• Gaming the Individual Mandate in Massachusetts

    Today Kay Lazar reported in the Boston Globe that thousands of Massachusetts residents are purchasing health insurance only when it is needed and dropping it and paying the relatively low penalty when it is not.

    In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and … [paid a monthly premium of] $400, but [had] average claims [that] exceeded $2,200 per month. …

    Governor Deval Patrick recently filed legislation that state regulators believe will help fix the problem, by restricting insurance enrollment to twice a year for people who buy on the open market and allowing waiting periods before coverage kicks in. …

    It would also bring back the rule allowing insurers to exclude coverage for preexisting conditions for six months, or impose a similar waiting period under certain conditions for people buying coverage on their own. …

    Consumer advocates said they aren’t convinced that a lot of people are gaming the system, and they said that many of the individuals buying on the open market are likely those who are between jobs, new to the state, or have some other legitimate reason to buy coverage for a short period.

    Implications for the nation’s individual mandate are obvious. But there is plenty of time to learn from Massachusetts’ experience and tweak the federal law, as there is to do more thorough analysis of the issue.

    I have no doubt there is some gaming going on, as there would be with any mandate. What has not yet been shown by anybody is the total size and significance of it. That is, how much higher are premiums due to the selection experienced by insurers? Is this a mountain or a mole hill? Some of the reporting is based on sources that have a reason to inflate the significance of this problem. And it can’t be all that big when about 97% of the state’s population is covered (though it depends how that figure is measured).

    All in all, I haven’t seen enough work on this that suggests there is a sound basis for policy. I hope somebody, somewhere can get their hands on some solid data and do some credible analysis.

    Later: I have many other posts on this topic.

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    • Well this strikes me as damn stupid. If you give the insurance companies an inch, they’ll sell your grandmother to the glue factory. Massachucetts shouldn’t use this kind of deregulation to fix the market, they’re creating room for new exploitation. If the incentives are really flawed (which the %97 rate belies), there are better ways to fix them.

      • @John – Please elaborate. What do you mean by “this kind of deregulation”? And what are the “better ways”? I’m not disagreeing or picking a fight. I just can’t tell what you’re getting at. How should a mandate be enforced? (My own view is that the financial penalty should be much higher.)

    • Austin,

      I have been watching from the sidelines and find the transition from theory to practice fascinating.

      Two points.

      1. I am a bit surprised that the “innate fairness” argument gets so little discussion. Doesn’t government owe it to those who obey the laws to assure that they are not being “gamed” – for it is they who are “stupid” enough to play by the rules. Putting in place a system that rewards those who ignore it seems to be bad policy.

      2. But that leads to my second concern. Higher penalties might cure the problem of “gaming”, but does that not lead to things like debtor’s prison dodwn the road. Strict enforcement of mandates would seem to lead to financial difficulties for some at some point (not sure we can afford to “subsidize” these away entirely).

      • @LonelyLibertarian –

        Per your 1: Good point. However, one has to be careful that the remedy isn’t worse than the disease. There is no credible, unbiased evidence that this gaming business is a big deal in MA. If it proves large enough to do something about then one needs to recognize that penalties will impose hardships even in sympathetic cases (I’m thinking of non-financial penalties, like pre-existing condition exclusion periods).

        Per your 2: Under ACA, financial penalty size is in part (and one could imagine fully) a function of income. Plus, there is an exemption for low-income individuals. Why is this not sufficient?

    • Gaming will only grow unless the incentive to do so is removed. Humans are funny that way. What can we expect in the future? Higher penalties, which LonelyLibertarian points out leads to debtor prisons of a kind, or, in my opinion, lead to state mandated preexisting condition exclusions which Massachusetts is already stepping towards.

    • Fine, punish “gamers” but not by punishing EVERYONE else at the same time. 6 Months for no coverage of a pre-existing condition is dangerous and stupid and only benefits the insurance companies.

    • I wouldn’t call it “gaming” the system. Rather, it’s economic self preservation or smart financial planning. This is especially true for young males who end up subsidizing eveyone else due to community rating, gender rating, and bloated minimum coverage requirements. Why in the world would they want to pay artificially inflated premiums on a monthy basis when they can just buy insurance when they need it, use it for awhile, then opt out and pay the fine. It would save thousands.

