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HEALTH PLANS/POLICY: Why is the individual market such a mess?

Following my post last week on the individual and small group insurance market, the Anonymous Academic declared some of his political colors by saying this:

    I haven’t followed the situation in California, but I am familiar with the situation in Washington State in the late 1990s, when the individual market there was a mess. The main culprit was a package of "progressive" reforms designed to enable chronically ill people to buy coverage, but which ended up making the individual market completely dysfunctional (for example, basically eliminating the market for generous individual coverage). After the reforms, most of the insurers (and many beneficiaries) fled the individual market, and those few insurers that remained offered truly crappy plans.

    Unbelievably, the state’s insurance commissioner, Deborah Senn, and many left-wingers denied that there was a problem–or if they acknowledged the problem they denied that the legislative reforms were in any way responsible. One prominent liberal said that "sometimes things have to get worse before they get better," by which I believe she meant the market for individual coverage had to be destroyed to engender support for a single-payer approach.  Prior to the reforms, the individual market in Washington functioned reasonably well, although admittedly the situation was not very good for someone who got hurt or sick while uninsured. I don’t see how this problem can be avoided in a voluntary insurance market. If (a) people can choose whether to buy insurance and (b) there are few or no adverse consequences for getting sick while uninsured, then (c) few people will bother to buy insurance until they get sick.

A little later in our conversation, while giving the proviso that his comments are directly limited to the insurance reforms in Washington State in the late 1990s (guaranteed issue, community rating, 3-month waiting period for coverage of pre-existing conditions), he adds:

    There were few serious consequences to being uninsured. If you got sick, you could get coverage in just 3 months with no underwriting.  I do think there are some problems with the individual market, but I definitely do not think that guaranteed issue, community rating, etc, are the right way to solve those problems.

Now I’m going to have to agree and disagree with the Academic. He is right. Individual health insurance CAN NOT work as a market if the insurer has any idea who they’re insuring OR if the individual has the choice to buy or not buy insurance. Both of them lead to one extreme–sick people being unable to get insurance–or the other–the adverse selection that kills companies that are compelled to offer insurance to the sick, as under those Washington State reforms. Insurers make money by getting rid of the expensive people. One of my buddies in the consulting business has been looking at individual enrollee profitability, and his analysis for his health  plan customer helped that plan increase profitability by identifying and enrolling the psychogrpahic profiles of a consumer who is less likely to be a big user of health services. Conversely if the plans have any clue in advance who those expensive people might be it’s their raison d’etre to make sure they don’t write them insurance. And funnily enough, crude though they may be, insurers have some tools to help them do that (hence my 300% quote increase when they found out I’d had knee surgery 2 years ago).  It’s the same concept as an insurer who covers fire damage knowing which 15% of houses are already on fire and therefore not covering them.  If an insurer gets it mostly right they do OK; if they get it wrong, they get hosed (pardon the pun).

And, by the way, as both the Academic and on a larger stage Mark Pauly gloss over, there are damn serious consequences for getting sick while uninsured. For example, there’s the raft of stories in the WSJ about denying care to the uninsured at UT Galveston. Another recent story well covered in the medblogs was the hospital in Indiana that carted deadbeat payers off to debtor’s prison.  And anecdotally (but I know her well), there’s my friend who has had no steady job in 30 months, is off COBRA, has a chronic blood-clotting illness (DVT) that flares up occasionally and was quoted (legally) $1200 a month she didn’t have for coverage with a $2,000 deductible (with no coverage of her pre-existing condition for the first 6 months) by California Blue Shield.  Her barely existing middle-class life will be torpedoed the next time she’s carted off to hospital when her condition breaks out, and she’ll probably have to declare bankruptcy to avoid paying the $20,000 bill she’ll likely receive.

I guess that if Pauly and other "free market" economists really believe that an insurance market is "good enough" if it works for the 80% of people who don’t actually need care, then the individual insurance market is fine.  If, on the other hand, you think that sick people should be able to get health care and have their costs spread over a larger group of healthy people (which I believe is the original concept of insurance) then everyone has to:

a) be anonymously community-rated in a big pool and
b) be forced to be in the pool (i.e. have to buy insurance)

But then again, that means that if you take it to its logical extension we should all be in one pool (or have large pools which make genuinely risk-adjusted transfer payments between each other), and then that means that the government is the logical organization to run that process. That then means the premiums we pay are called taxes, and we don’t like that.  So we pay much higher taxes called "premiums" for worse coverage and services (and pay way more out of pocket) and keep a bunch of useless anachronisms called brokers and small insurers in business all for the pleasure of avoiding "socialized medicine"–even though in Japan, Germany, Holland, Germany, etc, etc, they’ve worked out how to do this without nationalizing care delivery.

