Is Anthem scenario a sign of things to come?

February 24, 2010

The most interesting thing I heard in Anthem-Blue Cross’ testimony Tuesday wasn’t the 39 percent rate increase the company wants to impose on some customers. Or the 700 claims handling violations over the past three years alleged by the insurance commissioner. It was the 25,000 customers that the firm says it has lost from its individual insurance line in California over the past year.

Maybe some of those people left because of the way the firm handles its claims. But chances are most dropped their coverage because of rising prices and the tough economy. And the company says many of them were the kind of young, healthy people who are crucial to keeping the risk pool broad. In other words, by buying insurance and then not using it, they subsidize the care of other people who get sick or injured. When they leave the pool, higher costs have to be spread among fewer people. Thus, rate hikes.

Ironically, this is the biggest risk in the kind of health reform that was proposed in California in 2007 and is now on the table in Washington, D.C. By requiring insurers to cover all comers, without regard to pre-existing conditions, the government would be creating a disincentive for people to buy coverage while they are healthy.
Why bother, if you can easily get it as soon as you are sick? But if only sick people bought insurance, the costs would skyrocket. It is like letting people buy homeowner’s insurance while their house is on fire.

One way around this is to require everyone to buy coverage, the so-called “individual mandate.” California’s proposed plan had a fairly robust version of this rule. There was talk of including it in the national reform plan. But politicians of all stripes are reluctant to go there. Liberals don’t want to require people to pay money to the same industry they are repeatedly bashing in their speeches. Conservatives don’t want to require people to do anything, including buy a private company’s product. So the mandate gets watered down, its enforcement weakened.

The result could be a repeat of the what we are seeing now with Anthem Blue Cross: Rising costs as more sick people enter the insurance pool. And healthy people, especially young people, leaving the pool because they can no longer afford the premiums. This would force even more premium increases. We’ve already seen that happen in other states that have tried to impose these kinds of requirements on insurers.

I have yet to hear a good explanation for how this scenario would be avoided under the kind of hybrid design most likely to emerge from the debate now underway in Congress.

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One Response to Is Anthem scenario a sign of things to come?

  1. jskdn

    February 24, 2010 at 8:18 pm

    It bears noting that candidate Obama was against the individual mandate during the primaries against Clinton, who supported it. Of course he changed his tune as president because he knows Paul Krugman is right when he wrote in his recent column, “California Death Spiral,” about “reform that would ban discrimination on the basis of pre-existing conditions and stop there. It’s a popular idea, but as every health economist knows, it’s also nonsense. For a ban on medical discrimination would lead to higher premiums for the healthy, and would, therefore, cause more and bigger death spirals.”
    I would argue that you hardly have to be a health economist to understand that it’s nonsense, except in one way: politically. Unfortunately many people do not understand this basic concept so fundamental to reform and even though it was a campaign issue two years ago between Obama and Clinton. What I’d term a grossly negligent news media didn’t see fit to make sure the concept was widely understood. Hence it is still being exploited now, just as candidate Obama did back then.

    Obama’s just released plan lowered the penalty for going without insurance “$495 to $325 in 2015 and $750 to $695 in 2016. Subsequent years are indexed to $695 rather than $750, so the flat dollar amounts in later years are lower than the Senate bill as well. The President’s Proposal raises the percent of income that is an alternative payment amount from 0.5 to 1.0% in 2014, 1.0 to 2.0% in 2015, and 2.0 to 2.5% for 2016.” That $695 penalty would go to the 2.5% rate after at $27,800. A person earning $43,344, 4 times the poverty rate when insurance subsidies end, would be required to pay $1084 a year as a penalty and then $250 for every additional $10,000 in income. So the question is what would such persons have to pay for an insurance policy on the exchanges with a 70% insurance value (Obama’s lowest figure) and is the differential enough to make relatively healthy people not spend the extra money given that they can buy insurance through guaranteed issue if any expensive medical conditions arise?

    But in regard to Anthem/Blue Cross’s claim, the math doesn’t seem to support it. I heard the increase premiums affects 700,000 people. 25,000 lost customers is only 3.6% of that number. If those lost customers paid premiums and made absolutely no claims, the effect their loss would be a small portion of the kind of increases being proposed.

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