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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24 replies »

  1. I think my husband was only fined $300 for not having health insurance the entire year. I know this post is a few years old so maybe it’s changed since then. Still a great article, thank you!

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  3. My father says “People will do absolutely ANYTHING except what’s required.”
    Margalit asks:
    > What would the premiums look like if the
    > pool was 300 million Americans?
    Let’s say 340 million Americans.
    This may be overstated a little, but without changing anything else, approximately $2T / 340MM = $5.9K per person per year, growing at around 5% per year.

  4. Margalit a good question but to understand the answer you first need to understand the difference between Theory and Reality, and I don’t mean that in a rude way at all.
    In Theory a single risk pool covering all 340 million Americans with a single payor would be the most efficient delivery system for insurance.
    In Reality politics being politics it is usually the most inefficient. By the time everyone gets their peice it is so expensive and bloated it is worthless.
    In Theory we are discussing insurance.
    In Reality we are discussing the finance of healthcare and provision of care through social entitlement. A risk pool is a pot where money is collected from all the insured to pay out claims for those insureds. Politicians have so bastardised our system that this pool pays for people not covered by it, subsidized those that don’t contribute, and wants to charge a small group of members considerably more then they actuaraly should so they can charge others less. We call them risk pools but they really aren’t. Voluntary tax collections, extortision, but not insurance.
    Risk pools have cost, it doesn’t make sense to pay those cost if you really don’t have a risk pool. The problem with single payor and entitlement programs is they never work. Politics always destroys them. Even if you pass today the perfect sustainable health system it won’t be more then 1-2 elections until politicians start to change it to buy votes. It wont be more then a couple elections until their is a budget mess and funds are reallocated.
    CA is a perfect example of what large entitlement programs do, in good times they increase benefits and spend the money and in bad times they run around with their heads cut off.
    Our current healthcare crisis is the result of Medicare and Medicaid. If those programs did not exist we would not be in the middle of a crisis. It was the unfettered promises of unfunded benefits and no budgeting that is bankrupting the states with Medicaid and the federal government with Medicare. It has beent he cost shifting of those programs to private that has been driving their cost up.
    Risk pools by design are sustainable, if inadequate money is comming in it must be immediatly dealt with.

  5. OK, maybe I am missing some insight that everybody seems to have, but I don’t understand the necessity for risk pools. I mean, I understand why insurers have them and all that, but why do WE need them?
    How is it possible that employee A at a company with 12 employees is more expensive to insure than his twin counterpart, employee B, at a company with 120 employees, one block up the street? Not to mention employee C, who is self employed. (Do we all have to be C-Corps now in order to get health care?)
    I have to admit that the logic behind all these complex pool structures, merged or unmerged, escapes me, unless of course it’s just a way for insurers to make sure that their profits are adequate by jacking up premiums wherever possible, in which case, I do understand the logic.
    What would the premiums look like if the pool was 300 million Americans?

  6. Barry which do you think will happen first, admitance to heaven for the living or meaningful healthcare reform?

  7. “We can all see the eventual trend lines, but no one is prepared to do anything about it.”
    I’ve noted numerous times that none of the stakeholder groups seem prepared to give up anything of significance to bring about sensible healthcare or health insurance reform. They all want the problem solved at someone else’s expense. It reminds me of a line attributed to a former Boston councilman named Joe Langone. He said: “Everyone wants to go to heaven but nobody wants to die.”

