Catching the falling knife in Iowa

Iowa’s Exchange market is in trouble. Right now there looks to be one insurer, Medica, that will cover most of the state. I think this is a stable equilibrium. But what is going on in Iowa that makes it such a stressed out state. It has some of the typical problems with large transitional, underwritten plans eating up most of the good and profitable individual market, and rural hospitals with pricing power but plenty of other states have those types of problems.

Iowa has an individual who buys an on-Exchange policy who easily runs up a $1,000,0000 a month in claims and does so every month. This is a unique oddity for the Iowa risk pool. We’ve talked about this person before, as a single individual drove 10% points of a 40% rate increase for 2017 for a single carrier. Even with the shock absorbers of risk adjustment and reinsurance, the carrier is eating a massive loss.

Risk adjustment does not help as risk adjustment does a decent job of calculating average costs of conditions. A $12 million dollar a year claim episode is an extreme outlier so a risk adjustment transfer might only move a small fraction of the total claim cost to Wellmark.

Commercial reinsurance works well when the reinsurer is taking on the risk of unknown catastrophic claims. A carrier buys reinsurance to pay for the possibility that a car full of hemophiliacs get in a wreck and start a six month bleed. Private market reinsurance fails miserably when the claims data shows a predictable, recurring catastrophic expense. It can be bought but the reinsurance premium is more than the expected value of the incredible, recurring expense. It could potentially be useful in a crisis. US government reinsurance eats a small chunk of a $12,000,000 claim year as paid 50% of the claims from $90,000 to $250,000. The federal reinsurance kicked in $80,000 and risk adjustment might have kicked in another $100,000 to $150,000.

The carrier that covers this person is on the line to spend a net of $11 million dollars or more for their care after external funding.

This is a problem given the market design. Rates have to be high enough to cover this individual’s costs. In a competitive market where the subsidies are tied to the second least expensive Silver and there is one super-outlier who can not be re-insured against, every carrier lives in fear of being chosen by the one outlier. If they set their rates low enough to be attractive to healthy people, they lose money on the catastrophic expected claims. If they set the rates high enough to cover a $12,000,000 claim, no one buys their product.

No one wants to catch a spinning, falling knife.

So what can be done?

Right now, the market is converging to a rational single carrier solution. The single carrier can raise their rates high enough to cover this catastrophic claim while the post-subsidy price is low enough to actually attract normal risk as well. The off-exchange market can be competitive especially if the single on-Exchange carrier splits their filing IDs so they can use different actuarial assumptions for a more normal market.

There are two other possible solutions. The first is a cynical solution. All of the insurers in Iowa could agree to kick in $300,000 a piece and buy this single individual a very nice house ten feet over the state line and make this person someone else’s problem.

The other solution is that this is the textbook case of where a high cost risk pool or invisible reinsurance or a prospective re-assignment system would make sense. This is fundamentally an uninsurable scenario but the care needs to be paid for, so removing this single individual from the risk pool and paying for this person’s care out from general taxation lowers premiums in the individual market by $10 per member per month and allows them to function as if they mostly normal markets.

29 replies
  1. 1
    randy khan says:

    I admit I laughed out loud at the cynical solution.

    Of course, if the individual moves to Illinois (with many more people on the exchange), the impact on the insurers would be much less, too.

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  2. 2
    Mike J says:

    A naturally occurring example of why it’s bad to concentrate high risk in a small pool rather than diffuse it across a large pool. Naturally, Republicans saw something bad happen through chance and decided to base all their policies on making sure it happens by design.

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  3. 3
    Rathskeller says:

    What would the 1mm/month person’s bills be if the US Government were allowed to negotiate drug rates?

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  4. 4

    @Rathskeller: I don’t know that. Since there is probably no next best alternative and the market for this drug combination can probably be counted on fingers and toes, I would not expect extreme savings.

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  5. 5
    stinger says:

    This is why, as an Iowa resident, I am desperate to stay employed for the next year and a half, so that whatever happens after that, I can go on Medicare and not on the Exchange. Whatta country.

