Cost clustering and concentrating risks in state high cost risk pools

Let’s imagine a hypothetical high cost risk pool of the top 1,000 individual claim years in the country.  The average claim will be $5,000,000 for the year. Let’s simplify things and say 990 are randomly distributed by population and 10 are a non-random cluster that we can insert into any state at any time.  The first run through is with fifty one state (and DC) based high cost risk pools.  We’ll look at two states, California and Wyoming, for this run.

California has about 10% of the population.  California should expect to see 99 people in this hypothetical pool plus an expectation that one of the ten non-random people would be expected to be in California.  Their expected high cost risk pool budget is $500 million.  Now if all ten of the non-randomly clustered people are in California, they increase the expected pool costs by 9%.  California is big enough and rich enough that a surprise $45 million dollar medical expense does not destroy their budget.

Now Wyoming should expect to see between 1 and 2 people qualify for the high cost risk pool.  Let’s assume the Wyoming state government is very cautious and they allocate $10 million for the high cost risk pool.  That works great in a normal year.  But if the travelling roadshow of catastrophic medical expenses arrive in Cheyenne, the state is now on the hook for twelve qualified individuals.  They are 500% over budget now and the state budget is underwater.

This thought experiment is amazingly unrealistic.

Even if we are to assume that extreme medical cost cases are randomly distributed, we should expect several states to be surprised at the number and expense that they face as Pennylsvania could reasonably expect to see anywhere from 45 to 51 qualifying individuals from the scenario above in any given year just do to random chance.

More importantly, we know that diseases are not randomly distributed.  My ongoing freak-out about Zika is based on the fact that this is a concentration of very high need and high cost individuals on states with low Medicaid funding.  Genetic disorders are tightly clustered due to both the combination of most people live near their families rather than being randomly distributed and localized clusters of diseases have led to local medical-industrial clusters of medical knowledge and treatment.  For instance, maple syrup urine disease is a common genetic disorder among Amish families, so there is a good deal of knowledge on treating that disease clustered in Lancaster County, Pennyslvania and Holmes County, Ohio.  Sickle cell disorders are overwhelmingly a disease of African Americans, so it is more common in Mississippi than Montana.

From a financial perspective, there is a chance that there is enough sample size that although one state will have more of one genetic disorder it washes out as another disorder it is light in is dis-proportionally prevalent in another state so the cash flows balance out.  That is an empirical question that I don’t know enough to answer.  But even if genetic disorders balance out, localized outbreaks like Zika won’t balance out.

State based high cost risk pools would remove some of the falling knife incentives that I described in Iowa but they will be underfunded and overwhelmed at times of high need.  National level pooling is far more efficient and effective.

Rebranding reinsurance in the AHCA

The House Rules Committee introduced a new amendment to the AHCA this morning. What does it do and does it matter?

SEC. 2205. FEDERAL INVISIBLE RISK SHARING PROGRAM.
(a) IN GENERAL.—There is established within the Patient and State Stability Fund a Federal Invisible Risk Sharing Program (in this section referred to as the ‘Program’), to be administered by the Secretary of Health and Human Services, acting through the Administrator of the Centers for Medicare & Medicaid Services (in this section referred to as the ‘Administrator’), to provide payments to health insurance issuers with respect to claims for eligible individuals for the purpose of lowering premiums for health insurance coverage offered in the individual market.

(b) FUNDING.—
(1) APPROPRIATION.—For the purpose of providing funding for the Program there is appropriated, out of any money in the Treasury not other- wise appropriated $15,000,000,000 for the period beginning on January 1, 2018, and ending with December 31, 2026.

These two paragraphs are the meat of the four page amendment.

So what does it do. First it renames reinsurance to “Invisible Risk Sharing Program.” Secondly, it authorizes HHS/CMS to inject $15 billion dollars of non-premium dollars into the claims payment of the individual market over nine years.

Renaming reinsurance to Invisible Risk Sharing Program is a nothingburger. The key is the injection of money from outside of the premium pool into claims payment. Assuming that HHS elects to use this money as if it is reinsurance, that means HHS will use general revenue to pay some portion of very high cost claims. Since the money is coming from outside of the premium pool, it will lower the premiums paid as the premiums no longer to have to cover full claims expenses.

The question is by how much?

Not much is the answer. The appropriation is $1.67 billion dollars per year. In 2015, the ACA spent $7.8 billion dollar on reinsurance. This was approximately 10% of the total premiums collected so reinsurance under the ACA reduced premiums by 10% in 2015 compared to what they otherwise would have been. So a very rough guess is a $1.67 billion dollar externally funded reinsurance pool would lead to a 2% reduction in premiums.

So we get a rebranding of a basic insurance concept and a 2% reduction in premiums. Not much of any real substance actually is happening in this amendment.

Both Sides Still Need a Deal

The Republican Party suffered a spectacular political defeat yesterday when they pulled their AHCA legislation from the House floor, after all the words they spilled the past 7 years. Speaker Ryan said the ACA is the law of the land, and President Trump said that Democrats will want a deal to improve the ACA within a year.