  8. “The bottom line is that those of us in the individual market feel like we are on a ship with a slow leak which could explosively enlarge at any moment.”
    bev MD what your doing is called projecting. Your taking your experience and assuming it is the same for everyone else. I have clients and talk to people with individual insurance every day, the FACT is most people with individual insurance ARE NOT like you, they are not a ship with a leak. IN FACT studies done on the matter always show affordablity is an issue for a minority of those in the individual market.
    I am my employer so when it comes to cost I not only feel the effect of paying for my coverage, my parents coverage, but also my employees coverage. So once again my field of reference is considerably larger then yours.
    Your last comment pretty much boils it down to the fact and is what people should take away from your beliefs,
    “There is no reason that we should be penalized out of proportion to those covered by their employer.”
    Why don’t you work for a hospital or PHO or a larger physician group? Because you want the benefit of being your own boss, you want the financial reward that comes with owning the show. You want the benefits of being your own boss without the risk or liability, you want everyone else to subsidize you. Nothing is stopping you from forming a corporation and enjoying the same benefits corporations enjoy, but you don’t want the double taxation and accounting mess that comes with a C corp. Yes bev it does appear you are greedy, lets hope the day never comes that you take responsibility for the deciisons you make and stop looking for someone else to take the risk while you roll in the reward, we wouldn’t want you to change.
    What do you operate under bev MD Partnership? S Corp? Why aren’t you set up as a C corp? If you had a C corp you and your husband would be protected by your states Small Group reform laws, is your and your husbands health not worth the extra paperwork of forming a C Corp? If your sitution is really as bad as you want us to believe why haven’t you taken these couple simple steps to solve it? Sounds to me like your more concerned about pocketing the extra money and let the rest of us worry about your bills if something happenes, am I wrong?

  9. All – Great observations and comments. When I wrote this on the HPHC blog at http://www.letstalkhealthcare.org, several people suggested an annual open enrollment period for individuals purchasing coverage – the same way it works for group coverage. That might be a better idea than a waiting period or a pre-ex exemption.
    BTW, when these two markets were merged, some folks – including me – suggested that instead of putting the whole thing into one big pool, we should have had two pools – one for groups of 1-5 and another for group of 6-50. I still think that would have been a better strategy. We could have then used some kind of stop-loss coverage for the 1-5 groups, along with an annual enrollment period, to keep premiums affordable for this group of purchasers. And yes, the mandate is there, but the price for non-compliance is pretty small. It does, however, get bigger over time.
    To the single payor folks, I offer two observations:
    1) Medicare and Medicaid are financial basket cases.
    2) Medicare payment policies – which reward new technology and more procedures, and underfund primary care – have had more to do with building the health care delivery system we all wish to change than any other factor. I can’t see how more of this approach is a good answer to anything.

  10. As much as I dislike insurance companies, they are simply not the biggest cost driver we’re facing. Not even close. I just wonder what the health “insurance” market would look like if we first focused on health “care” reform.
    With 1) chronic conditions making up 75% of our costs and 2) with most of those conditions being preventable, don’t you think we should place at least a teeny bit more focus on preventing those conditions?

  11. Nate;
    I would guess you are covered by your employer right? So your definition of “unaffordable” might be different than others. Yes I can “afford” my insurance right now (since I am one of those greedy doctors, right?) but the premium went up 22% this year after previous years of steady increases. This is with a $6000.00 deductible, and a husband with a chronic condition excluded by all medical insurance, which could rear up and become “unaffordable” any year now.
    The bottom line is that those of us in the individual market feel like we are on a ship with a slow leak which could explosively enlarge at any moment. There is no reason that we should be penalized out of proportion to those covered by their employer. In fact, I agree with Margalit, NEITHER insurance companies nor employers belong in this business, there are too many built-in conflicts of interest.
    And Nate – I hope you never become seriously ill, for your sake. It might change your attitude, and we wouldn’t want that.

  12. “Which is why using the tax system to collect premiums is a better idea than using health insurers to do it. Except then they’re called taxes and oh we can’t have those can we.”
    Matt can I remind you that both Medicare and Medicaid are paid for with tax dollars and they are the two biggest failures, neither is sustainable and it is largely due to the two of them that private insurance is so expensive. Tax based funding hasn’t worked the past couple decades, please explain what you would change that would suddenly make it work.
    They do have a mandate, if you don’t participate you are fined, the problem is the fine is done through taxation and if you don’t pay taxes the fine is meaningless. To pass political muster the fine is also of such a small amount it is cheaper to pay the fine then buy insurance. Are you advocating we strengthen the mandate and lock people up that don’t purchase insurance? Do you want them executed Matt?
    Bev MD far more people find the individual market affordable then find it unaffordable as you claim. There are only 3-5 million uninsured people in this country that can’t afford coverage. Most people agree it is not a person’s fault they have a pre-existing condition, it is their fault if they wait till they have one to buy coverage. Again the number of people trying to game the system far exceeds the few honest people that fall through the cracks. If you stop those gamming the system we can easily assist those honest people and do ti affordably.
    Maralit, insurance is compensation and has a set value. TO claim it should be no different between small and large employer part time and full time is the same as saying a part timer working for a small company should be paid the same as a full timer working for a large company.

