More Fun with Reinsurance

We’ll continue our analysis of the reinsurance market – or the method by which the PPACA hopes that they can compensate for any risks associated with offering health insurance in smaller risk pools.

Section 1342 – Establishment of Risk Corridors For Plans in Individual and Small Group Markets

Why don’t we take a moment and discuss why these smaller markets exist, and why they might be a problem for health insurers.

The first question is pretty easy – smaller markets exist because not everybody in this country works for a large corporation. Small groups are those employers that have less than 100 employees, and the individual market is for people who do not have access to any health insurance through an employer. These people might be freelancers, or small business owners, or in a relationship such that they are not eligible for health insurance through their partner’s employer, etc.

The second question is a little more complicated. Why do insurers not just give these people the same plans as those people who work for large corporate employers? There are several reasons.

One is that the price of insurance plans is negotiated by each employer, and would therefore be dependent on the bargaining power of each side. A large corporation has a lot of clout when they decide who will get their millions of dollars in health insurance premiums. The insurers will not just want to give you, an individual, the same rate and benefits that they gave someone with more ability to bargain with them. Remember – the health insurance company doesn’t really care about your health, other than the fact that the healthier you are, the more profit they have. Companies, since they offer health insurance as a benefit to employees, want to have premiums as low as possible, but they also have their own profits to consider. Since they pay a portion of your health insurance premium (although the amount they pay differs widely) they want the lowest price possible. They could just not care, and pay nothing, but if they did that then they might not skilled employees. Balance – it’s all about balance.

The second is that large corporations have lots of people – and therefore have a lot of healthy people compared to the likely number of sick people. Health insurance, after all, makes its money by betting that you won’t get sick, while recognizing that you of course, will get sick at some point. You, all by yourself, or in your small company, don’t have as many people to spread that risk over if you happen to get sick.

Finally, there are the concepts of adverse selection and moral hazard. Adverse selection is the idea that people who want insurance are the more likely to need it because they are riskier in some way. Moral hazard is the idea that if you have insurance you are more likely to engage in risky behavior. The insurance company hopes to limit each of these possibilities by using your employment as a signal of sorts that you are not likely to take advantage of the health insurance they are offering. After all, the company was willing to hire you, so you can’t be TOO bad. And presumably, their families aren’t TOO bad either, if this same responsible, working, person was willing to engage in a long term relationship with them. Of course, they can’t know any of this for sure but insurance is all about probabilities. Due to laws protecting large groups (HIPAA) – they can’t deny you insurance based on your individual characteristics – but there are not as many protections for smaller groups.

So all of that means that people who are part of the small and individual insurance market, about 62.7 million people under age 65, will be affected by these changes. The previous section (1341) described how this market would be handled until the year 2014, when this section (1342) takes effect. This section provides additional payments to participating insurers in this market, in order to allow them to adjust to covering higher risk individuals that they had likely not been covering previously.

That was a lot for what was essentially a small section, but hopefully it clears up some issues.

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