Network construction in an underwritten world

If you loved credit card companies and how they all were headquartered in South Dakota to take advantage of their very lender friendly laws before the passage of the CARD Act, you will love the health care vision of Rep. Jim Jordan.

The vision is that the House Freedom Caucus/MacArthur Amendment is attached to the AHCA. The AHCA passes the House and Senate without major modification. At least one state opts for the waiver to allow for medical underwriting and gutting essential health benefits by replacing a federal standard with a state standard. A minimal essential health benefit package could still include prescription drugs but only require generic drugs and very common, low cost brand drugs. Specialty drugs including most chemotherapy agents, cystic fibrosis treatments, Hep-C cures and coagulation disorder treatments could be excluded from the minimally required list.

A second bill would also be passed that would allow for insurance to be sold across state lines. And that gets us to the individual health insurance market looking like the pre-CARD Act credit card market. Most states may still require guarantee issue and community rating but the states mandating these restrictions either will not have any in-state insurers offering products in the individual market or their locally regulated individual market effectively work as a high risk pool.

Matthew Fiedler at Brookings has a good analysis on the race to the bottom in an opt-out state:

In brief, healthy people would have a strong incentive to “opt out” of the community-rated pool and instead pay a premium based on health status. With healthy enrollees opting out of the community-rated pool, community-rated premiums would need to be extremely high, forcing sicker individuals—including those with continuous coverage—to choose between paying the extremely high community-rated premium or being underwritten themselves. Either way, people with serious health conditions would face prohibitively high premiums. As a result, community rating would be eviscerated—and with it any meaningful guarantee that seriously ill people can access coverage.

And if a state elects to operate a waiver in an environment where insurers can choose the state of regulation, that state will effectively gut community issue across the country.

But.. but… but… what about networks?

That is a common argument as to why selling across state lines would not be attractive. In the current world of  guarantee issue and community rating, this is a strong defense. Networks are tough to assemble and expensive to build. We know there is a chicken or an egg problem. Large membership is needed to get good provider rates.  Good provider payment levels are needed to offer attractive premiums that leads to large membership numbers.  A new insurer trying to move into a new state has to build a network. And it has to build a network by either going super skinny or by being willing to lose significant money for several years to buy membership.

But that is under guarantee issue/community rating rules. Networks are not a blocking force for cream skimming carriers.

If an insurer wants to expand out of its home region in Rep. Jordan’s vision, they can either build a network organically or they can rent a network. Rental networks are very common. They are how regional carriers offer national emergency room coverage. They are how smaller carriers offer very high end specialty care. The provider are paid at a very high level. Some rental network contracts are full usual and customary, others are full billed charges, some offer a discount on one of those two benchmarks and others are 500% of Medicare. These are expensive networks where regional carriers work very hard to minimize the number of claims paid to that network.

If a minimally viable network can be rented even at an extremely high per unit rate, and the plan can medically underwrite to only offer coverage to people who will never use the skimpy, practically inadequate, high cost network, this works as a business model.

If an individual has a complex medical condition during the contract year, the insurer has significant claims expense but since the network is extremely unattractive to individuals with complex care needs, the one time catastrophic expense will leave the plan at the next open enrollment if they can afford to do so or if they are in a policy that does not have guarantee renewability.

This is effectively the Assurant business model from the pre-ACA status quo. They aggressively underwrote policies to only include healthy people, they offered very low rates and access to a very expensive to them network and seldom payed a claim as their covered population just did not use services.

Networks are not a barrier to entry for carriers that think they can aggressively underwrite.

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?

(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.

(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.

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.

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.



Stabilization Funds by State

The consulting firm Oliver Wyman has projected what each state would receive from the American Health Care Act (ACHA) State Stability Fund during calendar year 2018.  They are making some assumptions in the distribution but the they seem reasonable.  In 2018, the Fund would be 93.5% Federal money and 6.5% state matching money.  The goal would be to use these funds to take a significant amount of high cost risk out of the premium paying insurance pool and transfer those costs to the fund.  It is a reinsurance fund.

And since it is a reinsurance fund with external money, it will result in lower net premiums.  Alaska is an extreme outlier as they are a very high cost state with a single insurer.  The contiguous forty eight states have an average Stability Fund cash infusion of $91 per member per month (PMPM).  However that is not even distributed throughout the country.  There is significant variation from Iowa’s $45.68 PMPM to Wyoming’s $136.19 PMPM cash infusion.

The South overall is better off than the North while the Great Lakes and the Plains are seeing less of the Stability Fund flow to them.

CY 2018 State Stabilization Fund PMPM

Spreadsheet data is here. Massachusetts and Vermont excluded per Wyman’s calculations.  Alaska ($209 PMPM) and Hawaii ($100.90 PMPM) are excluded for visual presentation purposes.