Problems in the Small Group Market - Rates Go Up

Anthem BCBS of California has been hit by a firestorm of protest  over increases as high as 39% for its small group policies.  Kathleen Sebelius and Dianne Feinstein have blasted the company, and Barack Obama mentioned these rate increases during an interview with Katie Couric.   Wellpoint, the parent company, had large profits; why should it increase its rates so much? What has changed?

With the economic downturn, many companies downsized.  The smaller the company the higher the ‘selection’ risk – where the healthiest people opt out of insurance, leaving a sicker group continuing in insurance.   Further, younger (healthier) workers were more likely to be laid off.  A less healthy population leads to higher premiums.

Further, health plans have been able to “underwrite” for these small group plans – where they assess the risk of the group and price accordingly.   That means that a small group with a single person with a catastrophic chronic disease would pay prohibitively high rates.  There is significant threat to the insurers that health care reform would make health insurance “guarantee issue,” where an insurer could not turn down an individual (or a small group), and might not be able to charge more for such a group.   

Guarantee issue (which we have in Massachusetts) is socially good, since the sickest people need insurance the most – and this way they get it.  But guarantee issue works best when (almost) everyone is insured.  The sick get insurance, and underpay for it. The healthy get insurance, and pay more to subsidize the sick.

However, the political climate has changed dramatically.  While there is still support for sticking it to the health plans and forcing them to offer insurance to all, support has waned for individual mandates.  In fact, the Democratic–controlled State in Virginia just passed a bill banning individual mandates.   Even Howard Dean railed against individual mandates (and the Senate health care reform bill in general) on National Public Radio. 

 If there are no mandates to keep the healthy people IN the insurance system, it’s likely that the individual and small group markets will increasingly serve only the sickest of the sick.  If that’s the case, the Anthem rate increases are only the beginning.