The Sacramento Bee has an interesting story about three highly attractive plans in Califonia’s public employee health system facing the possibility of a death spiral:
Three of the best health plans California state workers and retirees can buy are speeding toward collapse, according to CalPERS insurance experts.
The plans may be salvaged, but a proposed solution likely will involve price increases for young, healthy workers…
The California Public Employees’ Retirement System provides health insurance to about 1.5 million people, including current and retired state workers, other public employees and their dependent family members.
The plans’ benefits have attracted some of the least healthy workers and retirees, who need more medical treatment than healthier members. When insurers have to pay big medical bills, they raise premiums. Price hikes in turn push healthier people out of the plans and into cheaper plans.
These three plans cover about 200,000 people or about 13% of the entire CALPERS pool. The plans have broad networks, and low cost-sharing. They buy those attributes by having high premiums.
Broad networks and low cost-sharing at high premiums are very attractive to individuals who are very likely to use a lot of services. Narrow networks with high cost sharing and low premiums are attractive to people who don’t anticipate using much if any healthcare services. Given that people usually have some insight on their underlying health and expenditure profile, people will somewhat effectively sort themselves. If we are to use a simple heuristic that people will choose the plan that costs the least of the sum of premiums and expected cost-sharing. People may place more value on unlikely but expensive outcomes but in this framework, most people will choose the cheaper premium as they are unlikely to use many healthcare services in a year. And if they guess wrong, and suffer a life changing medical event they can switch next year to a high premium, big network, low-cost-sharing plan.
People when given the chance to sort by cost and expected healthcare use will sort by cost and expected healthcare use.
So what can be done?
There are several options. The first is to do nothing and let the sorting process continue where only people with hemophilia, cancer and multiple schleroris choose the high premium and low cost sharing designs with big networks. This is the death spiral as premium growth accelerates and the enrollment shrinks dramatically.
The other option is to risk-adjust between plans. Risk adjustment is a counter-reaction to adverse selection. Selection occurs when people can predict their exposure and sort based on that knowledge. Risk adjustment can have two sources of revenue. The first is external to any premium revenue. This is the Medicare Advantage system. The second is insurers with low expected cost populations pay insurers with high expected cost populations. This is the ACA system. Either system is, from the point of view of a high cost insurer, an injection of new, non-premium revenue that can be used to pay some of the claims which means premiums are lower than they otherwise would be and that enrollment is higher to much higher than it otherwise would be.