HEALTH PLANS/POLICY: RAND study on the individual market puzzles me a little

Here are my longer comments on the RAND study about Consumer making in the individual insurance market published on the web last week by Health Affairs. Somewhat ironically I was interviewed and fairly extensively quoted in this Olga Pierce UPI story (yup, the Moonies got to me!) before I'd read the whole study, so I was mostly venting my prejudices about the individual insurance market as a whole in my comments there. This is a little long, so I've put it below the jump -- but I think it’s very important.

Reaction to the study has largely focused on the unsurprising finding that paying subsidies to poorer people to buy into the individual market wouldn't do much to lower overall uninsurance. There was also some comment about the problems with information availability for people purchasing insurance. I'll have some more to say about the information piece later, but first we need to look at the core results.

Before I do that, I must congratulate the authors for their work and Jill Yegian and her crew at CHCF for funding research into the individual insurance market. No one has really touched this stuff other than Mark Pauly, and long-term THCB readers won't need me to remind them what I think of his analysis. (BTW I think that the authors of this study accept some of his results a little too easily).

So what do they say? Their main conclusion is this:

A 20 percent subsidy to the price of individual insurance would reduce the number of uninsured people by at most 12 percent, or about 5.5 million people. On the other hand, we also find that tax subsidies in the individual market would not lead to an unraveling of the group market as some fear; a 20 percent subsidy in the individual market would reduce the number of workers participating in their own plan by less than 0.05 percent. At the same time, subsidy approaches will also help achieve other policy objectives—namely, promoting whole-family coverage and continuity of coverage. They are likely to be an inefficient way to achieve any of these objectives, however, because it is difficult to target subsidies only to those who would not otherwise purchase insurance for some or all family members and to those who need longer-term coverage but would leave the market because of high prices.

I think that's code for saying that the individual market is un-reformable, outside of the complete re-tooling of the health care insurance system or giving everyone 100% subsidy to buy in. That gets no argument from me. And don’t forget that a very small percentage of Americans get their insurance from the individual market—even if that number happens to include many self-insured health care consultants—but the current erosion of employer coverage means that that number will be growing, and it’s the great white hope of the wing-nuts in charge of what passes for policy in the White House these days.

But there's plenty more that's actually more interesting in the study.

Our analysis confirms earlier studies’ findings that there is considerable risk pooling in the individual market and that high risks are not charged premiums that fully reflect their higher risk

My first real problem is that the earlier studies who’s findings they are confirming were done by Mark Pauly -- but I should be a big boy and get over that. But here's where they start talking about risk pooling, and the impact of underwriting.

Among new enrollees, families that include an adult with a chronic medical problem pay an actuarially adjusted premium that is about 10 percent higher than the premium for new enrollees with no chronic conditions. Among longer-term enrollees, families that include an adult who contracts a chronic medical condition after enrolling in the individual market pay more than longer-term enrollees with no health problems (7 percent) but less than families with a chronically ill adult at enrollment (who pay 12 percent more than the healthy families). This is consistent with the hypothesis that pooling increases over time.

SNIP

Thus, there may be less separation of risks among longer-term enrollees than among new enrollees. The evidence on this is somewhat mixed (Exhibit 2). The less generous PPOs include fewer longer-term subscribers with newly acquired chronic conditions than we would expect at random. Thus, there continues to be a separation of risks in the less generous PPOs, even among those who acquired chronic conditions subsequent to enrollment. On the other hand, the share of longer-term enrollees who become sick who are in higher pricing tiers is about the same as their share in the population, which is consistent with a decrease in separation of risks over time as a result of health status changes.

So they’re saying that the less generous PPOs (i.e. the HDHPs) find a way to weed out the chronically ill (more on that later) but that the more expensive plans don’t over time. This may be true but there are several things that do not seem to be considered in their analysis (or at least didn’t make into the final report).

