While about another development, buried in this San Francisco Chronicle story published today is a revealing disclosure by Janice Rocco, deputy commissioner of the California Department of Insurance. Rocco told the Chronicle Blue Shield of California will have only three individual insurance plans open for enrollment after it closes nearly two dozen existing plans next month. Rocco is quoted as saying the insurer is seeking approval from the Golden State’s managed care plan regulator, the Department of Managed Health Care, to nearly double the number of managed care plans to 20.
This development is counter to the market trend of the previous decade in which individual market consumers shifted out of more comprehensive and costlier managed care plans to cheaper, high deductible insurance plans overseen by the Department of Insurance. Blue Shield could be preparing to offer richer, lower deductible managed care plans that can meet the essential health benefit requirements of the Patient Protection and Affordable Care Act in order to potentially qualify them for the California Health Benefit Exchange in 2014. Blue Shield’s shuttering of the nearly two dozen individual insurance plans is likely due to their falling into the death spiral of adverse selection.
Kaiser Health News (KHN) provides a roundup of federal and state options to regulate health insurance premiums. Reading between the lines, however, the story is really about a larger issue: regulatory action to hold down the cost of medical care that underlies the actuarial basis of premiums. Either indirectly by giving insurance regulators more authority to approve or reject filed premium rates or more directly as KHN reports:
Tired of complaints that underlying costs are the problem, but hearing no consensus from the health-care industry on how to solve it, Massachusetts Gov. Deval L. Patrick (D) introduced a broad proposal to overhaul the way health care is paid for. Part of the proposal would allow regulators to reject premium increases if insurers pay hospitals, doctors and others more than a limit set by the state.
Either way, to providers it smells like price controls. In California, that prospect has doctors so alarmed that they’ve allied with their traditional payer adversaries to oppose pending legislation (Assembly Bill 52) that would give the Golden State insurance and managed care plan regulators prior approval authority over health insurance rate filings and allow them to bar the use of rates deemed excessive, inadequate, or unfairly discriminatory.
Massachusetts Gov. Patrick’s concept bears watching and could have national implications insofar as that state’s health care reform served as a template for the federal Patient Protection and Affordable Care Act (PPACA).
Two newspaper accounts of substantial recent rate increases for individual health insurance premiums approved by the California Department of Insurance this week strongly suggest the segment is in deep trouble and poised to collapse upon itself from both ends.
The stories show that both insurers and consumers believe the segment is growing economically unsustainable amid rapidly rising medical costs.
While Blue Shield of California will boost rates on its individual health insurance policies by an average of 18.2 percent, the nonprofit insurer will still be operating at a loss. “Even with these increases, we’ll be losing money from our individual policies,” Blue Shield spokesman Tom Epstein told the Sacramento Bee. Epstein said the red ink could total in the millions of dollars.
Market share leader Anthem Blue Cross will increase rates by 14 to 20 percent effective Oct. 1 for nearly 800,000 individual California policyholders, the Los Angeles Times reports. “It’s already verging on completely unaffordable,” said Mary Feller, 57, of Northern California, told the newspaper. “If our insurance keeps going up at this rate, we’ll lose it.” And in a still anemic economy, those rate hikes appear even less affordable.
When selling individual health insurance produces losses for insurers and policyholders can no longer afford the premiums, the market is essentially dead. The only question is whether it will be pronounced so before 2014 when insurance purchasing exchanges of the Patient Protection and Affordability Act are set to begin operating. I predict it will.
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.
California and federal policymakers are on convergent paths when it comes to regulation of premium rates charged by health plans and insurers. The California state Assembly this week approved and sent to the upper house legislation that would subject managed care service plans overseen by the Department of Managed Health Care and indemnity insurance policies regulated by the Department of Insurance to a prior approval rate regulation scheme. Such as scheme has been in place in California since 1989 for property/casualty insurers after voters approved a ballot measure instituting it. Helping push the ballot measure over the top by the slimmest margin of voter approval was anger over rising auto insurance rates.
Similarly, increasing health insurance premiums and particularly a big jump in individual policy rates that Anthem Blue Cross had planned effective March 1 (the rate increase has since been withdrawn) are providing impetus to AB 2578 after a nearly identical bill stalled in 2009.
The Patient Protection and Affordability Act (H.R. 3590) also authorizes a prior approval rate regulation scheme. Section 1311(e)(2) of Part II the Act (Premium Considerations) requires “justification for any premium increase prior to implementation of the increase.” That provision would take effect Jan. 1, 2014 as part of the Act’s requirement that states establish American Health Benefit Exchanges — mandatory on line markets through which individuals and small employers (and by 2017, anyone) can compare and shop for health plans.
