The Business of Health Care

State Insurance Exchange Blind Spots: Unknown Risks and Unintended Consequences

October 1st marks the first ever public exchange open enrollment season.  This means some of the speculation around consumer awareness and understanding, enrollment/uptake, premiums, and payer participation (not to mention the technical readiness of the exchanges) will finally subside and give way to a clearer picture of the PPACA’s initial success in mandating individual health coverage.

Despite this approaching level of clarity, however, several very significant “blind-spots” will continue to persist, principally for the health insurance carriers that choose to participate by offering PPACA compliant plans in the exchange.

This is due to the law’s guaranteed issue mandate prohibiting health carriers from denying coverage based on preexisting conditions.  As a result, the traditional enrollment process which consists of a comprehensive assessment of each applicant’s health status and risk cast against the backdrop of time-tested underwriting guidelines is completely thrown out.

What takes its place is an extremely limited data set (i.e., the member’s age, tobacco/smoking status, geographic region, and family size) from which carriers can determine pre-approved premiums and variability therein.  To use an analogy, health insurance companies no longer have a “bouncer at the door” turning people away, or a sign reading No shirt, No shoes, No service at the entrance.

In other words, everyone, regardless of their risk profile, must now be welcomed in with open arms and with very limited risk-adjusted rates.

This wouldn’t necessarily be a problem if the enrolling population comprised a well understood risk pool representing a true cross-section of the population.  The reality, however, is that a predominantly unknown and potentially unhealthy population will flood the individual health insurance marketplace in a two weeks just as most states quickly phase out their high-risk pre-existing condition pools and shift them into the exchanges.

Additional blind-spots will result from the fact that millions of previously uninsured individuals that are expected to enter the exchange have very little in the way of historical claims data – making it virtually impossible to determine the health risk of a member until a preliminary view can be established 6-9 months into the future, once a meaningful period of claims data are generated.

This period of uncertainty, along with the fall-out created by an inability to medically investigate new members prior to enrollment, impacts the very means by which carriers price their products, measure/control risk, and manage the care of its members.  In our view, the following are three of the top challenges faced by carriers participating in the state-based exchanges:

  • Pricing / Rate Setting Deficiencies:  With high levels of uncertainty regarding the health status of incoming enrollees, health carriers are confronted with an actuarial “blind-spot” as it relates to estimating the underlying cost structure of new members and setting rates for the upcoming 2014 open enrollment season.  This problem persists through the 2015 open enrollment season as carriers will be required to submit their 2015 rates before claims generated from 2014 enrollees can inform and substantiate changes to the existing rates.
  • Ineffective Risk Monitoring:  In the absence of historical claims data and information typically picked up within the traditional individual health underwriting process, carriers are extremely disadvantaged in identifying, stratifying, and managing the risk of individual members as they enroll through the exchanges.
  • Lack of Member-Specific Insight: Another issue stemming from the challenging risk assessment dynamics at play within the exchange environment is that carriers are unable to identify and address the medical needs of their members in a proactive and cost effective manner (e.g., care / chronic disease management program alignment, PCP assignment, alternative care scheduling, telemedicine interventions, wellness coaching, behavior modification / intervention, and other member outreach and education opportunities).  In this way the goal of providing greater access to coverage has the unintended consequence of disadvantaging the individual as the carrier has a diminished ability to address their care needs in a meaningful way.

For these reasons, many national carriers, including Aetna, Cigna, and United Healthcare, have been very cautious in taking on the relatively unknown financial risk associated with the state-based exchanges – opting in favor of a “wait-and-see” approach until the trade-offs between member acquisition and financial viability come into clearer view.

As for the carriers participating in the exchanges, it will be critically important that a well-defined risk management program with strong consumer engagement underpinnings is put in place to embrace these newly insured individuals, better understand their individual health needs, and triage high risk members into appropriate care intervention programs.

A sound strategy in this regard will ensure high levels of consumer satisfaction and retention while avoiding the significant claim losses related to members with expensive, unmanaged conditions.  This will in turn increase the plan’s odds of long-term financial success coming off the inaugural open enrollment season.

Looking ahead, our team will continue to monitor how carriers are onboarding new members and look to see where innovation will occur not only in advertising and member acquisition, but in enrollment and upfront member engagement and onboarding.  Given the rapid growth in the individual market, we suspect most carriers will be strained in this regard since these B2C markets have not been historical strengths and most carriers are still working their way up the consumer engagement “learning curve.”

