1. Managing Health Insurance Risk
THIS DOCUMENT IS PRIVILEGED & CONFIDENTIAL AND CONSTITUTES ADVICE OF COUNSEL
Patrick 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 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

3. Managing Health Insurance Risk: Basics
Different risks have different incentives to purchase coverage
Higher risks:
Sicker individuals, or individuals vulnerable to illness (i.e., older)
Are less sensitive to price
Tend to select policies with broad benefits, lower cost sharing
Lower risks:
Younger, healthier individuals
Are highly price sensitive
Are less interested in broader benefits
Are 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 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

5. 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:
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
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

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 possible
Key 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 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
35-44
$218
45-54
$268
55+
$350
C/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 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
Underwritten Iowa premium: $169/month
Guarantee 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 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

10. 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

11. Managing Health Insurance Risk: Effect of Pooling Arrangements
State purchasing pools do not address cost drivers for premiums
Provider
Payment
Rates
Utilization
Enrollees’
Health Status
Benefit
Package
Administrative
Costs
Risk/Cost of Care (83-90%)
Health plans negotiate on behalf of all members
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

12. Managing Health Insurance Risk: Pooling Small Employers
Health Plans Required to Pool All 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 Rules
Community Rating
Community Rate if 20% Drop
Tier 1
$346
$454
$476
Tier 2
$399
Tier 3
$447
Tier 4
$526

13. 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?