Here are my longer comments on the RAND study about Consumer making in the individual insurance market published on the web last week by Health Affairs. Somewhat ironically I was interviewed and fairly extensively quoted in this Olga Pierce UPI story (yup, the Moonies got to me!) before I’d read the whole study, so I was mostly venting my prejudices about the individual insurance market as a whole in my comments there. This is a little long, so I’ve put it below the jump — but I think it’s very important.

Reaction to the study has largely focused on the unsurprising finding
that paying subsidies to poorer people to buy into the individual
market wouldn’t do much to lower overall uninsurance. There was also
some comment about the problems with information availability for
people purchasing insurance. I’ll have some more to say about the
information piece later, but first we need to look at the core results.

Before I do that, I must congratulate the authors for their work and
Jill Yegian and her crew at CHCF for funding research into the
individual insurance market. No one has really touched this stuff other
than Mark Pauly, and long-term THCB readers won’t need me to remind
them what I think of his analysis. (BTW I think that the authors of
this study accept some of his results a little too easily).

So what do they say? Their main conclusion is this:

A 20 percent subsidy to the price of individual insurance would
reduce the number of uninsured people by at most 12 percent, or about
5.5 million people. On the other hand, we also find that tax subsidies
in the individual market would not lead to an unraveling of the group
market as some fear; a 20 percent subsidy in the individual market
would reduce the number of workers participating in their own plan by
less than 0.05 percent. At the same time, subsidy approaches will also
help achieve other policy objectives—namely, promoting whole-family
coverage and continuity of coverage. They are likely to be an
inefficient way to achieve any of these objectives, however, because it
is difficult to target subsidies only to those who would not otherwise
purchase insurance for some or all family members and to those who need
longer-term coverage but would leave the market because of high prices.

I think that’s code for saying that the individual market is
un-reformable, outside of the complete re-tooling of the health care
insurance system or giving everyone 100% subsidy to buy in. That gets
no argument from me. And don’t forget that a very small percentage of
Americans get their insurance from the individual market—even if that
number happens to include many self-insured health care consultants—but
the current erosion of employer coverage means that that number will be
growing, and it’s the great white hope of the wing-nuts in charge of
what passes for policy in the White House these days.

But there’s plenty more that’s actually more interesting in the study.

Our analysis confirms earlier studies’ findings that there is
considerable risk pooling in the individual market and that high risks
are not charged premiums that fully reflect their higher risk

My first real problem is that the earlier studies who’s findings
they are confirming were done by Mark Pauly — but I should be a big
boy and get over that. But here’s where they start talking about risk
pooling, and the impact of underwriting.

Among new enrollees, families that include an adult with a
chronic medical problem pay an actuarially adjusted premium that is
about 10 percent higher than the premium for new enrollees with no
chronic conditions. Among longer-term enrollees, families that include
an adult who contracts a chronic medical condition after enrolling in
the individual market pay more than longer-term enrollees with no
health problems (7 percent) but less than families with a chronically
ill adult at enrollment (who pay 12 percent more than the healthy
families). This is consistent with the hypothesis that pooling
increases over time.

SNIP

Thus, there may be less separation of risks among longer-term
enrollees than among new enrollees. The evidence on this is somewhat
mixed (Exhibit 2). The less generous PPOs include fewer longer-term
subscribers with newly acquired chronic conditions than we would expect
at random. Thus, there continues to be a separation of risks in the
less generous PPOs, even among those who acquired chronic conditions
subsequent to enrollment. On the other hand, the share of longer-term
enrollees who become sick who are in higher pricing tiers is about the
same as their share in the population, which is consistent with a
decrease in separation of risks over time as a result of health status
changes.

So they’re saying that the less generous PPOs (i.e. the HDHPs) find
a way to weed out the chronically ill (more on that later) but that the
more expensive plans don’t over time. This may be true but there are
several things that do not seem to be considered in their analysis (or
at least didn’t make into the final report).

First, the impact of insurance avaibility (or unavailability) on
defraying health care costs is not evenly spread on the average—it’s on
the margins and on the margins the unlucky are getting screwed—or
worse, having their insurance cancelled. (That news broke after this study was concluded but before it was published).