First, the impact of insurance avaibility (or unavailability) on defraying health care costs is not evenly spread on the average—it’s on the margins and on the margins the unlucky are getting screwed—or worse, having their insurance cancelled. (That news broke after this study was concluded but before it was published).

Now the study's data shows that people 60% of people turn over within the individual market every 3 years.

About 60 percent of new coverage episodes continue more than one year, and more than 30 percent continue for more than three years

In fact it’s only around 50% of even the near-elderly who last more than 3 years in an individual plan—and that’s the group that’s least likely to find other options and therefore has the greatest incentive to sit tight in an individual plan. So the individual market is highly, highly unstable. What's happening is that people go from individual plans into group plans when they change jobs. People change jobs frequently, (they have their plans changed on them by employers too) and in that process, as anyone who’s looked for a job knows, they have frequent periods of needing insurance. Often they have relatively long periods of uninsurance. Commonwealth estimated that 80m Americans had at least a 4 month period of uninsurance over a 2 year period—as there are about 20m long term uninsured, that means 60 million odd are being ground through the group to individual to uninsured mill, with plenty more going from group to individual and back.

Then when people come back into the individual market, they have to be re-underwritten. It's an arduous process, and as I just wrote about at Spot-on it produces wildly varying results in premiums offered for the same individual. And when they get re-underwritten, life is not so much fun.

Underwriting might prevent some high-risk market candidates from obtaining insurance because insurers are free to deny coverage. Those who obtain health insurance are in better health than those who remain uninsured. About 32 percent of those who recently purchased individual health insurance reported that an adult family member included on the policy has a chronic medical condition, and 4 percent reported that an adult family member was in fair or poor health.

So the real story should be the focus on what happens to those who turnover, not the 30% stuck in the individual market longer term. Unfortunately, as far as I can tell, the only way that you can do this study properly is to longitudinally follow a group of people into and out of the individual insurance market over time, and then discover what happened to those who developed chronic conditions. Were they charged much higher premiums? Did they become uninsured? What coverage were they offered? What happened to their premiums, max out of pocket costs, benefits while they were insured, etc, etc. All the anecdotal evidence (and THCB readers know how I berate various Canada-bashers for only using anecdotal evidence) points to many problems that this study didn’t uncover. It looks to me like the researchers at RAND might have got at some of this data for some people by linking the individuals’ experience between the three insurers from whom they got data (although from some of my other data work I know there’s lots of complexities in doing that linking, and the data set wouldn’t capture those who found another plan or no plan at all). But as far as I can tell they didn’t do that, so the information they captured on the experience of individuals over time was incomplete.

Unfortunately, other research indicates that underwriting is much more prevalent and aggressive than the RAND team suggest, even though their data (Exhibit 2) suggests that in the HDHP (or what they call the “less generous PPO”) sector the insurers are getting pretty damn good at weeding out new entrants with chronic conditions. Click on the chart for details, but the important part is that 92% of people joining those plans are healthy compared to 79% joining individual plans overall (and this  “overall” number is within an already underwritten individual market!).

In a study researchers at Georgetown University found that even an applicant with just hay-fever only received a “clean” acceptance for insurance only three out of sixty times. The rest of the time they were asked for higher premiums, or their illness wasn’t covered at all. (California doesn’t allow those exclusionary riders—so they’d just be denied coverage here).

What counts as a chronic disease?  In the study it tells us in Footnote 17--The chronic conditions included in the measure are arthritis, cancer, diabetes, hypertension, heart disease, lung disease, back pain, and ulcers. For example, I just got totally rejected from health insurance from one of the carriers the researchers examined for a) prior surgery, b) groin strain, c) elevated cholesterol and d) gout—even though most of these diagnoses were over four years old and I have had no health expenses other than $40 a year for medication for the gout in the past 18 months.You could argue that the elevated cholesterol is heart disease and that gout is arthritis and thus are within the categories of chronic condition, but that's really pushing it. And don't forget that a virtually identical plan from a competitor let me in at the most heavily underwritten rate although I'm obviously an identical risk!

