— Steve Sisko (@ShimCode) August 20, 2016
Going to be a mass adverse selection event for anyone that offers OOP credits https://t.co/iLmtt9dufm
— Richard Mayhew (@bjdickmayhew) August 20, 2016
What is the situation and why am I thinking it is an adverse selection event if anyone offers to write credits for the Land of Lincoln members.
Land of Lincoln was a Co-Op. It was placed under state oversight in July. It’s reserves had gotten too low due to a higher than expected risk adjustment bill and no compensating risk corridor asset. Coverage for people on the individual market will terminate on 9/30/16. That means people will be running without coverage from October 1 to December 31.
New York had a similar experience in 2015 when Health Republic was liquidated in the fall of 2015.
Normally regulators would prefer to allow an insurer under oversight to run until the next open enrollment period. That would allow their members to have continuous coverage with the least amount of disruption and added stress. However Land of Lincoln and Health Republic could not make it to the end of the current policy year. Instead, they ended mid-contract. This triggers a Special Enrollment Period as the members lost coverage due to no fault of their own.
In New York, there was an arrangement that people who were on Health Republic who signed up for a month of coverage would have their deductibles and out of pocket expenses credited to their new policies.
That is now not the case in Illinois. Blue Cross and Blue Shield is refusing to enter into a voluntary arrangement to credit deductible and out of pocket spending for any new policies it rights for any qualifying event. That is their right to do so. However, their refusal to do so pretty much forces every other Illinois insurer to also refuse to extend deductible credits.
Adverse selection is the cause of this race to mutually assured ugliness.
We’re more than halfway through the year right now. There are four classes of people in Land of Lincoln plans who will lose coverage in six weeks.
- Low utilizers — These people are barely touching the system. They may or may not have used their no cost sharing preventive care benefits and a few prescriptions but they still have most of their deductible left to satisfy. These are the people that all of the insurers want to attract for three more months of coverage as they are highly likely to be profitable as a class.
- Every year deductible busters — These individuals have long term, consistent chronic conditions where they will meet their deductible under any scenario. They as a class have already maxed out for the year under Land of Lincoln. These are the people that other insurers want to avoid as they are a guaranteed money loser.
- Surprised $25,000 claimers — these individuals had a single bad year. They could have been hit by a bus, they could have needed a knee replacement, they could have finished up their Hep-C treatments in April and been clean since. They are a one year shock where the shock has gotten out of the system and they already hit their annual maxes. Insurers are leery of this group if they have no more deductible or out of pocket spending left as it makes a lot of sense for someone who had a surprisingly bad year to decide that they might as well get a problem fixed that they had been putting off for years as that surgery will only cost them parking. Some of the people in this group will be very cheap going forward, but a good number will be expensive with preference sensitive procedures.
- Almost therers — these people have had a mediocre year in health. They are getting close to meeting their maximum share and will hit it soon enough. After that, they might get preference sensitive procedures done.
If all insurers in a state offer to hold the newly transitioning members whole, the distribution of membership probably won’t be too concentrated by any one segment on any one carrier. The low utilizers will probably choose the cheapest plan possible, the every year deductible busters will choose the broadest network possible, and the last two groups are a coin flip.
If one carrier does not offer deductible credits and forces everyone to start at zero again for three months, the low utilizers won’t care. They’ll still go there at the same rate as they would have under a deductible credit scheme. However the other three groups will avoid that insurer. Instead these three groups will go to any carrier that offers to keep them whole. For someone on a $5,000 a month prescription, that move saves them thousands of dollars for perhaps only a few bucks more in premium per month for the last three months of the year.
This could be addressed on the back end if we had perfect risk adjustment. But we don’t and the HCC model for Exchange could not be sledge hammered to allow for needed types of compensation in a short enough time to get through the federal comment period.
So the carriers that have not announced that they will not offer deductible and out of pocket credits to Land of Lincoln transfers will either need to not offer those credits, or be prepared to lose massive amounts of money due to a temporary adverse selection shock. They’ll not offer credits to protect their balance sheet.
It is a collective action problem which will produce a stable, socially negative outcome where no carrier will want to move off of the no-credit position unless everyone else is forced to do so.