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.