Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Posts Tagged ‘Healthcare

CBO weirdness with HR3962

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Compare and contrast Table 2 from the CBO analysis of HR3962, the new House healthcare bill.  Specifically note that non-group /other net enrollment increases from 24 million to 30 million between 2015 and 2019.  Now compare this to the bill itself, Title II, Section 202, Page 94:

Individual health insurance coverage that is not grandfathered health insurance coverage under subsection (a) may only be offered on or after the first day of Y1 as an Exchange-participating health benefits plan.

How can enrollment go up if new enrollment is disallowed outside the Exchange?

The problem is further exacerbated when you realize the new dependents born after “Y1” (A-1-B, page 91) are not allowed onto their parents’ plans and that individual business generally has a 30-40% lapse rate annually.  Granted, people may not be willing to part with the relatively cheaper grandfathered plans, so the lapse rate is likely to fall.  But it can’t go negative.

Perhaps the circle is squared by the ephemeral “other” category in the analysis.  But I doubt it.  Compare the HR3962 score with the Baucus bill score, which separated “other” from “non-group”.  In that score, those two categories moved in tandem under “current” law, and it seems reasonable to presume that the “other” category is mostly unaffected by reform (I presume it is Medicare disability, etc.).

There are many such examples like this, where you just want to shake the CBO and ask “What are you smoking?  And … Can I have some of that?”  I think I’ll need it.


Written by Victor

October 30, 2009 at 1:50 am

Adverse Selection is Not the Problem

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I hate to say it, but I think the excellent bloggers/economists Andrew Samwick and Donald Marron are entirely wrong when they say that “The problems of adverse selection and moral hazard in insurance markets are well known — they are what stands in the way of extending the benefits of competition to health care.  Addressing them should be the central features of the reform, with a risk-adjustment mechanism to address the former and high-deductible plans to address the latter.”

Adverse selection does not exist when the insurance company knows more about your expected costs than you do.  Here’s a quick question to illustrate:

You’ve had a simple fracture in the past three years.  What is your additional expected healthcare cost next year?  Do you know?  I do.  Change the question to a “wait-and-see” diagnosis for a pre-cancerous lesion and I’d still say I know more about that expected cost than you do.  We’ll rate for that expected cost, load for profit, and sign the contract.  Cool?

Insurance companies can issue surcharges for significant extra risk.  Profits don’t come from only insuring the healthy.  Insurance companies actually earn more profit insuring the <i>identifiably</i> sick <i>who also choose to be covered</i>.  Those contracts have more risk and more associated profit, almost always (if nothing else, profits are generally priced as a percent of premium, and the sick will be charged more premium because insurance companies are able to identify them with reasonable accuracy).

The problem is that there comes a cost level where the expected cost plus needed risk charges will exceed the person’s willingness / ability to pay.  And/or the needed price will be so high that it will make a demure health insurance company blush, making them worry about PR.  And rates are also frequently capped by regulatory limits on surcharges (I’m not arguing against those regs, I am simply pointing out that their existence leads people to be denied coverage).

This leads naturally into a second error I believe that Andrew and Donald are making when they trumpet potentially imperfect and administratively costly risk-adjustment mechanisms (actuaries are a top 3 profession and someone has to pay us for something).  Risk adjusters aren’t really a solution for adverse selection; risk-adjusters are really a way to transfer resources between individuals.  Again, an illustration:

A 20 year old male with a risk-score of 0.5 walks into a bar that sells insurance (yeah, yeah).  The bartender says “what’ll you have?”  The male says a $1,000 deductible plan.  The bartender says that he used to be able to sell that for $100 … but now he has to compensate for the 20-year old’s low risk score, so that he has to charge $300.

A 55 year old woman walks into that same bar.  She has a risk score of 1.5 because she had a zit on her nose when she was a teenager.  Yadda, yadda, yadda, and instead of being charged $600, the bartender can sell a policy to her for $400.  The bartender can (has to) do that because he has $200 shifted from the 20-year old.

