By Daniel Weintraub
The Supreme Court decision last week upholding President Barack Obama’s health reform law clears the way for a transformation in the way millions of Californians will get their health insurance, and, ultimately, their care.
For the shrinking number of people who still receive insurance coverage as a benefit from their employers – mostly at big companies – the changes will be gradual at first, though still significant. And despite assurances from Obama, it is still not clear that most people will be able to keep the coverage they have today.
But for individuals who do not have insurance because they are unemployed, self-employed or working in places that do not offer health benefits, the change will be dramatic, fast and probably to their liking.
The easiest way to understand the coming change is this: The current business model of the health insurance industry consists of avoiding risk. The new model will instead force insurance companies to compete by offering the best service.
In today’s environment, insurance companies avoid risk by spending vast amounts of time, effort and money weeding out potential customers who might actually need to use their product.
That might sound crazy, but it’s true. Insurers make money only if they collect more in premiums than they pay out in medical costs and other expenses. They know that inevitably some people will get very sick or suffer grievous injuries that will cost the insurer more than the consumer paid in premiums. But the first job of the insurance executive is to avoid these circumstances whenever possible.
This kind of thinking gave rise to what is known as the pre-existing health condition. Insurance companies grill potential customers with dozens of questions about their health history, searching for anything suggesting that the person might become a burden to the bottom line. Anyone who has ever suffered more than the sniffles has a good chance of being declined, and if you do get coverage, you will pay a hefty price premium for it. If you have been seriously ill, forget about it. You will not find insurance in the private market at any price.
The Affordable Care Act will change all of that. It already has begun to do so.
Starting in 2014, insurance companies will no longer be able to exclude people based on their health condition. And the companies will no longer be able to charge higher rates to people who have been sick. Rates will be adjusted only for geography, age and whether or not a consumer uses tobacco.
Already, because of federal health reform, insurance companies are prohibited from denying coverage to children through the age of 18. Adults who have been excluded from coverage can apply to a state-run pool for high-risk consumers to cover them until they can move into private coverage when the law is fully implemented. About 9,000 Californians who were previously denied insurance have already been accepted for this transition coverage.
The federal reform also eliminated the lifetime caps on how much insurance companies will spend on an individual’s care, limits that used to end some people’s coverage just when they needed it most. The law is also phasing out similar caps on annual benefits.
Millions of Californians are also now getting preventive care with no out-of-pocket costs; adult children can get coverage on their parents’ policies through age 26 (and about 300,000 have done so); and seniors are getting a price break on their prescription drugs.
Essentially, the Affordable Care Act turns the insurance industry into a quasi-public utility. Insurers will still be private companies. But for a large swath of the market, the benefits insurance companies offer and the practices they follow will be tightly regulated by the government. Their rates won’t be directly controlled, but all of the reforms taken together are likely to amount to de facto rate regulation.
In return, the insurers will get millions of new customers in California alone. Many of these customers will be young, healthy people who will be compelled to buy insurance by the “individual mandate” that was at the center of the legal fight that ended in the Supreme Court last week. The premiums they pay will in most cases exceed the cost of their coverage, and the surplus will be used to help finance the provision of care to sicker people who until now were excluded from coverage.
In California, most of this transformation will be managed by a new agency known as the Health Benefit Exchange. The exchange will be an online marketplace at which insurance companies offer their products and consumers shop for the coverage that suits them best.
Anyone who applies for coverage through the exchange will get help obtaining insurance from whatever program they are eligible for. The poorest Californians will get their coverage through the state’s Medi-Cal program, and the state is expecting about 2.5 million more Californians to become eligible in 2014, mostly childless adults who until now have been excluded from the coverage. Through the end of this decade, the federal government will pay almost all of the cost of caring for these people.
Another 2 million Californians with greater means will be eligible for subsidies from the federal government for the first time. The Health Benefit Exchange will calculate these subsidies based on a family’s income and its size.
The subsidies, which will be in the form of tax credits paid to an insurance company on the consumer’s behalf, will limit the amount families must pay for coverage. Low-income families will pay no more than 2 percent of their income for insurance. Families earning four times the federal poverty rate, or about $93,000 for a family of four, will pay no more than 9.5 percent of their income. Many will pay far less.
The subsidies will be financed in part through more than 40 separate tax provisions expected to raise nearly $500 billion over 10 years. These include an increase in the Medicare tax, new fees on insurance companies, a new tax on medical device manufacturers, a tax on tanning salons and, of course, the tax on people who do not comply with the mandate to purchase insurance.
Peter Lee, the exchange’s executive director, said the marketplace will be open for business by Oct. 1, 2013, so individuals and small employers can begin buying coverage to take effect on the first day of 2014.
“We’re moving full speed ahead,” Lee said last week after the court issued its opinion.
That is no surprise. California has led the nation in implementing the Affordable Care Act. The state has been an early adopter, taking advantage of nearly every federal dollar, expanding access early to the populations targeted by the reform and, in some cases, adopting state-only provisions that go further than the federal law.
“No state in the nation had more at stake in this decision than California,” said Anthony Wright, executive director of Health Access, a consumer advocacy group.
Indeed, California had the most to lose if the court had stricken down the entire law. And in the years ahead, the state will have the most to gain from its implementation. If it works as planned, millions of Californians who have gone without coverage will now get it at an affordable price, and, just as importantly, they will be able to keep it when they need it most.
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Tags: health reform, insurance exchange
It doesn’t sound at all crazy that people selling contracts to assume the healthcare cost risks of those who buy such policies would care about what risks they were assuming. If you we’re selling such policies with your money at risk, how would you handle it Dan?
Furthermore underwriting doesn’t just affect those who get insurance or not because of that, it affects the price of insurance of those already in that insurance line pool. You write that “(t)he premiums they pay will in most cases exceed the cost of their coverage”. No company can exist without that being true, and if an insurance line let’s in a higher ratio of sicker people who use much more health care than their premiums, the other people in that insurance pool will have to pay for it in the form of higher premiums. Premiums have to equal medical loss + overhead and profit. I know people like to focus on profit but you can remove that from the equation and the formula holds true.
Consider those who are in an insurance line where the pool of the insured entered their contracts with underwriting. Some of those will have developed conditions that will result in them receiving health care greater than their premiums. But they have a contractual right to that care and the insurance company can pay for that without having to raise premiums that much because proper underwriting makes it likely that the pool will have many people in the opposite situation.
Now if you allow in a lot more sick people who will be getting more care than their premiums will cover, the rates have to go up for everyone else in the pool to cover the health care costs not covered by the premiums of these new entrants. That can lead to those who can to avoid paying higher premiums by switching to another line that has a healthier risk pool. In turn that can lead to ever-rising premiums as the risk pool shrinks to just those who can’t leave because they can’t survive new underwriting to get replacement insurance but won’t leave because the they have a lot of health-care needs, as long as they can make the premiums. It can lead to a downward spiral of ever-rising premiums due to an ever-shrinking pool of ever-sicker people.
For those who entered contracts with underwriting and have paid for insurance for years and, now have conditions that would exclude them for new underwriting, yet remain insured because they have a contractual right they paid for, that group would be much worse off than if their insurer paid attention to the underwriting risk of those allowed to join their line.
It’s irresponsible journalism to portray things only in terms of those who benefit, ignoring the other side of the ledger. So to tout the end of actuarial underwriting regarding health status or gender or age without saying that will result in premium increases for healthy individuals, premium increases for males and premium increases for the young is to distort what’s real. We may still choose to do these things but that ought to be done in the context of a reality-based discussion.