Monday, February 15, 2010

Been there, paid for that...

The predictable dynamic of individual health insurance is underway, as staggering increases have triggered regulatory alarm and consumer outrage.  But the reason for this boost should have been obvious coming down the road.
Premiums are far more volatile for individual policies than for those bought by employers and other large groups, which have bargaining clout and a sizable pool of people among which to spread risk. As more people have lost jobs, many who are healthy have decided to go without health insurance or get a bare-bones, high-deductible policy, reducing the amount of premiums insurers receive.
Steep rate hikes in this sliver of the insurance market — about 13 million Americans, as of 2008 — have popped up sporadically for years. Experts see them becoming increasingly common.
"You're going to see rate increases of 20, 25, 30 percent" for individual health policies in the near term, Sandy Praeger, chairwoman of the health insurance and managed care committee for the National Association of Insurance Commissioners, predicted Friday.
Most states don't have the legal authority to block or reduce health insurance rate increases, Praeger noted. [More]

But the actual mechanics of this is even more complicated and frankly frightening to those of us who buy even high-deductible policies.  Your rate increases depends on some unknown "group" that was likely created when you bought your policy.
When insurance companies sell coverage in the individual market--that is, when they offer polices to people one-on-one, rather than through employers--they don’t typically put everybody’s premiums into one big pot. Instead, they usually break up their business into different “blocks.” A block could be everybody living in a particular area, everybody fitting a certain demographic profile, or everybody buying a particular type of policy, just to use a few examples. And after enough people are in a block, the insurer will often “close” it, meaning they don’t add new beneficiaries to that particular group.
Insurers will set the premiums in each block based on their projection of what kinds of medical bills people in the block are going to incur. And so, for example, a block that has a a lot of young, healthy men will probably have really cheap premiums--since, on the whole, young, healthy men tend not to have very high medical expenses.
(Young, healthy women are another story. They have the actuarially unfortunate habit of getting pregnant and having babies.)
Over time, the blocks evolve. And, inevitably, some of those young, healthy men will develop medical problems. They’ll get injuries or develop life-threatening illnesses--the type that require extended hospitalizations, long stints in rehabilitation, and all sorts of prescriptions. Rates in the group will start to go up.
At that point, people in the block will seek better deals. And the healthy ones will find such deals quickly. But the ones with the medical problems won't have such an easy time. If they shop around, they're likely to find only policies that provide way too little coverage or cost way too much. Whether they stick with their existing coverage or decide to switch, they're going to end up paying a lot more for their medical care.
Policy wonks call this the adverse selection death spiral. And the key thing to remember is that it happens all the time, even when the economy is strong. It is inevitable, given the way the individual market works, although insurers can make it better or worse depending upon how aggressively they want to pursue profits.
An insurer might, for example, raise rates for a particularly high-cost block more severely than its expenses actually require, in the hopes that expensive-to-treat beneficiaries will eventually flee for other carriers. There's no way to know if that's what's happening here, at least given the information now available. [More]

Now consider what this process, which appears to be just beginning, will have on wages and labor mobility. The inability (or even reasonable doubt) to get individual policies should you lose your job will certianly keep unhappy and/or unpaid workers glued to their current employment.

Perversely, this is good news on the inflation expectation front.  Coupled with vast amounts of unused labor, the willingness of workers to show up for health coverage alone means employers can pay as little as possible - perhaps even lowering real wages faster, even as they are also faced with higher medical coverage costs.

It also suggests that if medical coverage costs were to be lowered, real wages will reise.
There is, in other words, very good evidence that employers pass health-care savings onto employees. A Rand study by Dana Goldman, Neeraj Sood and Arleen Leibowitz examined a particular firm's response to a period of premium increases and found that "about two-thirds of the premium increase is financed out of cash wages and the remaining one-thirds is financed by a reduction in benefits." Another study by Katherine Baicker and Amitabh Chandra found that a 10 percent increase in premiums "results in an offsetting decrease in wages of 2.3 percent," which is fairly impressive given that income is much higher than health-care premiums.
There's good reason to think that if health-care costs can be tamed, wages will rise. But one of the big problems in health-care reform is that workers don't understand this connection. They think of health-care coverage as a "benefit," rather than a form of compensation engaged in a fairly zero-sum competition against their wages. [More]
The larger question now, is the loss of participants in the individual market.  While relatively small - about 9 13 million of us - those who cannot afford the increases mentioned above will not only become more economic deadweight by being drafted into the corps of uninsured, we won't be adding what premiums we could afford to the cost of medical care.

For those of us in rural America, this has some further implications:
  • More women will be stuck in more undesired work situations simply to obtain health coverage.
  • Those few jobs in the country that do provide good coverage tend to be in government, health care or manufacturing. As local/state budgets implode, I am already seeing those jobs being cut. As for manufacturing, the credit crunch alone is having the same affect.
  • A small reprieve can be obtained by forming your own employment group, even as small as 3-4 families and qualifying as a group. This provides another advantage to large farms, and effectively adds to their economic edge.
I was in a "death spiral" group a few years ago with my relatively small insurer.  Thanks to a very hard-working agent we were able to shift to a another HD policy even though we had become "uninsurable" as most people are by their 50's.  Being able to afford coverage and not being able to buy it is a panicky feeling, I can assure you.


Anonymous said...

Wow! Did this blog hit home! My wife and I went through this in about 2000, when our carrier, Conseco, sent "Dear John" letters to Nebraskans, informing us that they were pulling out of our state, and that our insurance would terminate in 30 days. While I would assert that we were healthy, we hadn't reached our late 50's without going to the doctor. My wife, a nurse, knew she would inherit blood pressure problems and monitored it as the years went by and with her Dr., put herself on meds, finally. I had had a small, duodenal ulcer in the 1960's in college. I had disc ruptured from too many hay bales and railroad ties in the 1980's. I had it repaired in 1987. Without more tedious detail, when I went shopping for health insurance following the Conseco termination, I found I could get $5000 deductible with riders excluding musco-skeletal and gastro-intestinal problems for $900 per month. My wife couldn't get coverage at any price unless she discontinued medication for 12 months and applied again.

We chose to go without insurance, all the way to Medicare. ...a big risk, but we're about $90,000 richer for having taken the risk. We're now both on Medicare. I'm very sorry that the president and congress couldn't have implemented a national healthcare system with mandatory insurance coverage. We had been trapped by the system with no way out. Funny how much more important Latin American illegals, Haitians, Iraqi's, Afghani's are to my government that I am.

John Phipps said...


Thanks for the comment. I think you just scared the bejeezus outta a whole bunch of readers.

Glad you made it to 65 okay! Truly a gutsy move.

Anonymous said...

Years ago my banker, who also sold insurance, told me, "you should self insure". I never had any medical insurance until Medicare, and only had it because it was required. Also, when beginning farming in the 50's, social security was optional for farmers and I did not want it. Then a couple years later, it was required. (so now I get $1608 per mo.) My CPA kept telling me to put money into a gov't approved retirement plan, which I would not do. Kept putting any money available into good farmland.
Now retired in HI!

Anonymous said...

Dear Anon, Self insurance is risky in today's world and you got lucky. It doesn't sound like you had many health problems while self insured. But if you had gotten sick or injured, your self insurance strategy would have given you few choices. First you could have not sought any treatment and your choices would have been live, die or be disabled or if you would have sought treatment, without any insurance you would be facing $10,000s if not $100,000s or more in bills and debt collectors would be hounding your every move. It is a risk and life choice that most cannot take especially if there are other family members and their future to worry about.