Has any adverse selection problem been solved here?  Nope.  Either could have gotten the service for the initial price (and notice that the initial prices are independent of the quantity of competitors since they are simply a function of their true cost, which insurance companies can guess at better than you).  The difference is that after risk-adjustment, the healthier pay more and the sick pay less.

In fact, risk-adjustment may <i>cause</i> adverse selection, because, suddenly, the bartender can’t charge the 20-year old the low rate his health deserves.  The 20-year may just tell him to kiss off.  In which case everyone except the actuary will lose since you’ll have to pay the actuarial salaries to offer the exact same contract to the 55 year old that you would have without risk-adjustment.  Because even risk-adjusted markets can cause adverse selection, actuaries are (misguidedly) demanding that an insurance coverage mandate accompany this push to deform healthcare.

One of the fundamental questions of healthcare reform is “Who has the right to benefit from or pay for your health?”  If you answer that you do, then you don’t support risk-adjusters.  That has very little, if anything, to do with adverse selection.  Conversely, if you answer that no single person should benefit from or pay for their health, then by all means, risk-adjust away. They are great make-work for actuaries with tons of cool intellectual problems I’d like to try to be clever and solve.  And if that isn’t enough of a reason to support them, they can also be very successful at redistributing the financial gains and losses that would otherwise be caused by your health.

Just don’t pretend that you did it to solve a perceived adverse selection problem.  You did it to solve a perceived maldistribution of resources.

Written by Victor

October 8, 2009 at 3:33 am

The $20,000 Annual Cap on Medical Costs: Healthcare Reform and You, Part II

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Part II: The Math of Individual Coverage

The benefit plan defined in the House healthcare reform bill is designed to limit a family of four’s annual healthcare expenditures to under $20,000 in 2013, assuming they are at 400% of Federal Povery Level (FPL) or lower.  Here’s how they do it.

First, the direct premium subsidies in the bill will limit the premium paid by a family of four to just over $800 per month, or $9,680 per year (see Section 243; assuming 400% of FPL and no increase in salaries between today and 2013).

The plan that can be purchased for that price, or lower, is the “basic plan” that will be designed to cover 70% of your allowable medical costs.  For a typical plan that might have $10,000 in expected allowed costs, this means that the family of four will expect to have $3,000 in additional copayments and coinsurance amounts.  The total expected outlay would therefore be less than $12,680 in after-tax dollars.  Impressed yet?  If not, there’s more.

This plan separately caps the household’s potential out of pocket cost.  For that same family in 2013, the House bill promises that you will not owe more than $10,000 per year.  The total annual out of pocket outlay would therefore be capped at $19,680 for that family.  This out of pocket maximum is much higher than the expected outlay in 2013.  In later years, the expected outlay will increase faster than the out of pocket maximum, pushing those values closer together.  I’m not sure why they chose to do that.

This maximum $19,680 will have to come from after-tax income.  Most families at 400% of FPL are in a 15% tax bracket and perhaps a 5% state bracket.  That means that $24,825 in pre-tax earnings will cover the maximum outlay designed by the basic plan in the House.

For the same family of four earning 200% of poverty, things look much better.  Their maximum premium is $2,200, with (potentially) the same out of pocket maximum.  Their total maximum out of pocket cost would then be $12,200.  On average, they would expect to pay “only” $3,700 in cost in after-tax dollars, however, because they will enjoy another feature of the bill: lower copayments for poorer families.  This after-tax difference of about $9,000 represents a sizeable implicit penalty that this plan will levy against those who get wage increases, take on second jobs, etc.  When making forecasts, the CBO assumes that this implicit penalty does not signficantly affect the labor market.

For those earning more than 400% of FPL, there is no cap on premiums, but the $10,000 cap on out of pocket medical expenses remains in the base plan.