      If the penalties are increased, more individuals might be forced in but then they might feel compelled to over-utilize the healthcare system. After all, what else would they be getting except piece of mind if they never use the forced insurance?

    • “Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount.”

      Thus, 3% without insurance could still amount to 30% of all health care spending. It probably does not as those who use the most right now are likely constant users of medicine, but just because 97% are enrolled does not mean that you got the high cost people in there. Also, if a future high cost person remains outside the system, as soon as that person gets sick and joins the system, that is one person who did not pay their share.

    • Funny thing is that when I lived in Mass they had mandatory car insurance and were very good and knowing whether you had coverage or not. They would have the insurance company notify the state when you dropped coverage with them and you had 10 days to prove you had new coverage or the state revoked your drivers license.

      The easiest way to deal with this would be to require verification of a new policy in place before you are allowed to drop your current insurance. If you do manage to drop it without another policy or move to the state without buying insurance just require the individual to pay the previous insurance to the current date with a penalty attached going to the state. This means the person will not benefit from dropping the insurance and the insurance company will not benefit from the preexisting condition clause.

    • Austin – please help!

      Would you explain to your posters that denying payment is not some sort of windfall for the insurance company. The issue is where do the funds come from to pay for the coverage denied.

      When an insurance company refuses to pay for treatment for ANY reason it reduces it’s COSTS – and yes in some cases this MAY lead to increased PROFIT – but it will not if the rates that are charged are truly cost based.

      I am no fan of the insurance companies – but this insane belief that they deny payment JUST to increase profits is getting in the way of solving this problem.

      We need to begin with the understanding that rates are cost based [at least in part] and choosing to allow someone to enroll in health insurance on the way to the hospital after they have been in an accident will increase COSTS for insurance companies – and yes this cost increase is offset by a cost decrease for the individual – which may be the right social choice – but then again it might not be – I do think there are fairness issues woven into this that are getting ignored.

      • @LonelyLibertarian – No doubt there are many who do not understand how insurance works. But I’m not seeing a lot of evidence that my readers don’t get it. Perhaps you are reacting to the general zeitgeist that views insurance company as evil for medical underwriting and pre-existing condition exclusions. If that’s your point then I agree with you that vilification of insurers is misplaced. They’re really just doing what any business would do in a climate and regulatory structure that permits these things. And these things are ways of managing costs (or potential costs) and maximizing profit. At the same time, those actions also keep premiums lower than they otherwise might be. So, insurers aren’t the only ones benefiting.

        Nevertheless, I think it sucks, and it should be changed (and will be), but I don’t think anybody is doing anything evil–or no more evil than we permit by our choice of regulation. But all this will end. The battle was fought and won.

    • Thanks Austin – and you are probably right – I may be over reacting to what is more careless language than intentional demonization…

      But I do think that many have come to believe the insurance companies [and government] obtain revenues – resources from some magical place disconnected from the pockets of real people – who worked hard fo earn what they pay in premiums [and taxes].

      You go on to say “I think it sucks” and I am not sure I understand what you mean by “it”. If you mean what I think you do then yes the “old way” sucks [I would even concede it can suck a lot] for one person – the one with the health care expense that will now get paid and can’t be rejected. Of course this is a zero sum game – the “sucking” gets transferred not to some insurance company, but to the 50% or so of the population that will now get to pay for the health care expense.

      • @LonleyLibertarian – Re: for whom it “sucks.” I think insurance exists precisely to help those life has thrown a curve ball. That’s the reason we buy it. Given the way our system is structured one way it can work better is if we’re all insured. There are other ways it might work better but not within the current structure. So the shortest path to something more (but not optimally) sensible is universal coverage. That I feel this way shouldn’t be a surprise given my posts.

        Fair warning: I do not welcome a debate on this topic on this post. If you’re eager for one, find a post for which it makes sense. I still may not engage. Frankly, I’m sick of it. Been there, many times.

    • Fair enough – it is after all your blog…