A Costly Wrinkle in the Merged Market


One of the more controversial elements of health care reform in Massachusetts is the so-called “merged market.”  In most states, individual health insurance is bought and sold under one set of rules, and small group insurance (for firms with either 1-50 employees or 2-50 employees) is sold under another set of rules.

It used to be that way in Massachusetts, too, before health care reform.

Individual insurance was guaranteed at the point of sale and the point of renewal, but the products were limited by state law, the price was based on the total medical expenses of the individual enrollees who bought individual coverage, and individual purchasers either couldn’t purchase coverage for pre-existing conditions or had to wait six months once they purchased insurance to access coverage.

The final rule was designed to make sure that people who had open access to health coverage wouldn’t simply buy it when they knew they were going to need it, and then drop it after their procedure was completed and paid for.  Insurance is, after all, insurance.  It’s all about shared risk.  When it works, the healthy subsidize the sick.  If there’s no incentive to buy health insurance when one is healthy, that reduces the size of the population that’s willing to pay premiums without requiring services, and increases the total cost of the coverage.

Under health care reform, the Commonwealth of Massachusetts merged the individual market with the small group market – creating what is commonly referred to as the “merged market.”  I’ve written about this before. As a result of the merger, the premiums paid by small businesses went up, and individual prices went down – because the medical expenses of small employers, on average, were much lower than the medical expenses of individuals.  That’s due – in large part – to the fact that in Massachusetts, small businesses, their employees and their families had much lower medical expenses than individuals and their families.  It’s as simple as that.  Estimates vary, but my cut is that individual premiums went down by about 25%, and small group premiums went up by 2-3% to pay for the merger.

The outcome of a merged market would be different in different states, depending on the rules for individual policies and small group policies prior to and after reform.  ‘Nuff said about that.

Now here’s the costly wrinkle.  When the merger occurred, the state told the health plans in Massachusetts that we could no longer apply a pre-ex exclusion or waiting period to individual purchasers unless we applied it to all purchasers in the merged market (including all small businesses).  No one was willing to impose such a condition across the entire merged market – primarily because it would be unfair to small businesses to impose such a requirement.  In the end, we all hoped that the new state requirement on individuals to have health insurance – or pay a tax penalty – would encourage healthy individuals to purchase insurance every year, and offset this now wide open front door for individual coverage.

Long story short, I don’t think it’s working.  A few months ago, brokers started posting comments on this blog site that implied that people – and some brokers and employers – were gaming that wide open front door – purchasing health insurance for a few months at a time, using a lot of services, and then dropping their coverage.  The penalty for not having coverage isn’t all that steep – about $900 – and while a few months of coverage might cost $2-3,000 in premiums – that’s peanuts compared to the cost of many medical services, which can run into thousands of dollars in a matter of days.

After about the fifth broker comment, I asked our finance people to check and see if individuals purchasing insurance from us either directly or through the state’s Connector web site were buying for a few months at a time, and using a lot of services.  The results were astonishing.  Between April of 2008 and March of 2009, about 40% of the people who purchased individual insurance from Harvard Pilgrim stayed covered by us for less than 5 months.  Even more amazing, they incurred, on average, about $2,400 per person in monthly medical expenses – roughly 600% higher than what we would have expected.  It wouldn’t surprise me if other health plans have the same problem.

This is a problem.  It is raising the prices paid by individuals and small businesses who are doing the right thing by purchasing twelve months of health insurance, and it’s turning the whole notion of shared responsibility on its ear.  It’s also created a new way for people who don’t want to play by the rules to avoid them.  The state needs to reconsider its policy to eliminate waiting periods and/or pre-ex exemptions for individuals purchasing health insurance in the merged market.  That would be the simplest and easiest way to protect individuals and small businesses who are playing by the rules – and limit the very costly impact of this wrinkle in health care reform.

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