Presentation on theme: "Managing Health Insurance Risk"— Presentation transcript:
1 Managing Health Insurance Risk THIS DOCUMENT IS PRIVILEGED & CONFIDENTIAL AND CONSTITUTES ADVICE OF COUNSELPatrick Ryan, F.S.A., M.A.A.A Sr. Actuary Wellmark Blue Cross Blue Shield of Iowa
2 Managing Health Insurance Risk: Basics It’s critical to maintain random mix of risks:1% of individuals generate 20% of costs5% of individuals generate 50% of costs20% of individuals generate 80% of costsAttraction of disproportionate share of high risk will raise average costs – higher premiums for everyone
3 Managing Health Insurance Risk: Basics Different risks have different incentives to purchase coverageHigher risks:Sicker individuals, or individuals vulnerable to illness (i.e., older)Are less sensitive to priceTend to select policies with broad benefits, lower cost sharingLower risks:Younger, healthier individualsAre highly price sensitiveAre less interested in broader benefitsAre less concerned about a higher level of medical management (i.e., an HMO)
4 Managing Health Insurance Risk: Avoiding Adverse Selection Disproportionate share of high risks lead to the most problematic and most predictable insurance problem: Adverse SelectionAs more high risks enroll, the average per member cost increases so premiums increaseThe 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 enrolleesLoss of or failure to enroll younger, healthier risks results in a further increase in the average per member cost and further premium increasesThis continuing set of dynamics – referred to as an Adverse Selection Spiral – leads to increasingly higher average per member costs –– and higher premiums for everyone
5 Managing Health Insurance Risk: Avoiding Adverse Selection Insurers are constantly sensitive to the need to avoid triggering an adverse selection spiralInsurers try to avoid triggering the adverse selection process by: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 riskUnderwriting (e.g., turn down highest risk) and relying on broader-based funding (high risk pools) than just individual market enrollees to subsidize highest risk
6 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 possibleKey Challenge: How to convince healthy individuals to buy insurance coverage?Many healthy individuals: “Insurance is expensive and unnecessary”Older and sicker individuals very motivated to buy
7 Managing Health Insurance Risk: Using Age Rating Age Rating in Individual Market: Insurers offer lower premiums to younger individualsCommunity Rating (CR): All ages charged same premiumAgeMonthly Age Rated PremiumMonthly Community RateCR if Youngest 20% LeaveCR if Youngest 40% Leave19-24$149$267$301$35425-34$16935-44$21845-54$26855+$350C/R Increases Premiums by 79% for Year Olds
8 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 coverageHigh Premiums: Premium for a 25 year-old is:$1,269/month in New Jersey$924/month in MaineReduced Choice:Lowest deductibles in NJ and Maine: $1,000;The majority of insurers have left these statesUnderwritten Iowa premium: $169/monthGuarantee issue encourages individuals to delay purchase until they become sick
9 Managing Health Insurance Risk: Pooling Pooling protects individuals and small groups purchasing coverage from the extraordinarily high costs of highest risk enrolleesStates have recognized this and have required all insurers to pool their small group marketStates 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 statusA large claim for a small firm is spread over the entire pool – not just the small employerPremiums 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
10 Managing Health Insurance Risk: Pooling Some states have tried to build on the value of pooling by establishing state purchasing poolsExperience with state purchasing pools shows:No additional pooling occurs; pooling is still at the insurer level not at the state purchasing pool levelAverage per enrollee – premiums – costs in any purchasing pool is determined by health status of enrollee
11 Managing Health Insurance Risk: Effect of Pooling Arrangements State purchasing pools do not address cost drivers for premiumsProviderPaymentRatesUtilizationEnrollees’Health StatusBenefitPackageAdministrativeCostsRisk/Cost of Care (83-90%)Health plans negotiate on behalf of all membersRisk Selection Issues:5% enrollees = 50% costs20% enrollees = 80% costsSmall employer risk volatilityMarketingAgents/BrokersBillingClaims ProcessingDisease ManagementCustomer ServiceNetwork Management Risk/ProfitTaxesCompliance Costs
12 Managing Health Insurance Risk: Pooling Small Employers Health Plans Required to Pool All Small EmployersHealth plans required to pool all small firms; cannot vary premiums by more than 25% from average due to health statusA large claim for a small firm is spread over the entire pool – not just the small employerPremiums cannot increase by more than 15% due to claims experienceCommunity Rating Would Increase Premiums by 30% for healthy groupsHealth StatusNAIC RulesCommunity RatingCommunity Rate if 20% DropTier 1$346$454$476Tier 2$399Tier 3$447Tier 4$526
13 In ConclusionGreatest challenge health insurers face: attracting balanced pool of risks to keep healthcare as affordable as possibleKey Challenge: How to convince healthy individuals to buy insurance coverage?
Your consent to our cookies if you continue to use this website.