Managing Health Insurance Risk

Patrick Ryan, F.S.A., M.A.A.A.

Sr. Actuary

Wellmark Blue Cross Blue Shield of Iowa

» It’s critical to maintain random mix of risks:

• 1% of individuals generate 20% of costs

• 5% of individuals generate 50% of costs

• 20% of individuals generate 80% of costs

» Attraction of disproportionate share of high risk will raise average costs – higher premiums for everyone

Managing Health Insurance Risk: Basics

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» Different risks have different incentives to purchase coverageHigher risks:• Sicker individuals, or individuals vulnerable to illness (i.e., older)

1) Are less sensitive to price2) Tend to select policies with broad benefits, lower cost sharing

Lower risks:• Younger, healthier individuals

1) Are highly price sensitive2) Are less interested in broader benefits3) Are less concerned about a higher level of medical management

(i.e., an HMO)

Managing Health Insurance Risk: Basics

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Managing Health Insurance Risk: Avoiding Adverse Selection

» Disproportionate share of high risks lead to the most problematic and most predictable insurance problem: Adverse Selection

– As more high risks enroll, the average per member cost increases so premiums increase

– The premium increases (triggered by the enrollment of relatively higher risks) triggers dropping of coverage – or a decision not to purchase – by younger, highly price sensitive enrollees

– Loss of or failure to enroll younger, healthier risks results in a further increase in the average per member cost and further premium increases

– This continuing set of dynamics – referred to as an Adverse Selection Spiral – leads to increasingly higher average per member costs –– and higher premiums for everyone

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Managing Health Insurance Risk: Avoiding Adverse Selection

» Insurers are constantly sensitive to the need to avoid triggering an adverse selection spiral

» Insurers try to avoid triggering the adverse selection process by:

1) Trying to attract young healthy enrollees (to moderate overall costs) by adjusting premiums for younger healthy enrollees to reflect their predictably lower health care expenses (i.e., lower premiums)

• Strategies that keep prices affordable by adjusting premiums for risk

2) Underwriting (e.g., turn down highest risk) and relying on broader-based funding (high risk pools) than just individual market enrollees to subsidize highest risk

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Managing Health Insurance Risk: Making Coverage as Affordable as Possible

Greatest challenge health insurers face: attracting balanced pool of risks to keep healthcare as affordable as possible

• Many healthy individuals: “Insurance is expensive and unnecessary”

• Older and sicker individuals very motivated to buy

Key Challenge: How to convince healthy individuals to buy insurance coverage?

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Managing Health Insurance Risk: Using Age Rating

Age Rating in Individual Market: Insurers offer lower premiums to younger individuals

Community Rating (CR): All ages charged same premium

Age

Monthly Age Rated

Premium

Monthly Community

Rate

CR if Youngest

20% Leave

CR if Youngest

40% Leave

19-24 $149 $267 $301 $354

25-34 $169 $267 $301 $354

35-44 $218 $267 $301 $354

45-54 $268 $267 $301 $354

55+ $350 $267 $301 $354

C/R Increases Premiums by 79% for 19-24 Year Olds

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Managing Health Insurance Risk: State Experience w/Community Rating

Guaranteed issue and community rating can have unintended consequences:

• Fewer Insured: Maine/New Jersey 50% of individual enrollees dropped coverage

• High Premiums: Premium for a 25 year-old is:– $1,269/month in New Jersey

– $924/month in Maine

• Reduced Choice: – Lowest deductibles in NJ and Maine: $1,000;

– The majority of insurers have left these states

Guarantee issue encourages individuals to delay Guarantee issue encourages individuals to delay purchase until they become sickpurchase until they become sick

Underwritten Iowa premium: $169/month

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Managing Health Insurance Risk: Pooling

» Pooling protects individuals and small groups purchasing coverage from the extraordinarily high costs of highest risk enrollees

» States have recognized this and have required all insurers to pool their small group market

• States require health plans to pool all small firms and cannot vary premiums by more than a specified amount (e.g., 25% in most states) from average due to health status

• A large claim for a small firm is spread over the entire pool – not just the small employer

• Premiums cannot increase based on claims experience more than specified amount (e.g., 15%)

• Result: In the small group market, low-risk firms pay higher premiums to subsidize high-risk firms

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Managing Health Insurance Risk: Pooling

» Some states have tried to build on the value of pooling by establishing state purchasing pools

» Experience with state purchasing pools shows:

• No additional pooling occurs; pooling is still at the insurer level not at the state purchasing pool level

• Average per enrollee – premiums – costs in any purchasing pool is determined by health status of enrollee

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Managing Health Insurance Risk: Effect of Pooling Arrangements

Health plans negotiate on behalf of all members

Risk/Cost of Care (83-90%)Risk/Cost of Care (83-90%)

Risk Selection Issues:

– 5% enrollees = 50% costs

– 20% enrollees = 80% costs

– Small employer risk volatility

Marketing

Agents/Brokers

Billing

Claims Processing

Disease Management

Customer Service

Network Management Risk/Profit

Taxes

Compliance Costs

ProviderPayment

Rates

ProviderPayment

RatesUtilizationUtilization

Enrollees’Health Status

Enrollees’Health Status

BenefitPackageBenefit

PackageAdministrative

CostsAdministrative

Costs

State purchasing pools do not address cost drivers for premiums

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Managing Health Insurance Risk: Pooling Small Employers

• Health plans required to pool all small firms; cannot vary premiums by more than 25% from average due to health status• A large claim for a small firm is spread over the entire pool – not just the

small employer– Premiums cannot increase by more than 15% due to claims experience

Community Rating Would Increase Premiums by 30% for healthy groups

Health Status NAIC RulesCommunity

RatingCommunity Rate

if 20% Drop

Tier 1 $346 $454 $476

Tier 2 $399 $454 $476

Tier 3 $447 $454 $476

Tier 4 $526 $454 $476

Health Plans Required to Pool All Small Employers

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In Conclusion

Greatest challenge health insurers face: attracting balanced pool of risks to keep healthcare as affordable as possible

Key Challenge: How to convince healthy individuals to buy insurance coverage?

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