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  6. 6
    jacy says:

    This would make a great plot for a murder mystery novel.

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  7. 7
    stinger says:

    I like the way you think!

    ReplyReply
  8. 8

    @jacy: then you should write it :)

    I will be a technical consultant for the insurance analyst viewpoint character chapters

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  9. 9
    Baud says:

    @jacy:
    @David Anderson:

    The Actuary Affair

    ReplyReply
  10. 10
    Another Scott says:

    @Baud: Yeah, it could easily be a series:

    The Actuary Sanction, The Taking of Actuary 123, … :-D

    Cheers,
    Scott.

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  11. 11

    The problem here is the presumption — not to use any stronger word — that the great bulk of that $1M/month is, in effect, a transfer payment directly into the personal bank account of the CEO of some pharmaceutical company. If the Iowa legislature contained any persons with any spirit at all, they would subpoena the financials and the internal communications of that firm, determine the actual cost (let us be fair, including development costs) of the medications involved, and publish their findings. If the one remaining insurer had any courage to defend their own prerogatives, they would make their continued operation in the State contingent upon the State legislature doing exactly as above, by a date certain.

    But the legislature has no courage to defend its prerogatives, and the top management of the insurer have no courage to defend their prerogatives. This is what ends badly, regardless of the calibration of public policy.

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  12. 12
    eldorado says:

    well, if the market doesn’t work (it doesn’t) and medicare/single payer is off the table, what if the government just sends moose and rocko over to some of the drug companies to have a little talk about pricing?

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  13. 13
    Pangloss says:

    Who is making $1 mil a month, and for what? I assume a large part of this expense has to be the R&D on an expensive drug that only applies to a few people. This is where cost controls ought to come in. Even at an average of $50 an hour (making $104k a year), that’s 119 people working full time, 5 days a week, 8 hours a day on this one person’s care.

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  14. 14
    Mnemosyne says:

    If we added the cost of that person’s medical care to everyone’s federal income tax, we would each pay an extra $0.01 per year.

    Just sayin’.

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  15. 15
    Wapiti says:

    Perhaps another possible solution is to put coin jars with a heartfelt plea in shops across Iowa to raise money. Say 10 thousand coin jars. They’d only need to raise $100/month on average to cover this cost.

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  16. 16
    Feathers says:

    Move this category of care onto Medicaid. Medicaid picks up all of the costs of transplants, a patient’s regular insurance covers the aftercare at a certain point, including the anti-rejection drugs. There are panels of doctors at the transplant centers to make allocation decisions, under federal guidelines.

    It can be harsh, but better than the current wild, Wild West for these conditions. And it would put the drug development/supply beholden to something other then the pure profit motive.

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  17. 17
    Brachiator says:

    @Rathskeller:

    . What would the 1mm/month person’s bills be if the US Government were allowed to negotiate drug rates?.

    Probably no different. If the person’s condition is rare or unusual, the drugs might also be rare and expensive. Other aspects of care could also be very expensive.

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  18. 18
    Mnemosyne says:

    @Mnemosyne:

    Wait, sorry, my math is wrong — if their healthcare is $1 million a month, the 122 million of us who pay personal federal income tax would have to pay an additional $0.10 per year.

    My bad.

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  19. 19
    TenguPhule says:

    The first is a cynical solution.

    That’s not the cynical solution. The cynical solution is that they bribe a doctor to quietly put the patient to sleep. Forever.

    Because it would be cheaper and less risky then keep on paying for a known money pit. And a fairly smart doctor with bendable ethics could easily get away with a “mistake” or even “natural causes”.

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  20. 20
    Kay says:

    I have talked about this before, but I was once a donor for a new way of treating blood cancer. I was the donor and a relative was the recipient. Anyway, it worked, she recovered, and they use it now and it’s much cheaper but it must have been incredibly expensive. I didn’t stay in the hospital but I had to go there every day for 5 days and there was this huge team of people involved, all of whom probably had multiple degrees and such, right?