Expect the Senate Finance Committee to be much stingier with subsidies, thereby raising these annual cost levels.  Also expect the Blue Dogs to fight to reduce these subsidies, also increasing these annual costs.  Lastly, this bill is planned to increase the size of all deficits in 2013 and beyond.  This increased budget pressure in the second half of this decade will force budget cuts, also decreasing these subsidies.

Therefore, I suspect that the $20,000 annual cap on costs is a best-case scenario.  We do need healthcare reform.  I’m concerned that the focus on federal deficits and budgets has obscured the fact that this bill does little to solve the average family’s problems.  If anything, it could make it worse.  Sad.

The first part of this series was posted here.

Written by Victor

July 30, 2009 at 3:47 am

What Healthcare Reform Means for You

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Part I: Individual Coverage Purchased after 2013

The House healthcare reform bill will significantly change the way you buy individual coverage.  Here’s a summary of the more striking provisions, and possible ramifications:

  • Beginning in 2013, all individual insurance must be purchased through the government’s Exchange.  No more ehealthinsurance.com, although I wouldn’t be surprised if they aren’t a bidder for the government contracts to build the Exchange.
  • Premiums on young men must be at least 50% of the premiums charged men age 64; the impact of this will differ around the country.  In states like New York where full community rating is already in place, this may lower premiums for young men; in most of the country, this will significantly increase premiums for young men.
  • Premiums cannot reflect the cost differences between men and women; since women utilize care more intensely than men, at least through most of the age spectrum, this means that women will enjoy better value from plans offered after 2013.
  • You will have up to 4 possible plans to choose from, three of which will basically be the same but with slimmer copays, with the fourth potentially adding dental and vision benefits.  These plans will focus on the use of copayments, avoiding coinsurance whenever possible.  Plan design will be governed at the national level through the Benefits Advisory Committee.
  • Member copayments will increase faster than medical cost inflation which in turn will almost certainly continue to increase faster than the Consumer Price Index; the reason for the rapid rise in copayments is technical, and I’ll reserve for another post.  This is also little different than what is going on in the market today; the important distinction is that the Exchange plans will be tightly constrained by this law in how they deal with this mathematical problem whereas in today’s market, consumers decide how they want to spread this cost around.
  • Over time, the basic plan will converge into something that will look like a $5000 deductible, 100% coinsurance major medical plan; the other plans will likely follow suit unless Congress intervenes.
  • For members with incomes less than 400% of the Federal Poverty Limit, payments will be made by the Commissioner to the offering healthplans to help offset lowered copayments.  Healthplans, in turn, are to require lowered copayments, consistent with subsidized actuarial values.  How this consistency is determined is quite complex theoretically, and the proposed law is silent on measurement and enforcement, other than that the Commissioner’s actuarial models are to be used to establish the size of the payments from the Commissioner to the healthplans.
  • For healthy members, the basic plan will almost certainly be the best value.
  • For poor members, the basic plan will almost certainly be the best value, since the plan will be enhanced, for free, through government subsidies.
  • You will need to annually file evidence of coverage.  Healthplans will send you information on what months you had qualifying coverage.  You will owe 2.5% of gross income in taxes if you did not have qualifying coverage for yourself or your dependents.  This is prorated if you let coverage lapse for any portion of the year.
  • You will need to notify the commissioner when your income or family status changes.  This way your subsidies and plan design can be reconfigured by the Benefits Advisory Committee.  Failure to do so may result in penalties, especially if your benefits or subsidies should have been reduced because of an increase in income.
  • If you don’t like the commissioner’s reconfiguration (i.e., change in copayments), you will be allowed to change plans during your annual election period.