On December 16, 2010 I first blogged that “Both Sides Need a Deal” and laid out a set of big ideas that I claimed would emerge in a deal if the two sides negotiated in policy good faith. I even wrote a book that more fully laid out what a health reform deal would look like, and said it was the crux of a sustainable federal budget. Last Sunday, Ross Douthat, maybe sensing the outcome of yesterday, wrote that a catastrophic insurance program loosely based on Singapore would be the best way forward for Republicans. This column reminded Reihan Salam of my pitch from several years before.

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Deal’s between Democrats and Republicans seem impossible politically, but the structure of our system of government makes them a feature, and not a bug. At some point we will have to return to that type of equilibrium. And both sides really do need a deal to achieve more of what they want. I want to re-emphasize 3 of the big ideas from my original proposal and add a fourth in the hopes of starting a conversation, perhaps only with myself.

  • Replace the individual mandate with federally-guaranteed, universal catastrophic insurance coverage and sell private “gap” insurance in state-based exchanges, with income based subsidies
  • End the Medicaid program as we know it by transitioning full responsibility for dual eligible Medicaid costs to Medicare, and moving non-elderly and disabled low income persons into subsidized private gap insurance
  • Modify the tax preference of employer paid health insurance, and replace the cadillac tax with this provision
  • Not in my original proposal, but we should provide some help in purchasing health insurance to persons in the individual market, but whose incomes are too high to qualify for tax credits under our current system; it will help the risk pool and high income persons get a subsidy via the tax treatment of Employer coverage

I am a policy guy, and the policy is crucial (I wrote in 2014 what some of the above ideas could look like for one state–North Carolina to try some of this via an ACA waiver). What I have proposed above is a bit more grand, but it seems that a big deal may paradoxically be easier to obtain than a small one, particularly around the issue of Medicaid. Precisely because there is a no “best way” to address health policy, the politics are particularly important if we are to ever develop a sustainable health care system. A quote from my 2012 book in Chapter 7 sums this up for me:

What our nation most needs is a bipartisan health reform strategy that will allow us to address the interconnected problems of the health care system: cost, coverage and quality. There is no perfect health care system and no perfect plan. However, without a deal that allows both political parties to claim some credit as well as to have some responsibility in seeking to slow health care cost inflation, we have very little chance of success.

I will do some follow up posts on the policy aspect of the imperfect ideas above. I am happy to engage in dialogue if anyone is interested.

AHCA’s incoherent policy on HSA

The American Health Care Act (AHCA) is a bill in search of a policy even as it overturns significant elements of traditional conservative health care policy strategy.

Health Savings Accounts (HSA) have been a core component of conservative health policy thought for a generation.  They work by allowing people to put money into a designated savings account on a tax advantaged basis.  The accounts are tied to a high deductible health plan.  If a person incurs significant claims, the HSA balance pays for those claims.  If a person has a good, healthy and low cost year, the balance grows.  Over the course of a life cycle, the HSA should grow from accumulation and investment when people are young and shrink when they are old.

There is a coherent theory of change with the use of HSA in both a single year and over a lifetime.  The single year theory of change is that high first dollar expenses will lead to lower utilization with minimal real health consequences as people become expert shoppers and evaluaters of health care need and value.  The lifetime theory of change is that an HSA can be built up while an individual is young and healthy and spent when an individual is old and sick.  It prefunds some of the expected health cost obligations on an individual level.

There are several major weaknesses with the HSA strategy.  First it imposes a high cost to people with consistent, recurrent, high cost chronic conditions.  A person with multiple sclerosis will never be able to accumulate any year over year savings in their HSA as they will have used their maximum allowed limit and hit their deductible by the second month of the policy year.  A high deductible plan imposes an illness tax on the chronically ill.  Secondly, the evidence has been weak that people are actually effective shoppers and evaluaters of health care necessity.

In the original version of the AHCA, the subsidies were set up so that they could be split.  If a person found a policy that cost less than the subsidy, the remaining portion of the subsidy would be deposited into an HSA.  This conformed to standard conservative health policy thinking.

The young and healthy people would buy low premium policies with high deductibles.  They would also deposit a significant amount of the subsidy into an HSA.  Over time, the HSA would grow until the cohort of people who were once young, healthy and cheap to cover are no longer young, no longer healthy and no longer cheap to cover.  At that point, the savings they had accumulated in their HSA would be available to pay for either out of pocket expenses  or premiums.

There is a major issue of founder’s debt in this scheme but if we handwave away the problem that killed Social Security privatization in 2005,it is mechanically coherent.

The Monday Manager’s amendment took away the ability of a subsidy to be split between a premium and the HSA.  This was done to get more anti-abortion votes on board.  It will have two effects.  It will limit choice as insurers have no reason to price their products underneath the subsidy point. The second is that it completely destroys the mechanical theory of change for an HSA system.  People with limited incomes will not accumulate reserves in their HSA.    And more importantly, the young can not partially pre-fund their health care expenses when they become old as they can’t rollover a partial subsidy into their HSA.

There is no coherent policy thought here.

