Tag Archives: high risk pool

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.

Advertisements

Leave a comment

Filed under PPACA

Back to Work

While I don’t plan to change the name of this blog from stayathomeeconomist to atworkeconomist, I have recently returned to the full-time paid work force. As a result, I might actually have time to finish going through the PPACA. Toddlers and computers rarely mix so the last couple of months it have been challenging to find the time to write.

For those of you who have been otherwise occupied and didn’t notice, we have entered the election season. While I am not intending to get into politics – there are plenty of those places out there on the Interwebz – it behooves me to note that the Republican Party Platform specifically refers to the PPACA (as Obamacare) 9 times, and calls to repeal the Act as soon as possible. My hope is that by finishing this, you, my readers, can decide for yourself if it is worth repealing.

Since it has been a while since I began this, let’s recap a bit:

The first part of the Act makes immediate changes to health care insurance. We should have already felt these impacts, to some extent, in our lives. Lifetime limits were removed; annual limits were subject to requirements. Rescission was eliminated. Co-pays for items considered preventative care were eliminated (one area of which, contraception, was the subject of much debate recently). Being able to cover your children on your own health insurance was extended to age 26 (Blog Post 3/26).

Public opinion on the various component parts of these reforms has been generally favorable, except of course, the part where we have to pay for them by all buying insurance. (KFF Poll)

I started to make a list of the rest of the items that the first parts of the Act covers, but then realized that it was about as dull as reading the Act yourself, which if you are here, you clearly would rather I did. Plus – my original posts were funnier than a list. So go read them.

For those of you who already did – I’ll move on to the latest section.

Part 5 of the PPACA addresses the question of Reinsurance and Risk Adjustment. I can see why people who read the first 124 pages and got to this section decided to throw up their hands and go play golf or something. Just the title makes me want to go to sleep.

Section 1341 – Transitional Reinsurance Program for Individual Market

What is reinsurance you might ask? Reinsurance is when your insurance company buys insurance. In this case, it is to help ease the burden on the insurance companies for covering high-risk people in the high-risk pools.

Because – really – that’s the crux of the problem with health care in this country. It’s based on an insurance model and insurance doesn’t want to cover risky people. In the case of health care, some of the risk comes from personal action – like driving too fast, or skydiving, or whatnot – but most health problems are either complete chance, or a combination of genetic predisposition and lifestyle choices. And it is all well and good to say that everyone should make the best lifestyle choices possible, but economics, geography and fate all interact to make it impossible to predict with 100% certainty who will need millions of dollars of health care in their lives and who won’t.

So how can we solve this dilemma? There are three main options:

  1. We can go completely free market – if you can pay for health care, great, otherwise, you will die.

    This option has already been tossed out of the window in this country, because we have health care insurance, insurance that heretofore has been linked to employment. That makes health then become a matter of class. If you have a middle class job that has benefits, then you will have at least some protection against the conspiracy of genes, environment and chance that results in your health from day to day. If you don’t – well, we aren’t quite ready to say as a society that those people should just die. Some among us are, but not, thankfully, yet the majority.

  2. We can go single-payer – the government pays for all health care through taxation.

    This system is a non-starter in America. Doctors don’t like it, patients don’t like it, and politicians hate it. The efficacy of such a program is certainly mixed, depending on how you rank the outcomes, but even if it was the best deal in town, we don’t want to buy it.

  3. We can do a hybrid. Private health care, paid for by insurance, but that insurance is required for all.

    This is what the PPACA is intended to do. It faces the reality of the situation that we have an insurance system here, it is unlikely to go away any time soon, but that the current nature of that system (at least up to the implementation of the act) does not address everyone’s needs, and results in many people being denied health care. So let’s fix the last part, without fighting the uphill, if not impossible, battle of fixing the overall system.

So the Act recognizes that insurance companies are not going to want to cover higher risk individuals and creates an organized system of reinsurance so that companies are at least somewhat protected from the increase in the care they are required to offer.

Ok – that’s enough to chew on for one day.

1 Comment

Filed under PPACA