The individual insurance market in the United States has always been a funny beast. One part of the market has always been a market for long term insurance for freelancers and very small businesses. In this part of the market, people could reasonably assume that they want to stay with a single insurer and in a single network for several years. And if their lives changed, they just called their insurance agent to make a change to their policy. They could add their baby, their new spouse, drop their 19 year old college student who is now covered by their college’s insurance. This is true both pre and post-PPACA.
The other side of the individual market is very different. It is a very high churn market. 40% to 50% of the people in the individual market are in the market for under a year pre-PPACA. That is because the individual health insurance market is a holding tank until something better comes along. That something better is often employer sponsored coverage or Medicare or CHIP or the VA. The something better could be from age (Medicare), eligibility processing for CHIP ( side note, CHIP is awesome, better than Platinum coverage), new employment or getting on someone else’s insurance at their job.
When I was laid-off early in my career, I had an individual policy with an $8,000 deductible. I stopped that policy the moment my benefits started at Mayhew Insurance. This is common for the individual market.
The individual market changed dramatically with PPACA. Instead of being a medically underwritten, cherry picking market, it became a guaranteed issue market. However it is still a holding pattern for a lot of people. If someone is single and makes between 200% and 300% of the Federal Poverty Line odds are that if they are offered employer sponsored coverage at work, the employer sponsored coverage will be as good or better than what that person can afford on Exchange and the visible premium will be less. If that person makes over 300%, odds are strongly in favor that employer offered covered is superior to affordable Exchange coverage in most markets. People who earn under 150% FPL will see lower deductibles and lower premiums on Exchange than on most employer sponsored plans.
So people on Exchange are still looking for something better and ESI can be better for a lot of people.
That leads to an incentive structure for people who know that they have high cost needs and have a highly probable short term special enrollment window coming up (changing jobs, marriage, major cross country move) to get a high actuarial value policy (Platinum for instance), max out the benefits and get a lot of expensive things done before the special enrollment window.
Michael Hiltzik at the LA Times looks at this issue as some of the anti-PPACA hacks are at it again claiming that the Special Enrollment Periods are leading to significant gaming of the risk pools.
These remarks set the hearts of some members of the Obamacare deathwatch aflutter. Bloomberg’s Megan McArdle speculated that on the possibility of gaming by customers, though she later owned up via Twitter to being “sort of skeptical” that such strategies were widespread.
Cato Institute’s Michael Cannon, however, declared in Forbes that such “free-riding,” which poses “a serious threat to Obamacare’s future,” has now been established as “a real problem.”…
One insurer has provided numbers. Iowa’s Wellmark says 135 members signed up, got treatments, and then dropped their coverage after running up sizable bills. But they were about one-tenth of one percent of an individual insurance pool that appears to be about 150,000 members.
Is this first surprising and secondly a problem?
This should not have been surprising. Insurance companies going into Exchange had good experience with a similar guarantee issue program with uncertain contract lengths. That program is COBRA. COBRA has historically had an incredibly sick population compared to the same employer group’s currently employed population. The COBRA population was incredibly sick because COBRA was expensive as hell and the insured member had to pay the full cost of premium plus administrative fees.
When I was laid off early in my career, I had coverage that probably was between 85% and 90% actuarial value from my previous employer. I paid $75 a month for that coverage. My COBRA letter stated that if I wanted to enroll in COBRA, I would need to send $900 a month for individual coverage. My former employer had several people with MS, a few cancer survivors, and a family with a child with cystic fibrosis. It was an ugly risk pool. I was in my mid-20s and healthy as a horse. I could not afford to sign away half of my monthly unemployment insurance for medical insurance. At the same time, another colleague who was laid off in the same round went on COBRA as she was in fighting cancer and had several chronic conditions. COBRA was a much better deal for her then running naked as she could not get any underwritten insurance.
She found a job seven months later but she had three infusion rounds where the drugs cost $10,000 a round.
Insurers should be able to model (roughly) that there is a lot of movement in and out of the individual market, especially for people who could have better options available. The Exchanges are still data sparse (2017 pricing will be the first year with rich data) but insurers should not be surprised that the Exchange population or at least a subset of it, behaves a bit like COBRA.
Is this a problem?
Not really, and increasingly less so.
The Urban Institute is showing more people are keeping continuous coverage at a single insurer for the course of a year. There is less churn now than there was a few years ago. Some of that could be related to a better economy and more people having jobs that offer employer sponsored coverage and fewer layoffs. It could mean that the Exchanges are seen as decent coverage all around and moving to different options is not worth the hassle factor.
More importantly, at most this is a limited actuarial projection problem. Some companies projected this issue better than others, and some did not anticipate it at all. The biggest problem however is that the pricing structure of the Exchange market encourages people to sign up with insurers who have the most aggressively optimistic projections (winners curse), so there could be a lot of year over year churn in the market.
If people are convinced that this is actually a problem, there are a few policy solutions that could happen. The first is advocate and implement single payer. That is not happening until my kids are in college at the earliest.
Secondly, change the nature of the individual qualified health plan market from a month to month market to a year to year market. And if there is a qualifying event, the new insurer and the old insurer pool risk, expenses and costs via a set of back end transfer payments.
This can be an isolated problem, but insurers should have expected some COBRA like behavior in some segments of the individual market as people will move to something better but while they are in a short term product, they will maximize its use value.