I pulled this mid-afternoon as I made a serious error of fact. I’m okay with making errors of analysis, but I want my signal to noise ratio to be fairly high, so I needed to pull the post for corrections. Original errors will be in the following post but struck through. Corrections took a while as I had an urgent tea party with Kid #1 and five stuffed animal friends and then I had to go to work.
Get ready to see a lot of stories like the following:
“My husband is already working a second full-time job and I occasionally tutor and pick up some extra students,” said Charlotte, a public school teacher who did not want to disclose her full name. “We are looking at a three-hundred dollar per month increase in premiums for blue choice.”
This is in
North South Carolina, and reading through the story, context is given and roughly a third of the projected cost increase is due to PPACA:
BlueChoice said in a statement “The Affordable Care Act is adding federal taxes and fees, and additional costs due to enrichment of benefits; it is one-third of what is causing this particular insurance product to increase so significantly.”
The argument that roughly a third of the cost increase is attributable to Obamacare regulations and benefit enrichment is extremely plausible. It is line with other companies and their public release of information. For instance UPS saw a 12% increase in the cost of self-insuring its employees. A third of that cost was due to PPACA.
UPS officials said that the company’s actuaries expected overall employee health costs to rise by about 12 percent next year—and that about a third of that increase was in reaction to Obamacare.
The big drivers of additional premium costs due to PPACA is the individual mandate pushing people into the risk pool who previously were running naked at companies that offered insurance, and adding adult children to the age of 26 to parental policies. The elimination of life time maximum coverage is also playing a part.
However, this is not the entire story. Below the fold will have some reasonably well informed but complete speculation.
More than 250,000 public and state employees who use BlueCross BlueShield’s’ BlueChoice heath insurance and state insurance plans were notified their premiums were going up.
BlueChoice, however, says the exact number of their customers who are seeing increases to their premiums is as low as 16,678.
What drives rate increases?
Money that goes into an insurance plan will leave the insurance plan in four manners. The largest category of expense is the medical expense ratio. This is the money that actually pays for care and it also pays for some disease and case management functions. PPACA requires insurers to pay out 85% of their premiums as medical expenses for large groups.
BCBS of North Carolina exceeds that in large groups at 87%. South Carolina BCBS has a very low medical loss ratio and has been issuing refunds for the past several years to come into PPACA compliance.
The next biggest cost center is administration of the plan. It pays for me, it pays for the member service reps, it pays for the actuaries, it pays for the claims adjusters, it pays for the hookers but not the blow for the senior leadership.
After that, capital expenditures and investment costs are neck and neck with retained earnings or profit (depending on whether the insurer is non-profit or for profit. These last three groups eat up the non medical expenses from premium income.
in the case of BCBS North Carolina 13% of premiums. BCBS of North Carolina is fairly lean as it is and it has been getting leaner.
On large groups, insurers want to cover their costs and make a small and reliable profit. They can do this because the law of large numbers allows the actuaries make very good projections across 16,000 people or 250,000 people that they can not guess over 12 people.
If we hold the non-medical loss ratio expenses constant, then I think an interesting spiral is going on. If the medical loss ratio is constant as well, then medical costs are increasing. Total medical costs increases for one of two reasons. The first is the cost of services have increased. The second is that more services are being used. It is highly likely that the 16,000 people are using more and more expensive services for some reason, and a $200 a month premium increase year over year covers that increase.
However, let me depart into pure speculation.
$200 a month increase is a very large increase for a large group that has enough members to absorb statistically unlikely events. So what could be going on?
My first thought is the risk pool is changing. It is plausible that there is a very nice plan that has been offered to employees for years. It could have had rich benefits with a good size portion of premiums covered by the state or local district. This worked as long as there was a steady stream of relatively young and healthy people spent a year or two in the very nice plan risk pool.
However, we know that since 2009, teaching in North Carolina has been made to be a relatively unattractive profession for recent college graduates. The age profile of North Carolina teachers has been getting older than anticipated. Since 2012, the state of North Carolina has been actively making teaching a job and profession suck. Pay raises have been effectively zero, class room sizes have increased, and the public rhetoric has been strong against teaching as a profession that deserves non-starvation wages. Teachers with options have been leaving the system, and young/healthy/cheap teachers are not coming in as fast as they have in the past.
Now if people with options are leaving, that means people without options are staying. One of the sources of non-options may be health. If a teacher is in the glide path to retirement and has significant health concerns or has a spouse with significant health concerns, staying on a state health insurance plan is attractive. If this is the case, then a “rich” benefit package may be creating an adverse selection death spiral as the risk pool last year was significantly sicker than projected because more older teachers who were not handcuffed by a health plan to their increasingly less rewarding job have left the pool.
And if this speculation is right, the $200 a month marginal cost increase due to utilization is occurring because services are being used more often and at a higher cost level.