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.

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"Mini-Med" plans have low premiums, but can be a road to bankruptcy

Here’s a worry.  Some states are starting to offer “mini-med” policies for those who can’t afford “traditional” insurance.  Tennessee has a health plan with a cap of $25,000, which began after the collapse of the massive expansion of TennCare a few years ago.  Now, Washington State put out an RFP for insurers to provide an insurance plan with a $75,000 cap on benefits.  WSJ article  Puget Sound Business Journal 

The good news about these “mini med” plans is that they are cheap – the Washington plan is supposed to retail for $100 a month.  That’s nice for young healthy folks –especially the immortal ones who know for certain that nothing bad will happen.  These plans also probably select against those with existing illnesses, who know far too well how easy it is to rack up serious bills in our health care system.

The bad news: these plans basically offer no insurance for when people are especially sick – just when they need the coverage most.   “Mini-med” plans give their members access to the system – but the plans are a rapid route to medical bankruptcy if people get sick.  Many states (including Washington State) prohibit such plans – and proposed health care reform would not consider this kind of a plan to meet “minimum credible coverage” standards.

 “Mini med” plan could be a good complement to a community-wide “reinsurance”  program that covers all (or almost all) bills in excess of some set amount.   This suggestion was part of the Kerry health care plan in 2004, and Katherine Swartz of Harvard School of Public Health has written a book on the subject.  High cost “shock” claims are rare and somewhat random – so spreading the risk for these as widely as possible makes policy sense.   However, putting in place obviously inadequate plans that leave the truly sick without any coverage is a bad policy idea, and it’s depressing to see state governments heading in this direction. 

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Health Care Costs Keep on Rising

(click image to enlarge)

The Centers for Medicare and Medicaid Services (CMS) published the 2010 national health expenditure numbers – with spending projections through 2019.   The email announcing this article from Health Affairs screamed “U.S 2009 Health Spending Projection -- largest increase in 40 years.”  That’s a true statement –but it’s a little more complicated.

Health care expenditures went up by 5.7% last year –more than the 4.4% from the year before, but well under the double digit increases from the last decade. However, the economy as a whole contracted by 1.1%.  This means that health care inflation is even more ‘out of balance’ with overall inflation – and health care will have represented an estimated 17.3% of the GDP in 2009.

High points from my perspective:

• There was more growth in public programs compared to privately-funded health care – as the recession has left more people without employer-sponsored health insurance and eligible for government programs.   This understates the government’s role –since subsidy for COBRA payments for recently uninsured count as private insurance spending..
• Medicare spending will only grow 1.5% in 2010 assuming that the SGR 21% physician pay cut was implemented in January. It’s already been delayed until March, and such a draconian cut is highly unlikely.  If the pay cut is not implemented, Medicare costs will swell by 5.1%.  In fact the SGR reversal would result in an increase in overall health care inflation of 0.8%.   It’s going to be hard to reverse this and pay for it without cuts somewhere else or new taxes or fees.
• The CMS Actuary predicts that health care spending will increase after 2010 “primarily (as) a result of expected faster growth in disposable personal income associated with the economic recovery.”  This is a window into the CMS Actuaries assumptions.  Barring health care reform, overall economic growth leads to disproportionate increased spending on health care.   Economic doldrums could help avert health care inflation – but at a terrible price
• Drivers of heath care inflation are primarily increased cost per unit and increased utilization. Both population growth and ageing of the population are responsible for much smaller effects.
• Total costs were 2.24 trillion in 2007, and will more than double (4.83 trillion) by 2019, by which time health care will represent 19.3% of the GDP
• The government share of health care costs will exceed 50% over the next decade. Of course, if you count the tax subsidy for employer-sponsored health insurance, government already pays for more than half of all health care.

The impact of health care cost inflation on the overall economy, and on the federal debt, is huge. We’ll see how (if) this new data helps energize the effort to pass health care reform (and especially to cut future Medicare growth rate).

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