At the Heart of the Health Reform Debate: What Do Insurers Do?

As health reform moves to the top of the Congressional agenda, we will be hearing a great deal about the need to include a “public option” in the plan. Earlier this Spring I began thinking about whether a public option was absolutely necessary to a successful reform. I started out hoping that it wasn’t, because Republican leaders despise it, and Democrats have often let the “perfect be the enemy of the good” in health reform. But I’m now convinced that it’s necessary to reform, and I hope to spend a few posts explaining why.

To begin with, we should think about what it is that health insurers do. I have tried to summarize it in a one page chart, linked to here. You can’t get everything down in a one page chart, but you can at least begin to break down what it is that insurers do—and how governments can respond to their actions

The right column focuses on the purely positive role of insurers. I recently heard a speech by the Chief Medical Officer of Wellpoint which was one of the best summaries of the good work insurers can do. New technology can lead to better processing of claims. With massive amounts of data at their disposal, they can identify best and worst providers, good and bad treatments, and even spot dangerous side effects in drugs and devices. To the extent that they retain long-term relationships with customers, they have an incentive to reduce costs by keeping those patients healthy.

But the structure of the US health insurance market makes it difficult for most insurers to have that incentive. About 21% of insurance policyholders cancel their plans in any given year, meaning that the average customer’s commitment to a plan lasts for just about three years. That’s just not enough time for an insurer to gain very much from investing in improving the health of its members.* There are many more profitable strategies—which lead me to the left column, bad insurer practices.

Health care costs are highly concentrated among a small portion of the population. As AHRQ notes, “Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount.” (The famed 80/20 rule also applies in health care expenditures.) This creates almost irresistible pressures for private insurers to “risk select;” i.e., to avoid covering those who need care most. While “pre-existing conditions” exclusions and recissions are most common in the individual insurance market, they and other tactics can undermine the idea of risk-pooling at the core of any feasible insurance scheme. Given that many private insurers began thriving by cherry picking (and lemon dropping) the healthiest (and sickest) customers, they have long resisted regulation of risk selection.

But now, as the chances for reform increase, leading private insurers are beginning to soften their approach. They are promising to accept “guaranteed issue” coverage, “with no pre-existing condition exclusions.” They have even promoted plans for “risk adjustment,” which would assure “premium stability for those with existing coverage through a broadly funded reimbursement mechanism that spreads costs for the highest-risk individuals.” Would regulation like that preclude the need for a public option?

I don’t think so, because there are so many other ways for insurance companies to drive away the sickest. As noted in the chart, subtler selection can include refusal to respond to needs of high cost patients in order to drive them away, and attracting a disproportionate share of low‐risk individuals. For example, a plan might decide to increase coverage of gyms and cosmetic procedures (to attract fit customers) and devise six forms to be filled out (monthly) in order for a patient to get oxygen or insulin (to repel customers with CHF or diabetes). These are not mere hypothetical concerns. The Netherlands is often held up as a model for US reform because of recent moves there to make their system more like America’s. But risk selection threatens to unravel the Dutch “middle ground:”

[After the Dutch moved in a more American direction, insurers] have more tools for managing care, which can also be used to select risks. . . . Insurers have more room to define the precise entitlements of their insured groups, which can be used to select favorable risks. . . . [They] are allowed to sell mandatory health insurance together with any other type of non–life insurance (such as supplementary health insurance, sick leave insurance, and car insurance), which prior to 2006 was not allowed.

In particular, supplementary health insurance can be an effective tool for risk selection, because insurers are allowed to reject applicants based on their health status. [Finally,] insurers are free to give premium rebates to groups for the mandatory basic insurance, which prior to 2006 was not allowed. A group can have any risk composition, and the “organizer” of the group can selectively enroll preferred members only. Although the rebate for the basic insurance is at most 10 percent, insurers can give these groups any rebate on supplementary health insurance or other insurance products. . . . Given the increasing incentives and expanding tools for risk selection, further improvements of the risk-equalization method are necessary to prevent insurers from engaging in risk selection, which occurs, for example, in Switzerland.

US insurers are sure to import methods like that, and to continue along current lines of risk selection. As health policy expert Karen Pollitz has noted, all of the following tactics can be used to risk select:

–“Street” underwriting
–Selective marketing (including in competing markets)
–Renewal rating
–Closed blocks
–Benefit designs
–Payment practices
–Provider network design

Congress or HHS or state insurance commissioners could try to outlaw those practices. But as Pollitz has noted, as of 1997, the “US Department of Lagbor had resources to review each employer-sponsored group health plan under its jurisdiction once every 300 years.” The Bush years probably did not significantly address that shortage. Moreover, “state insurance department staff levels declined 11% in 2007 while premium volume increased 12%.” The personnel simply aren’t there, and when they are, they are as likely as not to be outgunned by private sector attorneys, lobbyists, and experts-for-hire.

I have taught health care regulation at both Seton Hall and Yale Law Schools, and my students have always been dismayed by the Rube Goldberg-esque cat-and-mouse games that regulators and insurers play to make (and evade) efforts to control risk selection. I have very little faith that DOL, HHS, or their state equivalents (who are also often tasked with regulating life and auto insurance and banks) can really make private insurers accountable, no matter how ingeniously the insurance exchanges are designed.

So that’s a case for the public plan largely based on the problems with private insurance regulation. For a positive case, which I’ll develop in my next post, I’ll focus on the middle column of the chart—eternally contested insurer actions designed to ration access to providers.

*For a recognition of this problem in the context of bariatric surgery, and a creative plan for solving it, see Ronen Avraham and K.A.D. Camara, The Tragedy of the Human Commons, 29 CARDOZO L. REV. 479 (“bariatric surgery is just one example of insurers’ failure to cover prospectively efficient treatments. A similar confluence of insureds switching insurers frequently, high transaction costs of individualized contracts, and medical-industry lobbying explain insurers’ failure to cover other prospectively efficient treatments.”).

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