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.The larger question now, is the loss of participants in the individual market. While relatively small - about
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]
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.