In yesterday’s post, Zelma asked a great question:
They demonstrate how amazingly complex health insurance is. It certainly seems to me that we have the worst possible system. Do you think COVID-19 is going to break it?
The short answer is probably not.
The long answer is complex. The most straightforward part is that the steps made to prepare the hospital systems for a COVID surge are steps that are financially bad for hospitals as high margin elective procedures have been cancelled en masse, but are pretty good for insurers. United Healthcare reported a profitable 1st quarter and a slightly low MLR in Q1 2020 compared to Q1 2019. The big question for insurers this year is how many people will get infected, how many will be hospitalized, how many ICU days will be needed, what are the medium and long term consequences of COVID inpatient days and how quickly does “typical” inpatient utilization come back. Insurers also have tremendous reserves to handle spikes in claims even before either commercial or federal reinsurance contracts kick in.
Over the longer run, the risk adjustment process for Medicare Advantage and the price linked subsidy system for the ACA individual market provide a lot of financial stabilization for private insurers.
The big challenge will be unsophisticated and small self-insured employer groups that have significant non-random clustering of expensive COVID-19 cases. David Grabkowski and Michael Barnett, both of Harvard, wrote in the Washington Post of the nursing home hot spots:
As of Wednesday, at least 5,500 Americans were reported to have died in nursing homes or other long-term care facilities: Just 0.4 percent of the entire population represents 22.5 percent of our country’s fatalities. In our home state of Massachusetts, the situation is dire: About 46 percent of deaths statewide were nursing home residents. And novel coronavirus infections in nursing homes are still drastically underreported…
The industry is potentially facing a financial catastrophe that could prevent any meaningful attempt to beat back covid-19.
They look at the case mix cash flow crisis that nursing homes are facing. Most non-chain nursing homes are likely to be self-insured with some stop-loss and reinsurance policy. This means that the nursing home is on the hook for large potential liabilities when their insured staff gets ill or injured. We know that nursing home staff as a class has significantly above random odds of being infected with COVID. A nursing home that has a COVID cluster among its residences is also likely to have a COVID cluster among its staff. Depending on how much the nursing home spent on their reinsurance or stop-loss policies, the nursing home could be facing catastrophic medical costs for their staff.
This is just one case scenario where non-random clustering of high costs could wipe out significant segments of the self-insured market. Small businesses can always move to the ACA small group, guaranteed issue, community rated markets, but average premium is higher there. Reinsurance and stop-loss policies could be improved but at a likely higher premium. Large employer groups often have the actuarial depth to absorb a bad year and they are more likely to have sophisticated and competent stop-loss strategies in place but they too could potentially get hit with idiosyncratic cost spikes.
Those are some of the mechanical reasons why I have a hard time seeing the US insurance system breaking because of COVID. The bigger challenge though is not mechanical. It is political. There is no consensus of what would the replacement be? The Democratic Party’s fundamental position is that the federal government should be the risk-eater of first resort through some combination of Medicaid expansion, ACA subsidy expansion, public options, Medicare for more, Medicare Advantage for All or several other things. The Republican Party’s fundamental policy belief is that risk should be shifted off of federal books and onto the individual or budget constrained lower levels of government as seen in Cassidy-Collins, Cassidy-Graham-Heller, AHCA, and BCRA. There might be agreement zones to smooth out rough edges such as what happens to peoples’ insurance when twenty million people get laid off in a month but there is no fundamental agreement on who should bear risk and what the risk bearing ladder should look like. Until there is an agreement zone, fundamental transformation is unlikely, so we’ll continue to muddle along.