Now the study’s data shows that people 60% of people turn over within the individual market every 3 years.

About 60 percent of new coverage episodes continue more than one
year, and more than 30 percent continue for more than three years

In fact it’s only around 50% of even the near-elderly who last more
than 3 years in an individual plan—and that’s the group that’s least
likely to find other options and therefore has the greatest incentive
to sit tight in an individual plan. So the individual market is highly,
highly unstable. What’s happening is that people go from individual
plans into group plans when they change jobs. People change jobs
frequently, (they have their plans changed on them by employers
too) and in that process, as anyone who’s looked for a job knows, they
have frequent periods of needing insurance. Often they have relatively
long periods of uninsurance. Commonwealth estimated that 80m Americans had at least a 4 month period of uninsurance over a 2 year period—as
there are about 20m long term uninsured, that means 60 million odd are
being ground through the group to individual to uninsured mill, with
plenty more going from group to individual and back.

Then when people come back into the individual market, they have to
be re-underwritten. It’s an arduous process, and as I just wrote about
at Spot-on it produces wildly varying results in premiums offered for the same individual. And when they get re-underwritten, life is not so much fun.

Underwriting might prevent some high-risk market candidates from
obtaining insurance because insurers are free to deny coverage. Those
who obtain health insurance are in better health than those who remain
uninsured. About 32 percent of those who recently purchased individual
health insurance reported that an adult family member included on the
policy has a chronic medical condition, and 4 percent reported that an
adult family member was in fair or poor health.

So the real story should be the focus on what happens to those who
turnover, not the 30% stuck in the individual market longer term.
Unfortunately, as far as I can tell, the only way that you can do this
study properly is to longitudinally follow a group of people into and
out of the individual insurance market over time, and then discover
what happened to those who developed chronic conditions. Were they
charged much higher premiums? Did they become uninsured? What coverage
were they offered? What happened to their premiums, max out of pocket
costs, benefits while they were insured, etc, etc. All the anecdotal
evidence (and THCB readers know how I berate various Canada-bashers for
only using anecdotal evidence) points to many problems that this study
didn’t uncover. It looks to me like the researchers at RAND might
have got at some of this data for some people by linking
the individuals’ experience between the three insurers from whom they
got data (although from some of my other data work I know there’s lots
of complexities in doing that linking, and the data set wouldn’t
capture those who found another plan or no plan at all). But as far as
I can tell they didn’t do that, so the information they captured on the
experience of individuals over time was incomplete.

Unfortunately, other research indicates that underwriting is much
more prevalent and aggressive than the RAND team suggest, even though
their data (Exhibit 2) suggests that in the HDHP (or what they call the
“less generous PPO”) sector the insurers are getting pretty damn good
at weeding out new entrants with chronic conditions. Click on the chart
for details, but the important part is that 92% of people joining those
plans are healthy compared to 79% joining individual plans overall (and
this  “overall” number is within an already underwritten individual market!).

In a study researchers at Georgetown University found that even an
applicant with just hay-fever only received a “clean” acceptance for
insurance only three out of sixty times.
The rest of the time they were asked for higher premiums, or their
illness wasn’t covered at all. (California doesn’t allow those
exclusionary riders—so they’d just be denied coverage here).

What counts as a chronic disease?  In the study it tells us in
Footnote 17–The chronic conditions included in the measure are
arthritis, cancer, diabetes, hypertension, heart disease, lung disease,
back pain, and ulcers. For example, I just got totally rejected
from health insurance from one of the carriers the researchers examined
for a) prior surgery, b) groin strain, c) elevated cholesterol and d)
gout—even though most of these diagnoses were over four years old and I
have had no health expenses other than $40 a year for medication for
the gout in the past 18 months.You could argue that the elevated
cholesterol is heart disease and that gout is arthritis and thus are
within the categories of chronic condition, but that’s really pushing
it. And don’t forget that a virtually identical plan from a competitor
let me in at the most heavily underwritten rate although I’m obviously
an identical risk!