    I was working for the postal service and my insurance was came from what was (essentially) a federally-funded state exchange. It was just so arbitrary. The only reason my insurance covered my costs was because Ohio had a First Lady at one time who chose organ donation as “her” issue so she lobbied for state regs that mandated coverage.

    It’s kind of scary when you realize what a mess this is. It’s all cobbled together and random.

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  21. 21
    Hoodie says:

    The government should be identifying these types of outliers as r&d investments that are not properly financed and create some sort of infrastructure bank to fund them instead of just forking over a million. It’s notoriously hard to get vc money for pharmaceutical startups because the investors can’t afford to wait for the payoff. If the treatment is being offered and is effective, then it’s possible that it has long term value beyond keeping a handful of people alive at a million a pop. That market alone would not be worth pursuing because of limited short term growth potential, but the long term might be quite valuable. Maybe create some sort of bonds to finance it.

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  22. 22
    Ruckus says:

    @Frank Wilhoit:
    I know of a company that develops treatments for rare genetic disorders. Last I checked they had 2 drugs under patent and were awaiting a third approval. The cost to make the drugs is rather high because the market is small and there were more people working to make it through the approval process than actually develop the drugs. Not a fan of big pharma nor of extreme salaries for upper admins but for at least this one company neither was the cost driver.
    Now these 2 diseases affect young children and without the treatments they will never get out of childhood. With them they appear to end up with normal lives. Who is going to make that decision that we don’t spend money to allow people to live? Insurance companies? The government? Everyone who doesn’t know the poor person with some disease? Who is going to say that there is some concrete limit to how much we spend per year, month, day, second for anyone’s life? For your life or mine.

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  23. 23
    Ruckus says:

    @Kay:
    My long time very good friend who passed away in January was a very early pacemaker patient. Early/mid 70s. The first person who lived a reasonable life with a pacemaker (26 pacemakers over the yrs in fact) was fitted with his first in 1968. My friend helped to make pacemakers a viable process that now allows millions of people to live normal lives, like what you did for your friend.
    Now some questions for the class.
    What if we learn something very valuable from this million dollar patient? What if there is a break through that his/her treatment that changes medicine and saves lots of lives? Would the cost of the treatment be worth it then? It’s called practicing medicine for a reason, learning to keep us alive and bettering our health advances takes not just immediate care but constant learning about what and how medicine gets better. I’ve suffered from migraines for decades, and only about 3 months ago was prescribed a relatively new simple method using over the counter supplements that have reduced my migraine occurrences by about 75%. The supplements are not new at all, the concept of the treatment is.

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  24. 24
    pseudonymous in nc says:

    This is surely where you have to go federal: this individual may be the only one in Iowa, but one advantage of a large nation-state is that 1-in-a-million conditions translate to ~330 people. The NIH has its rare diseases wing, and for a lot of conditions covers treatment in exchange for contributing to research efforts. (And if you have one of those conditions, you’re a research subject by virtue of being alive: that’s just how things are.)

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  25. 25
    Dustinator says:

    Are we just going to sit here and pretend that it’s reasonable that a person can incur a million dollars in medical bills in a single month?

    ReplyReply
  26. 26
    Brinks Truck Driver says:

    I’m mostly a lurker here, but thought I’d delurk to ask a particular question. Are there any good resources that go into detail on how insurers form and maintain provider networks and how they decide when to add additional providers etc.?

    ReplyReply
  27. 27
    Juice Box says:

    Is this person not eligible for permanent disability and Medicare?

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  28. 28

    @Brinks Truck Driver: find JAPA in threads and bug him… I will see what I can do

    @Juice Box: who knows

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  29. 29
    DavidTC says:

    The first is a cynical solution. All of the insurers in Iowa could agree to kick in $300,000 a piece and buy this single individual a very nice house ten feet over the state line and make this person someone else’s problem.

    *That’s* not the cynical solution.

    You can get a high quality professional assassin for about $50,000.

    ReplyReply

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