  13. As an employee of the Commonwealth who is ineligible for employer sponsored insurance and unable to afford it on the individual market, let me assure you the MA individual mandate is all too real! I was fined last year and will be fined again this year. This is why the state’s economy is circling the drain!

  14. Just to add to bev MD’s comment, the employers should also be out of the health insurance business. It should make no difference if one is employed by a big employer, by a small employer or self employed, part time or full time.
    A progressive tax is the cleanest way to make sure everybody pays their share. And you don’t have to chase people down for non compliance.
    I don’t see why that should be a political landmine. Most people will not see any change to their take home money. Employers will have one less headache to deal with. Insurers will have to change the way they operate completely. Maybe that’s the landmine, but it shouldn’t be.

  15. It would seem like some kind of commitment/open season rules would be useful along with stiffer penalties for dropping coverage. Usually employees can only switch plans once a year if another choice is available.
    Some years ago I had a mishap with my auto insurance and didn’t get it paid — I drove around for 6 months without insurance, fortnately without incident. Eventually I got a letter from the state with a fine that was about twice what the premium that I forgot to pay was! Yikes — my agent now calls me if they don’t get a payment, but I have not ever forgotten to pay that again!

  16. You cannot always eliminate a few from gaming the system. If the vast majority are playing by the rules, it makes sense to continue it. Then come up with some creative way to deal with those gaming the system

  17. I understand the point about people gaming the system, but re-establishing a pre-ex rule ONLY for individuals is discriminatory. The individual insurance market (I am in it) is unaffordable enough without adding on these onerous exclusions. It’s not always someone’s FAULT they have a pre-existing condition – a friend with a congenital heart defect and a husband with a vascularly compromised leg due to a teenage motorcycle accident are two personal examples – so why should they be singled out for penalty? This is one reason we need a completely different system, and why I have argued that insurance companies do not belong in the health care business, simply because their primary aim is to minimize their own $$ risk.

  18. JD. I’m not sure if we should be fiddling while the city burns, or just pure gasoline on it and make it burn faster. Either way the result is the same, the city burns to the ground and needs rebuilding later. Incrementalism a la Mass don’t do much to stop it.
    Our health care debate is beginning to remind me of the global warming/energy debate/ We can all see the eventual trend lines, but no one is prepared to do anything about it.

  19. Glad this got posted here. I was hoping it would get more visibility.
    If it gets the attention of folks in Washington, it should single-handedly destroy the idea that you can have guaranteed-issue without a serious penalty for not being covered.
    Matt, Americans need to take this slowly, as I’m sure has become abundantly clear. We need to dip our toes in this “universal health care” thing and will not dive into the pool. Once Americans become familiar and comfortable with an insurance exchange, a mandate for coverage (with penalties and subsidies that increase in tandem each year, I hope), community rating for individual and small group, minimum benefits, etc….then using the government to collect premiums (and forcing a default if you don’t choose) isn’t such a scary thought.
    I don’t endorse the attitude, just describe it.
    By the way, both the individual mandate (a meaningful one) and new taxes are political landmines, not just new taxes. That’s why the folks in Massachusetts “forgot” to have a real mandate! 🙂

  20. Hmm….but what about the individual mandate Charlie? It appears that you dummies in Massachusetts forgot to have one…but I thought that was the whole point.
    Which is why using the tax system to collect premiums is a better idea than using health insurers to do it. Except then they’re called taxes and oh we can’t have those can we.

  21. This is not a problem at all in countries where everybody is covered automatically. Just saying.