Health Care Math 2: Mandate Math
By Dr. Mike Razar
The Administration has put forth some goals for private insurance.
a. No Discrimination for Pre-Existing Conditions
b. No Exorbitant Out-of-Pocket Expenses, Deductibles or Co-Pays
c. No Cost-Sharing for Preventive Care
d. No Dropping of Coverage for Seriously Ill
e. No Gender Discrimination
f. No Annual or Lifetime Caps on Coverage
g. Extended Coverage for Young Adults
h. Guaranteed Insurance Renewal
Goals b, c, e, and g are not particularly expensive, but only redistribute the responsibilities for various costs.
Goals a, d, f, and h are expensive to implement. A related issue is the need to limit coverage contractually and the mechanism for rejecting uncovered claims. Another is the issue of changes in qualification for various plans. This often occurs when people changes jobs and is tied to the problem of pre-existing conditions.
There is no sense mincing words. These goals will be mandates
The popular outcry for insuring pre-existing conditions sounds like a good idea to most politicians. In fact it is a classic case of other people’s money being easy to spend.
Nobody can deny that there is a value to uninsured people in having an option to buy insurance anytime they anticipate an unexpectedly high medical bill. It is the job of actuaries to price this option depending on the current age and condition of each person.. This is not an easy task. The first problem is that this option is being granted to essentially every uninsured individual in the country. There is no easy way to measure the risk profile of that pool and to estimate the probability that any one of them will try to buy insurance from a particular firm.
Another reason it is so difficult is that there is a feedback loop between the consumer’s decision and the provider’s price. After all, if you are going without insurance until you need it, which company will you choose when you have that surgery you never guessed you would need? It is any easy choice. You go to the company offering the lowest cost for the best coverage. It is an example of the well known problem of adverse selection.
Will uninsured individuals will be able to game the system? Surely, an annual penalty at the ten or fifteen percent level of the cost of insurance will do little to discourage this.
From the insurer’s point of view, there is value in discouraging these consumers from choosing their company to get the newly needed coverage. It would be better to have them choose a competitor. That is just the opposite of the usual goal of setting a price. They have an incentive to set prices higher and provide less coverage. But wait a minute. If they do that, then they will lose their regular customers to competitors. Catch 22!
I do not know how actuaries can figure out how to set prices in this environment. It is hard enough to project the probabilities of various risk groups needing medical coverage. The introduction of these perverse incentives creates a wild card which will be tough to price.
The most efficient way to eliminate this problem, without requiring everybody to buy insurance, is to create a national risk pool of the uninsured. Then either private companies or the taxpayers must pay for the care of members of that pool when they get sick enough to need insurance badly enough.
The practical result of mandated coverage of pre-existing conditions will be to increase premiums and reduce coverage because it is more important to the shareholders to lower risk to the company than to expand market share.
Mandates d, f, g, and h:
When someone buys life insurance, typically a physical exam is required. If the applicant passes the exam, the insurance is permanent as long as premiums are paid. This is not always the case for health insurance policies. For a company to drop coverage because of illness seems completely unfair and unethical. Mandating coverage to young people in their twenties by allowing them to remain on their parents’ policies is just a special case of guaranteed renewals. Unlike the case of pre-existing conditions, guaranteed renewals can be fairly priced into a policy if the pool is large enough. Undoubtedly, a small increase in premiums is needed, but that is reasonable.
The lifetime cap is similar. Whether coverage is dropped due to a serious illness or due to exceeding a cap, it is a problem.
These three mandates seem susceptible to reasonable actuarial calculations. So where are these calculations? Doesn’t Congress have a duty to ask for them? The CBO doesn’t even come close to grappling with these costs.
Someone has to pay for these mandates. Some of the costs will be covered by premiums paid and some by government subsidy. Any bill which fails to explicitly allocate and quantify the responsibility for such payments is flawed.
Mandates b, c, and e:
Mandate b is simply cost shifting. It makes little difference to the big picture whether deductibles and co-pays are reduced in exchange for higher premiums. Pay it now, or pay it later.
Mandate c simply dictates that the cost of preventive care be actuarially allocated to premiums. Pay it now or pay it later.
As to mandate e, the costs of pregnancy and other gender specific conditions must be spread over the pool of all individuals regardless of age or gender. This pool seems to be in the spirit of providing free education to all children and medical care to older folks. No matter how these costs are allocated, the total needed remains the same.
The bills before Congress try to deal with these problems with the sledgehammer of federal law by simply disallowing certain practices by insurance companies. Changing the mixture of premiums, deductibles and co-pays saves nothing. Why are progressives so anxious to limit consumer choice in this area?
Funding the costly mandates will require a substantial increase in premiums to cover the additional actuarial costs. How much would premiums have to go up? Surely it would be useful for someone to come up with realistic estimates based on facts, not just wishful thinking, before these new mandates are enacted. The Federal Government has to live with the same actuarial facts as private insurers. The only way to keep premiums the same or lower is to subsidize the insurance. Obviously, that puts private companies at a distinct competitive disadvantage to any public plan and will ultimately drive them out of business. Progressives are happy with this outcome because it speeds up their goal of a single-payer system run by political appointees. They should not claim that this saves money unless they can point to specific savings.
These mandates are actuarially expensive. Forcing private insurers to pay for these mandates introduces a wild card into their premium setting. Actuarial science is already very difficult. It is doubtful that any member of Congress has a clue how premiums are calculated. Blustering about immoral profits is not helpful.
Whether insurance is public or private, only the government can be the insurer of last resort when claims rise above some level. No private entity can realistically cover a pandemic which hospitalizes half the population. It is not obvious how the limits should be defined, but the government must play a role in dealing with catastrophic costs to an individual, a family, or an insurance company. Passing this responsibility to the states as an unfunded mandate accomplishes nothing. All legislation being considered includes some form of catastrophic insurance. There is opposition to plans consisting only of catastrophic insurance, but it is an essential component of all proposals, whether explicitly or not. At the same time there is opposition to tort reform which leaves physicians and their liability insurers in a desperate situation with regard to very high awards. With that in mind, it is proposed that the government fund some version of the umbrella for all parties.
This principle is likely to be controversial, especially with conservatives. Catastrophic insurance has a bad reputation and a rocky history. Still, not just in health insurance disasters, but in all disasters, there is an implied promise that government will be there. If you doubt this, think back to Hurricane Katrina. This was not always so in American history, but it is today. That fact should be acknowledged so that straightforward mechanisms can be created to implement it fairly and efficiently.
Here is a simple, concise proposal.
The government should provide an explicit high deductible umbrella to protect individuals and private insurers from health disasters, no matter the cause.