AB 2578 is likely to end up on Gov. Arnold Schwarzenegger’s desk by September. A rational policy argument could be made that a prior approval scheme makes far better sense for an oligopolistic health insurance market than the much more competitive property/casualty insurance markets. But Schwarzenegger isn’t likely to sign the bill into law. The lame duck Republican governor doesn’t tend to favor market regulation generally and has voiced concern about the “fragility” of California’s individual health insurance market segment — a segment dominated by just five major players. Since rapidly rising medical treatment costs limit their ability to compete on price, they primarily compete on risk selection by limiting coverage to healthier individuals and pass through increased medical costs via rate increases. Schwarzenegger’s veto message will likely assert AB 2578 is not needed given the prior approval scheme contained in H.R. 3590.
If veteran Democratic Governor Jerry Brown is elected governor in November, however, legislation similar to AB 2578 will likely reappear in 2011 and potentially get signed into law effective Jan. 1, 2012. That would give California a two year head start on the feds and provide federal regulators drafting regulations to implement H.R. 3590’s prior rate approval scheme real world experience on how such a scheme actually plays out in the nation’s largest health insurance market.
Not long after 2010 got underway, Anthem Blue Cross created high anxiety among consumers in California’s individual health insurance market by announcing steep rate increases averaging 25 and as high as 39 percent effective March 1. After the California Department of Insurance asked Anthem to run its numbers again, the insurer said it found mathematical errors in its actuarial projections and would refile corrected rates later this year.
Since individuals lack the bargaining power of employers, they tend to get the biggest rate hikes since insurers can essentially offer them on a take it or leave it basis. Small employers with fewer than 50 employees by contrast have at least some negotiating leverage with insurers compared to individuals. But not much more. They offer next path of least resistance for payers to pass on rising medical costs.
And so come double digit rate increases for them, not just from Anthem Blue Cross but also from all of Anthem’s major competitors who along with Anthem make up about 90 percent of the state’s private health insurance market. A Los Angeles Times survey released May 26 found major insurers in California’s small-business market are raising rates 12 to 23 percent in the small group market. Not surprisingly, the increases are producing protests from those small employers who have thus far managed to ride out the recession and remain in business. Some warn the rate hikes will force them to curtail hiring or even close.
The small group market is the bleeding edge of the breakdown of employer-paid health insurance model upon which most working age Americans rely for health coverage. These rate increases will likely prompt more small businesses to cease providing health insurance for their workers, forcing those employees into the already distressed individual market.
Many of those workers will find they cannot qualify for or afford individual coverage, boosting the number of medically uninsured Californians and creating political pressure for more immediate reforms than those contained in the recently enacted federal Patient Protection and Affordability Act. The problem for policymakers is no amount of reform of the insurance mechanism that pays medical treatment and pharmaceutical costs can provide relief as long as those costs keep rising far in excess of the rate of inflation.
High risk health insurance pools to cover Americans with pre-existing medical conditions who fall short of medical underwriting standards of individual market insurers and managed care plans must be in place within 90 days of the March 23 enactment of the Patient Protection and Affordability Act. That mandate was put in place by H.R. 3590, Subtitle B, Section 1101.
Going forward, several aspects bear watching. Among them is how states — the majority of which already have high risk pools in place — implement the pool in their jurisdictions and conform their existing high risk pools to the new federal requirements.
In the interim before the high risk pool mechanism ends Jan. 1, 2014 and health insurance purchasing exchanges that must accept all applicants regardless of pre-existing medical conditions start up, a key question will be the number of people who actually sign up for high risk coverage. The number in large part will be driven by the size of the premiums.
California’s high risk pool, the Managed Risk Medical Insurance Program (MRMIP), is required by statute to set premiums 125 to 137 percent of standard market rates and has an annual coverage cap of $75,000 and a lifetime limit of $750,000. Currently the program covers just 7,100 Californians — a tiny fraction of the 1 million potentially medically uninsured Golden State residents projected by Harbage Consulting in 2008.
MRMIP has been limited on the supply side by enrollment caps due to limited funding and on the demand side by relatively high premiums. HR 3590 requires premiums to be established at a “standard rate for a standard population” that can vary based upon age, an important factor considering a large segment of medically uninsurable are between 50 and 64 years old. For the oldest members of the pool, premiums are limited to four times those charged the youngest members of the pool.
Standard rates however are on an upward trajectory as evidenced by a sharp increase being implemented for indemnity-based policies by California’s dominant player Anthem Blue Cross. Those rates if ultimately approved by the California Department of Insurance would be as high as those previously charged those in the MRMIP pool. For many, they would likely prove unaffordable. Particularly in a tepid economy that some economists predict won’t fully recover until the high risk pools are slated to end in 2014.
The upshot is HR 3590’s temporary high risk pool may not make much of a dent in the number of medically uninsured not covered through employment-based insurance or government insurance programs.