Defending Speech and Speakers on Campus

I was recently elected to the Chair of the Academic Council at Duke (the Faculty Senate), and so have been doing a bit of thinking about issues related to how college campuses deal with issues of free speech, association, inquiry and the like. This statement is the best thing that I have read  in the way of general guiding principles (Truth Seeking, Democracy, Freedom of Thought, and Expression). These two paragraphs are especially critical:

None of us is infallible. Whether you are a person of the left, the right, or the center, there are reasonable people of goodwill who do not share your fundamental convictions. This does not mean that all opinions are equally valid or that all speakers are equally worth listening to. It certainly does not mean that there is no truth to be discovered. Nor does it mean that you are necessarily wrong. But they are not necessarily wrong either. So someone who has not fallen into the idolatry of worshiping his or her own opinions and loving them above truth itself will want to listen to people who see things differently in order to learn what considerations—evidence, reasons, arguments—led them to a place different from where one happens, at least for now, to find oneself.

All of us should be willing—even eager—to engage with anyone who is prepared to do business in the currency of truth-seeking discourse by offering reasons, marshaling evidence, and making arguments. The more important the subject under discussion, the more willing we should be to listen and engage—especially if the person with whom we are in conversation will challenge our deeply held—even our most cherished and identity-forming—beliefs.

Three things stand out as key to me here. First, humility. Second, there are facts and things that are true and false. Third, it takes (at least) two sides to have a real conversation. I like this statement as guidance to navigating the many issues related to speech, academic freedom and inquiry on college campuses.

A few more thoughts that deserve later amplification.

This is a great piece by Mike Munger that notes the role of academic freedom that flows from the 1st Amendment protection of freedom of association as the true distinctive of Universities (and not speech, which is a universal freedom of our nation). However, bad, harmful speech often has an asymmetric chilling effect on individuals from groups that have historically been excluded from full membership in the robust discussions envisioned by the statement linked above. And freedom of association is a key way that people can decide which issues to discuss and debate, as well as how and when. So, while the entire University could never rightly be a “safe space” so would it be wrong to say there can be no such “safe spaces” on campus, of a variety of ilks. This may seem to be a paradox.

Similarly, for some members of University communities the term “safe space” is viewed only as a term that applies to intellectual discussion, while for others they have in mind their physical safety. People who are physically afraid have no hope of engaging in intellectual inquiry. Living up the best that a University can be will require continued struggle on many fronts.

All incentives align for high initial rate filings

The Wall Street Journal has a good overview article of where insurers are thinking about their pricing for 2018 as they develop their offerings. The initial numbers are going to be ugly.

According to a nonpartisan report released by the Congressional Budget Office on Monday, the House Republicans’ bill, known as the American Health Care Act, could raise premiums by 15% to 20% for individual plans in 2018, compared with rates without the bill. These increases would largely be due to the end of penalties for people who lack insurance; the CBO suggested that fewer healthy people would enroll without the mandate, helping to raise average costs….

One important element isn’t fully resolved in the House Republicans’ blueprint: whether the federal government will fund cost-sharing subsidies that help pay for low-income consumers’ deductibles and other out-of-pocket charges….

“The more uncertainty, the higher the price,” said Martin Hickey, chief executive of New Mexico Health Connections. His nonprofit has seen a potential 40% premium increase on ACA marketplace plans.

There is normal medical price trend. There is also a highly uncertain policy environment. The environment is what will be driving most of the initial rate request.

Rate filings in May and June are not final. They are merely the start of a long series of conversations between the filing actuaries and the reviewing actuaries. Rates will go up, rates will go down, data will be requested and models will be tweaked.

So how do the incentives align?

Read more of this post

CBO Score of AHCA

Following up on past stuff on the blog on the House reform plan, the CBO released its score of the legislation that passed the House Energy and Commerce and Ways and Means Committees last week. This puts numbers on on the general description I provided earlier, but I was wrong–CBO scored that it will reduce the deficit.

  • $1.2 Trillion decrease in spending on health insurance (Medicaid and private subsidies)
  • $900 Billion tax cut/decline n revenue
  • Reduce the deficit by $337 Billion (all over 10 years)

This version of health reform costs so much less than the ACA because it covers so many fewer people. The project a loss of health insurance coverage of 14 Million persons by next year, and 24 Million by 2026.

Underneath all this, the most profound thing going on in this bill is a nearly $900 Billion drop in federal Medicaid spending over 10 years– a 25% decline in the federal share over 10 years. The Medicare cuts that Republicans savaged for years that are part of what Obamacare used to pay for coverage expansions are kept in place.

This is horrible policy is health insurance coverage expansions are remotely important. The politics are even worse I think, as the shift of burden to states of either paying for Medicaid or deciding who not to cover in the future will be hard, and premiums in the exchanges will decline for younger persons under the new tax credit subsidies, but they will rise for persons in the decade before Medicare eligibility (age 55-64).

I keep thinking there must be some political angle that I am missing, but I don’t see it. If you wanted to lose the House in 2018, you would push for this. Many elected Republicans are getting cold feet. Not sure what comes next, but nothing is increasing as a possible outcome. If something becomes law, expect it to come out of the Senate–in much the same way the ACA did.