A Costly Wrinkle in the Merged Market

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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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CiCi
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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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Tom Leith
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Tom Leith

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.
t

Nate
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Nate

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… Read more »

Margalit Gur-Arie
Guest

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… Read more »

Barry Carol
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Barry Carol

Nate — Probably the latter, but I’m not holding my breath.

Nate
Guest
Nate

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

Barry Carol
Guest
Barry Carol

“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.”

Nate
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Nate

“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… Read more »

charlie
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charlie

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… Read more »

Deron S.
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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?

bev M.D.
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bev M.D.

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… Read more »

Nate
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Nate

“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… Read more »