But they come up with a statement that I just don't believe

Among new enrollees, families that include an adult with a chronic medical problem pay an actuarially adjusted premium that is about 10 percent higher than the premium for new enrollees with no chronic conditions.

Some of this may be because the study focused on families rather than individuals, so there's a little pooling going on there already. But as I say, this really matters on the margins not the average. Here’s the actual math from my “marginal” case for basically identical benefit policies in California ($2,500 deductible). Remember that my “group” was kicked out of the PacAdvantage buying group, making me eligible for HIPAA guaranteed issue. What happened was that my $220 monthly premium for the group policy via PacAdvantage became a $110 premium for a healthy individual. The alternative if I’d failed underwriting (and I did with one of my applications) was a $400 premium with a higher deductible for the HIPAA guaranteed-issue non-underwritten plan.

In previous years the gap between the "healthy" price and actual underwritten price I was offered care for—when they found my history of knee surgery—was even greater ($60 vs $420 if memory serves me right).

This of course ignores the reality of groups kicking out individuals into the individual market all the time, no matter what their health status may be. My association was kicked out of a state-sanctioned buying group, but plenty of people lose their jobs and find that the group doesn’t exist as their employer has gone bankrupt (something that happened to me in 2002) and hence has no COBRA plan to buy into. For that matter, given the cost of insurance via COBRA and the fact that most people trying to buy into it are now unemployed, that’s equally likely to cause more uninsurance or at the least to try to buy into a cheap underwritten plan. And of course, although it’s theoretically illegal, a small employer that gets rid of an employee with a chronic illness will see a marked improvement in its premium the next year. Don’t think that they don’t know that in an “employment at will” state.

So even though they’re talking about the whole individual market for families and I am focusing on the “less generous PPOs” for individuals, I’m having real trouble accepting the overall conclusions on the price differential between healthy and chronically-ill groups. A price 10% difference would be a dream for most individuals with chronic illness trying to buy into individual insurance, given that the mandated rate for the HIPAA plan is 300% higher than the advertised underwritten rate.

Here’s the real unstated conclusion. Creating an unmanaged risk pool and calling it the “individual insurance market”, is a complete disaster. By definition healthy people will logically pick the cheapest option—whatever Grace Marie Turner thinks will happen. That will mean worse choices for those who have some type of chronic illness, who are after all the ones who need the damn insurance in the first place!

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Now a few words on the information side of the equation.

My own experience with eHealthinsurance.com suggests that there is plenty of information available for people trying to buy individual insurance, but it's at best incomplete and unhelpful, or even worse deliberately misleading. The current state of the individual market means that because of the variation in:

a) premium price
b) co-pays
c) co-insurance
d) benefits
e) coverage of those benefits
f) Rx formulary
g) deductibles, and most importantly
h) maximum out of pockets,

it's well beyond the average consumer's ability to figure out what they are paying for what. Unless of course they can do multi-factorial equations in their head and know how sick they're going to be in the coming year. And then, the premium price you are given is subject to underwriting, so you have no idea what the actual price is until you’ve been through the hellish underwriting process.

There needs to be at least a mandated apples to apples comparison. For example, eHealthinsurance doesn’t even put the max out of pocket cost --which is the most important number of all as is well explained in this LA Times column from a cancer patient--on their main results page. What would be much better is mandated national identical benefits (including Rx formularies) so that consumers can make a real apples-to-apples comparison. Of course the current so called "free-market" advocates want to allow all kinds of shenanigans in the insurance market which will take us even further away from that ideal--even though such comparisons are the centerpiece of any rational consumer choice plan.

This is one area where I’m totally in favor of transparency, and the current market incentives for insurers are totally in favor of opaqueness. But, and here I disagree with the emphasis placed on information by the RAND folks, even if you showed a transparent view into the workings of the current individual market, it wouldn’t help those who actually need it and can’t get into it at a decent price. They’d just be able to see up front that they the system was conspiring against them.

That’s why we need one national health insurance pool.