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WSJ: Medical utilization decreasing

Rising medical costs — a key driver of the health insurance crisis — appear to be easing, the Wall Street Journal reported this week.  According to the newspaper, there are two factors at work.  The first is the recession.  Since a large majority of people get health coverage through employment, their coverage gets more costly once they lose their jobs since they must buy costly COBRA coverage (many long term unemployed have lost that coverage) or pricey individual health insurance or HMO memberships.

In the case of the latter, more are opting for more affordable high deductible plans, which serve as a built in deterrent to the utilization of medical services.  “People just aren’t using health care like they have,” Wayne DeVeydt, WellPoint’s chief financial officer, told the newspaper. “Utilization is lower than we expected, and it’s unusual.”

If the U.S. economy enters a post recession deflationary period as some economists expect and some Federal Reserve bankers worry aloud, premiums might even fall.  That along with decreased utilization might head off potential market failure in the individual and small markets, troubled market segments that might not otherwise survive in their current form by the time most provisions of the Patient Protection and Affordable Care Act take effect in 2014 if sharp increases in medical costs and premium rates continue.

Obama administration apparently concerned over failure of individual market before 2014 reforms are in place

The Obama administration is apparently concerned over the possibility the individual health insurance market will implode before insurers must take all comers and the purchasing exchanges of the Patient Protection and Affordable Care Act kick in at the start of 2014.

In my previous post, I speculated that unsustainable annual premium increases averaging 20 percent in the individual market could push the segment to a tipping point of market failure before 2014 arrives.  Health and Human Services Secretary Kathleen Sebelius evidently shares that concern based on remarks she made to the Reuters news service this week.  The Reuters dispatch notes Sebelius, a former Kansas insurance commissioner who earlier this year lambasted individual health insurers for imposing steep premium increases, has adopted a more conciliatory tone toward the industry.  Perhaps as a former insurance regulator, she now sees the business model of individual insurers — and possibly that of small group writers as well — in a potential life or death struggle leading up to 2014.

Sebelius suggested continued rate increases — which insurers say reflect the pass through effect of rising medical costs and utilization — could trap the individual market in a downward spiral of premium increases followed by policyholder cancellations and nonrenewals and more premium hikes.  “If they lose more and more market share as we move toward 2014, it’s not really good for them,” Sebelius said.

As rates go up, individuals who believe they are relatively healthy will be more and more inclined to drop their coverage, especially when monthly premiums begin rival the amount of mortgage payments.  This unvirtuous cycle — which I’ve dubbed “adverse deselection” — would leave as policyholders the most medically risky individuals who are likelier to use more and higher cost medical services, prompting more rate increases.  Earlier this year, Anthem Blue Cross told California lawmakers this dynamic partly justified the insurer’s request for individual premium increases averaging around 25 percent for 2010, an amount that was subsequently lowered to 14 percent in a revised filing with the California Department of Insurance last month.

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