The carriers that will be successful in the public exchange setting – both from a risk management and customer satisfaction / experience standpoint – will have to be successful beyond the enrollment package and find novel ways to engage, monitor, and manage members on an ongoing basis.  While the exchanges are designed to improve competition and foster improved consumer decision making among similar benefits packages, an unfortunate reality is that not all carriers will be successful.  In these instances it will not only be the health plan that takes the hit, but the individual member as well.

Seth Kneller is a Vice President at TripleTree, an independent, research-driven investment banking firm in the healthcare industry. This post originally appeared in the TripleTree Research Blog.

6 replies »

  1. I went on the obamacare calculator, and amazed at how expensive insurance is going to be. My annual income is 30,000.00 ( single male 49 yrs. old) which equates to a take home pay of $ 480.00 per week. Living in New Jersey to get the silver plan will cost $4512.00( $ 376.00 per month) I suppose I am to send 20 % of my monthly income to a plan that only pays 70 % of my healthcare. At the end of the year I will receive a $ 1,900.00 tax credit. Who will pay my rent ? Absolutely unaffordable. this law should be called the unaffordable healthcare act.

  2. A simple proposal.

    1) Scrap the not so affordable care act. Large monthly payments to insurance companies by millions of citizens? Well, you do the math. Most people I know are like me, they live paycheck to paycheck. They don’t have an extra three hundred or whatever to spend on health insurance. They would rather pay the fine.

    2) Merge Medicaid with Medicare. Lift the financial burden of the States to help fund other needed services.

    3) Expand Medicaid to cover every American citizen. Everybody gets the same coverage as our esteem government leaders. Cover health, dental, and vision with mandatory preventive exams with a small co-pays. Since we already pay into Medicare a little more won’t be missed. This relieves the burden from Corporate America; freeing up funds for needed expansion needs and hopefully to hire more people and thus help get the economy moving again.

    The insurance companies won’t like this but tuff too-tee. The Government can create a new Federal Lotto to help fund it as well. Crazy Eights. Pick eight numbers out of 63 and win a BILLION DOLLARS with no rollover and three dollars a ticket. Kha-Chink!

    Maybe the Democrats and the Republicans have seen the day when their parties go by the wayside in favor of a citizen based political coalition to replace all of them.

    Together We Stand
    Divided We Fall
    — Pink Floyd

  3. What kind of cushion are insurers building into their rates to protect them against unpredictable risks: 10%, 25%, 50%.

    Is it possible that in a few years the insurers will have a handle on their risks to cut their rates or raise them even more?

  4. Our US health care system costs too much because Health Care Insurers don’t provide health care. They are the single biggest reason we may never have a health care system like many other countries. Other countries do not have the HCIs increasing costs of health care by their very existence. We owe this to HCI being linked (mandated) by your company who lowers your pay to provide the cost.

    It’s in the best interest of HCIs – that we never have a national health care system, to fight with all their resources any attempt to change the current system, to limit payments for medical procedures, to deny coverage for certain procedures, and to be the agents of neglect and even death for those they deem to have a pre-existing condition or have gone over the life time limit.

    Change jobs and, even if the next employer has the same insurer, you may find a condition you had is deemed pre-existing (happened during the last job) and you won’t be insured. If HCIs don’t want to cover a procedure you will not be insured. But, you will be in a minority that the covered majority will just dismiss or prefer not to see.

    HCIs negotiate with health care providers to accept what they are willing to pay or they will not be allowed access to their group members. The providers fold and agree to lower rates because they need patients. But, some people, even those out of work, wind up paying full price, which is made even higher to make up for the legal HCI extortion losses.

    Others who have no assets get FREE hospital health care (some hospitals say 30% of patients can’t pay), which adds to the cost for all of us with coverage or can afford some type of payment plan.

    So what a wonderful system we have. That is if you have no assets, or are employed and have insurance, on Medicare or Medicaid, or you are a 1%er and don’t worry about any of this.

  5. I wonder if the federally established exchanges can simply shut down new enrollment once the budgeted vouchers have been exhausted, just like they did with the high risk, pre-existing condition pools (as if the exchange pools won’t be high risk, pre-existing condition pools)?