Some other items (either more obvious or related to features that exist today):

  • Individual plans purchased on the market today are “guaranteed renewable”, meaning that the healthplan cannot drop your insurance if you get sick.  Other laws prevent them from raising your premiums because of your health status, after you have insurance.  Plans under the Exchange will most likely NOT be guaranteed renewable; this isn’t a problem, for the most part, since you will have guaranteed issue rights to a new policy from the same or different carrier.  Your premiums still won’t increase because of your health status; in addition, they won’t be able to increase your initial premiums based upon your health status.
  • The policies won’t have pre-ex periods or exclusion riders.
  • The first few years are likely to see volatile premiums; after that, however, rate increases should be more stable than what you see in the individual market today.  That’s because rate increases due to aging will be limited (you will pay a much, much higher premium when young, but the flip side of that is that your premiums won’t increase as much as you age), rate increases due to “duration wear-off” won’t exist because initial underwriting won’t exist; and you will be part of a larger risk pool.
  • The larger risk pool likely means you will be included in a higher average cost risk pool, but administrative expenses may be somewhat lower because of reduced underwriting costs.  This improvement in administration costs may be offset by behind-the-scenes reporting requirements for risk-adjusters, monthly copayment recalculations, plan coordination, and increased bureaucratic oversight.  The CBO has net yet modeled these administrative costs.

For CNN’s perspective on what healthcare reform means to you, see this piece by Sahadi.  Obviously, I think CNN’s discussion focuses more on the talking points than the likely result of the specifics of the legislation.  Lastly, these plans are in flux and so any of the aforementioned opinions or predictions may be obsolete at the time of this writing.  I also wrote these while reading the legalese of the House bill while playing with my oldest son.  Caveat emptor.  But I feel confident that these predictions are reasonable enough that they should be contravened carefully before being dismissed.  The devil is truly in the details.

Part II of this series details the House’s $20,000 annual household cap on medical costs.

Written by Victor

July 25, 2009 at 3:18 pm

Modest Healthcare Funding Reform Ideas

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Here are a few healthcare reform proposals that deserve consideration.

1.  If a drug is advertised “Direct to Consumer” (DTC), ban it from being covered by a health insurance company.  This reflects two principles.  First, DTC advertising is done primarily when clinical effectiveness is not indicated, instead focusing on a “fad” element that drives up costs.  Rather than banning DTC, simply prevent those costs from being “socialized” through “insurance”.

2.  If an individual has prior creditable coverage, no pre-ex waivers apply, period, and they are guaranteed insurable, even if they want to switch carriers or select a different benefit option (actuarially equivalent to their current, or slimmer).  More details here.  This also means eliminating the COBRA purchase requirement from HIPAA before transferring to the individual market.  The COBRA requirement effectively guts portability because of the very high COBRA premiums and the fact that most individuals, if left to their own devices, would purchase plans that are slimmer than the plans offered by employers.

3.  Recognize that job loss causing insurance loss is a funding problem, not a systematic insurance problem (after reform #2).  Specifically, I’d propose expanding unemployment insurance benefits by an amount to exactly offset the employer’s contribution to the employee’s insurance plan.  This means that the laid off individual would be able to retain the exact same health insurance benefits for the length of their unemployment benefits.  At the end of that time, they could purchase in the individual market or, preferably, have been hired on with a company that offers group benefits.  This provision requires more money.

4.  Expand Medicare to be the primary insurance coverage for all eligible individuals over the age of 65.  Currently, an age 66 employee who has private insurance is covered first through private insurance (at companies with 20+ employees).  This is an administrative headache designed to save Medicare money.  However, it provides a significant deterrent to retaining aged workers in the workforce.  Medicare has its problems that need to be confronted directly, not through explicit or implicit cost-shifts to private insurance or companies employing older workers.  This provision is especially problematic for firms employing 20-50 employees and should be repealed.

5.  Revamp the FDA.  Drug approvals need to be based on increased effectiveness relative to the current market of drugs.  Drug dosages need to be determined clinically, independent of revenue and marketing strategies.  This requires a significantly greater commitment of federal resources to independent medical devices and pharmaceutical oversight.  A necessary evil.