But they come up with a statement that I just don’t believe

Among new enrollees, families that include an adult with a
chronic medical problem pay an actuarially adjusted premium that is
about 10 percent higher than the premium for new enrollees with no
chronic conditions.

Some of this may be because the study focused on families rather
than individuals, so there’s a little pooling going on there already.
But as I say, this really matters on the margins not the average.
Here’s the actual math from my “marginal” case for basically identical
benefit policies in California ($2,500 deductible). Remember that my
“group” was kicked out of the PacAdvantage buying group, making me
eligible for HIPAA guaranteed issue. What happened was that my $220
monthly premium for the group policy via PacAdvantage became a $110
premium for a healthy individual. The alternative if I’d failed
underwriting (and I did with one of my applications) was a $400 premium
with a higher deductible for the HIPAA guaranteed-issue
non-underwritten plan.

In previous years the gap between the "healthy" price and actual
underwritten price I was offered care for—when they found my history of
knee surgery—was even greater ($60 vs $420 if memory serves me right).

This of course ignores the reality of groups kicking out individuals
into the individual market all the time, no matter what their health
status may be. My association was kicked out of a state-sanctioned
buying group, but plenty of people lose their jobs and find that the
group doesn’t exist as their employer has gone bankrupt (something that
happened to me in 2002) and hence has no COBRA plan to buy into. For
that matter, given the cost of insurance via COBRA and the fact that
most people trying to buy into it are now unemployed, that’s equally
likely to cause more uninsurance or at the least to try to buy into a
cheap underwritten plan. And of course, although it’s theoretically
illegal, a small employer that gets rid of an employee with a chronic
illness will see a marked improvement in its premium the next year.
Don’t think that they don’t know that in an “employment at will” state.

So even though they’re talking about the whole individual market for
families and I am focusing on the “less generous PPOs” for
individuals, I’m having real trouble accepting the overall conclusions
on the price differential between healthy and chronically-ill groups.
A price 10% difference would be a dream for most individuals with
chronic illness trying to buy into individual insurance, given that the
mandated rate for the HIPAA plan is 300% higher than the advertised underwritten rate.

Here’s the real unstated conclusion. Creating an unmanaged risk pool
and calling it the “individual insurance market”, is a complete
disaster. By definition healthy people will logically pick the cheapest
option—whatever Grace Marie Turner thinks will happen.
That will mean worse choices for those who have some type of chronic
illness, who are after all the ones who need the damn insurance in the
first place!

—

Now a few words on the information side of the equation.

My own experience with eHealthinsurance.com
suggests that there is plenty of information available for people
trying to buy individual insurance, but it’s at best incomplete and
unhelpful, or even worse deliberately misleading. The current state of
the individual market means that because of the variation in:

a) premium price b) co-paysc) co-insurance d) benefits e) coverage of those benefits f) Rx formulary g) deductibles, and most importantly h) maximum out of pockets,

it’s well beyond the average consumer’s ability to figure out what
they are paying for what. Unless of course they can do multi-factorial
equations in their head and know how sick they’re going to be
in the coming year. And then, the premium price you are given is
subject to underwriting, so you have no idea what the actual price is
until you’ve been through the hellish underwriting process.

There needs to be at least a mandated apples to apples comparison.
For example, eHealthinsurance doesn’t even put the max out of pocket
cost –which is the most important number of all as is well explained in this LA Times column from a cancer patient–on
their main results page. What would be much better is mandated national
identical benefits (including Rx formularies) so that consumers can
make a real apples-to-apples comparison. Of course the current so
called "free-market" advocates want to allow all kinds of shenanigans
in the insurance market which will take us even further away from that
ideal–even though such comparisons are the centerpiece of any rational consumer choice plan.

This is one area where I’m totally in favor of transparency, and the
current market incentives for insurers are totally in favor of
opaqueness. But, and here I disagree with the emphasis placed on
information by the RAND folks, even if you showed a transparent view
into the workings of the current individual market, it wouldn’t help
those who actually need it and can’t get into it at a decent price.
They’d just be able to see up front that they the system was conspiring
against them.

That’s why we need one national health insurance pool.