The political economy of underwriting

Iowa’s Senate approved a proposal to allow Wellmark and the Iowa Farm Bureau to sell health benefit plans (let’s  not call them insurance) on an underwritten and limited benefit basis.  The goal is to give healthy people who make too much for strong subsidies cheaper options.

I want to look at the political economy of the play.  And for that, we need to look at the single most important chart in US health finance policy.  This is the 2015 version from AHRQ:

Think hard about this distribution:

The bottom 50% of the population barely touch the medical system in any given year.  Half of the people who make up the top 1% of expenditures are there because of a chronic condition and the other half are there for a one-off event.

Underwritten insurance plans that are aimed at the bottom 50% to 70%  of the population in expected healthcare expenditures need to act as an insurance function for the occasional meteor strike and not as a chronic care management and payment system.  Low premiums are sufficient if paired with even modest deductibles ($500 to $1,000) if an insurer is able  to target a population that it has very strong reasons to believe won’t use many or any services during the contract year.

This is the political angle.  Low premium, limited benefit plans are more than sufficient for most people that can pass underwriting especially if there is a safety net of a comprehensive benefit, guaranteed issued, subsidized plan to catch people who are hit by a meteor in the course of a year.  The failure points can either be blamed on bad luck or on some idiosyncratic personal weakness of the individual who is buried under an avalanche of bills.  The population that retrospectively is a low risk population feels far better off with underwritten plans because they barely touched the system and they don’t want to pour thousands or tens of thousands of dollars into the payment pool when they did not meet their deductible much less actually get the  insurer to pay out significant sums.

People who currently know that they won’t pass underwriting or that if they pass underwriting they will be uprated significantly have protection if they earn between 100% and 400% Federal Poverty Level (FPL) ($12,140-$48,560 for a single individual in the contiguous US for 2018 )

The ACA risk pool will get far worse which means premiums will go up significantly. However the federal government has taken on all premium shock risk so many people will be no worse off if they are subsidy eligible and Bronze buyers may be slightly better off.  Individuals who don’t qualify for subsidies and whose uprated premiums are less than their current ACA premiums may be better off.  The only people who are immediately and visibly hurt are the very few people who don’t qualify for premium tax credits AND who have chronic conditions that lead to underwritten premiums that are their entire income.  These people are screwed as they will bear a significant premium increase for their ACA coverage and they still get no help.

This is just a very small population.  It is sympathetic but small.  Pulling many healthy people out of the pool and letting them buy plans for half or less of their current unsubsidized premiums for ACA plans will produce a lot of happy “winners” from the policy and only a few people who are screaming in new pain.

This is the political angle to the policy.


9 replies
  1. 1
    smintheus says:

    And the higher costs to the federal government will be paid for by…cuts to Medicaid?

  2. 2
    jl says:

    Thanks for the post, which keeps us updated on IMHO sketchy schemes that will be allowed under current regime, and reminds of he IMHO sketchy political play behind them.

    I think that Mayhew guy recently posted a study on how frequently people move from the lower expenditure to the highest expenditure group. If I;m correct that I saw that research here, would be interesting find that post and provide a link. What I am interested in is whether we can figure out what percentage of the currently healthy insured moves to highest expenditure group and then stays there for a while, or permanently. That group is also hosed by these policies.

  3. 3
    Walker says:

    Low premium, limited benefit plans are more than sufficient for most people that can pass underwriting

    This is a big if. Splinter had a recent article on how difficult it was to make it through underwriting in some states.

  4. 4
    Florida Frog says:

    @Walker: difficult to near impossible to pass underwriting. I am a fit, healthy 62 year-old who has had no medical issues but because of an osteoporosis diagnosis 10 years ago, I don’t make it through underwriting at all. Without ACA I am uninsurable at any price. @Walker:

  5. 5
    MoCA Ace says:

    So my son and his girlfriend are in college. She is a beautiful young woman in every way and I fully expect her to be part of the family some day… She also lost the genetic lottery and her medical bills run in the $150,000.00 range and will be for the rest of her life. God willing it will be a long and happy life.

    So are my kids (I think of her that way already) wasting their time trying to become young professionals? Are they better off working at some retail job and keeping their total income under the ACA limit? As I see it they are fucked until this fucking heartless fucking country decides she deserves to live a normal life.

    I have to go fucking cry now.

    I wish I was kidding.

  6. 6
    Brachiator says:

    The goal is to give healthy people who make too much for strong subsidies cheaper options

    This seems to be a persistent theme. There are people who want cheaper stuff even if it is not real or complete insurance.

  7. 7
    stinger says:

    Just as I started reading this post, with the TV on the background, my local (Iowa) station ran a news story about this proposal. They interviewed two people who believe they would benefit. They want cheaper premiums (who doesn’t?) and say they are healthy and expect to remain so. Both are in the agriculture industry. Farming is one of the most dangerous occupations, and both seemed young enough to experience a pregnancy in their immediate family over the next few years. They could easily end up in the top 5 or 10 percent of your graph above. But it’s hard to argue against their position that health insurance premiums shouldn’t take half their monthly income, as one of them claimed.

  8. 8
    Kelly says:

    My first wife barely touched the medical care system until 1996. Then 5.5 years of 100k to 250k treatment bills for ultimately terminal cancer. We had rock solid employee health insurance thru the gigantic global corporation I worked for so a few dozen $25 copays a year. Met several folks at the clinics in much tougher financial positions.

  9. 9
    Bob Hertz says:

    The 400% of poverty ‘cliff’ is a serious problem. As I remember, the cliff was introduced late in the ACA debates as a way to hold the total program cost to $1 trillion over 10 years. Plus, premiums were low enough in 2011 so that even a person without subsidies could assumedly handle them without federal assistance.

    But then came guaranteed issue and a weak mandate, and the ensuing rise in premiums. This only happened about 6 times in various states that imposed guaranteed issue before the ACA, so no one knew it was coming. (hah!)

    OK now the problem is here. In the history of Medicare, problems like this have come up numerous times, and they have been fixed with more money.

    We could fix the 400% cliff problem with about $6-$8 billion a year. The subsidies would be extended to all income levels.

    But instead, the move is afoot to let the private sector ‘solve’ the problem with junk insurance plans. As you say, people can gamble on a short term plan and in most cases they will win the gamble. Some 95% of persons with no health history do not have a sudden large claim in one year.

    In all of this, my complaint against some Democrats is that they have not acknowledged that the problem exists until lately. They kept touting the ACA’s success for lower income persons, while ignoring the suffering over the 400% cliff. This was a factor in states like Wisconsin that went for Trump.

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