But instead we conduct minor and meaningless reforms like HIPAA at the edges of the individual insurance market, and try to get coverage to specific underinsured groups such as kids via tack-on programs like SCHIP which, as Cal Healthline and USA Today report, are incredibly vulnerable to the ongoing fiscal crisis at the state level. There is no way to put lipstick on this pig. But there’s no political interest in fixing it.

My personal solution for this whole mess is for Mark Pauly and all members of Congress to be forced to buy their health insurance on the individual market (even the over-65 year olds!).  Then you’d see a Clinton-style pooling plan implemented in about 3 weeks flat.

Wierd historical footnote: It was of course the smaller insurers who along with the AMA destroyed the Clinton plan with theHarry and Louise ads–the big guys fancied their changes in the pool structure. Ironically enough, a decade later the HIAA and the AAHP just merged!).

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Aaron
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Aaron

Bob: The HDHP’s from Fortis (it’s called Assurant now) are not limited plans in any sense of the word. They are no different than the non-HSA plans when it comes to the total amount of coverage, the only difference is the lack of any “first-dollar” benefits, which is a principal of an HSA plan. All of the plans have Rx coverage, so you are mistaken in claiming they don’t, and out-of-network claims are covered, albeit at higher out-of-pocket cost to the policyholder, which is true of pretty much all individual plans. It’s an incentive to get the insured to stay… Read more »

Bob
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Bob

Ron, I suggest you look closer at some of the HDHP’s offered, particularly from Fortis, a carrier where you seem to have a love affair . . .
The out of pocket caps apply only to those items covered by contract. These are not all encompassing plans. Some plans offer no coverage for Rx, others have no coverage for out of network claims.
And then there is the “Right Start” HSA from . . . Fortis.

Ron Greiner
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Sorry Jim But you are wrong. you said, “”Basic” health insurance is worthless if a person contracts a serious disease ….. patient’s can’t afford to pay even 20 or 30 percent of the typical $50,000-$100,000 hospital bill out of pocket. Then you said, “If consumers who purchased a “basic” health insurance policy to compliment their HSA contract an illness, their basically inadequate health insurance policy will only pay a small portion of their medical bills” Jim do you know of a company selling your so-called “Basic” coverage as HSA qualifying insurance? All the HSA programs I know follow federal law… Read more »

Richard
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Richard

…..So we pay much higher taxes called “premiums” for worse coverage and services (and pay way more out of pocket) and keep a bunch of useless anachronisms called brokers and small insurers in business all for the pleasure of avoiding “socialized medicine”–even though in Japan, Germany, Holland, Germany, etc, etc, they’ve worked out how to do this without nationalizing care delivery…….Wow…run-on-sentence….I can’t beleive that you would call a broker “a bunche of useless anachronims” since a broker is not an anacronym (you spelled it wrong anyways). Brokers and insurers are doing their jobs within the health care system. Neither broker… Read more »

Jim McMeans
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Insurance Bills Will Threaten the Health of Consumers Executive Summary State legislatures are considering bills to reduce mandates for small group health insurance, which if passed, will result in more medical bankruptcy and more sickness and misery in those states. Numerous mandates were passed by state legislators in the last few years because state regulators, legislators and health care advocates have learned that mandates are necessary to protect health insurance consumers from unsavory health insurance company practices like drive-by childbirth. Mandates save lives and save money for employers, policyholders and taxpayers. Moreover, it’s not true that mandates are the reason… Read more »

Jim McMeans
Guest

Insurance Bills Will Threaten the Health of Consumers Executive Summary State legislatures are considering bills to reduce mandates for small group health insurance, which if passed, will result in more medical bankruptcy and more sickness and misery in those states. Numerous mandates were passed by state legislators in the last few years because state regulators, legislators and health care advocates have learned that mandates are necessary to protect health insurance consumers from unsavory health insurance company practices like drive-by childbirth. Mandates save lives and save money for employers, policyholders and taxpayers. Moreover, it’s not true that mandates are the reason… Read more »