$447
$454
$476
Tier 4
$526
$454
$476
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In Conclusion
Greatest challenge health insurers face: attracting balanced pool
of risks to keep healthcare as affordable as possible
Key Challenge: How to convince healthy
individuals to buy insurance coverage?
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