Many of the regular buffet of ideas are amenable to my philosophies and experience.  More health IT probably wouldn’t hurt; more knowledge on clinical effectiveness would at least improve our medical care (although I doubt it will reduce costs); etc.  But we shouldn’t ignore the five issues I’ve outlined above.  Even though they aren’t politically saleable, they may be give a reasonable bang-for-the-buck.

Written by Victor

December 11, 2008 at 1:50 pm

Why oh why can’t we have a better press corps? Medicare Edition

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I have been very disappointed in the press coverage of HR 6331 — the Medicare Improvements Act recently passed over Bush’s veto. (CBO scoring) The storyline is that physician payments will not be cut, with the funding coming from cuts in Medicare Advantage plans. This is woefully incomplete.

Additional storylines that should have received greater coverage:

1) What is the Medicare Improvement Fund? It is the single largest expenditure item in this bill, topping out at close to $25 billion. It is to receive disbursements from the HI and SMI Trust funds beginning in 2014. Despite this fact, it has gone unmentioned in every article on the bill, and is not mentioned in the Baucus’ bill summary.  I’ll cover this item in a future post.

2) What is the impact of this bill on senior payments? Seniors will bear the largest burden of this bill through increased premiums and increased coinsurance amounts. How large are these increases expected to be? Again, I’ll address this in  a future post.

3) What is the impact of this bill on Medicare solvency? Is this bill solvency neutral? I am concerned that it is not.

4) What is the impact of this bill on the deficit? For 2008-2009, this bill increases payments to physicians; for 2009-2010, this bill increases payments to Medicare Advantage plans; through 2011, the CBO estimates that this bill will increase the deficit by more than $12b. This bill is “paid for” by long-run changes to the Medicare Advantage program, only some of which are traditional spending “cuts”. Therefore, this bill pays for short-run, certain payments with long-run, uncertain offsets. In what sense is this “paid for”?

Written by Victor

July 20, 2008 at 8:11 pm

Posted in Healthcare, Medicare

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How to Eliminate the “Pre-Existing Condition” Problem

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Steve Verdon at Outside the Beltway argues that pre-existing condition exclusions are necessary if health insurance is to be actual insurance.  He concludes:

But when you pool people with pre-existing conditions with those who are healthy, you are basically providing a transfer of income form those who are healthy to those who have pre-existing conditions. So please, call it what it is. You want to give people with pre-existing conditions other people’s money so they can get treatment. Calling [it] insurance is simply a lie.

Although this may be true, this doesn’t mean our current system is working.  There’s a common sense reform that should change this: apply HIPAA’s creditable coverage definition to the individual insurance market.

In the group insurance market, pre-existing condition exclusions are limited to rare circumstances.  The 1996 HIPAA reform stated that they cannot be applied to anyone who has “creditable coverage” — which is essentially everyone who has group insurance coverage sometime in the last 63 days.  Essentially, this is an alternative solution to the same underlying problem:  people who purposefully forego coverage until they are sick.

To extend this definition to the individual market, you’ll have to include an actuarial determination that the original health benefits were sufficiently “rich” (i.e., a limited-benefit plans that only gives you $1,000 of coverage really isn’t insurance).  And there would be a small adminstrative burden on health plans when they enroll new members.  That’s it.  To counter these costs, you also get administrative savings because you no longer waste manpower with as many denied applications which saves money in underwriting, as well.  You also reduce the cost of rescission control.

In the long-run, everyone either buys in or they don’t.  If they don’t, then pre-ex applies, as it should to keep individuals from free-riding.  If they do buy in, however, they’re protected from pre-ex, also as it should be. 

Just by extending creditable coverage definitions to the individual market, you defang much of the problem.  It is such a simple and straight-forward solution to the problem that I’m surely way off base.

Written by Victor

June 12, 2008 at 7:24 pm