• A follow-up: “Rate shock” will hit all healthy people, not just the young and healthy

    The following is a guest post by Sam Richardson, an instructor at the LBJ School of Public Affairs, UT-Austin. Sam is also a PhD candidate in Health Policy (economics concentration) at Harvard, where next month he will be defending his dissertation on quality-based provider payment. You can follow him on Twitter: @Prof_Richardson.

    Responding to my post from this morning, Ashish Jha had two excellent questions via Twitter:

    I didn’t look specifically at what does cause rate shock, but the obvious potential culprits are (1) guaranteed issue, meaning insurers can no longer deny coverage for higher-risk individuals or exclude care for pre-existing conditions; and (2) community rating, meaning insurers can no longer charge higher premiums for higher-risk individuals (though limited age rating allows older people to be charged premiums up to three times as high as those charged to younger people).

    Most analysis of rate shock has focused on young, healthy people, because these people are most likely to drop out of the market and cause adverse selection problems. If the limits on age rating are playing a large role, we should expect older people not to experience rate shock. Taking Ashish’s suggestion, I calculated insurance premiums for a healthy 60-year-old living in Sacramento, comparing the Kaiser 50/5000 plan to Kaiser’s bronze plan on the exchange. California only published rates for 25-year-olds and 40-year-olds, but we can infer rates for 60-year-olds by using the HHS rate curve, available here.

    It turns out that the premium for the pre-exchange 50/5000 plan is $317/month, and the bronze plan premium is $554/month, so the healthy 60-year-old faces a 75% premium increase. It is important to note that other states may have different experiences, but this result is similar to results Avik Roy found in Washington State.

    It seems likely that, regardless of age, most or all healthy people in the non-group health insurance market in California will see substantial premium increases, even without purchasing more generous plans. Whether this is a bad thing depends on two issues: (1) the degree to which rate shock results in adverse selection in the exchanges, and (2) what the social contract should be. Regarding point (1), our best evidence, from the Massachusetts health insurance reform, suggests fears of adverse selection and death spirals are probably overblown.

    But regarding point (2), the Obamacare exchanges represent a transfer from healthy people to unhealthy people (those who are currently uninsurable on the non-group market). This essentially insures people against the risk of becoming unhealthy and therefore uninsurable. Behind the veil of ignorance, this is insurance that many would probably choose to purchase, but it’s a debatable point, and I think this more philosophical idea is what the rate shock debate is fundamentally about.

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    • “…the Obamacare exchanges represent a transfer from healthy people to unhealthy people.”

      It seems more accurate to say that *community rating* represents a transfer from healthy people to unhealthy people. The exchanges also involve premium credits, which seem to represent transfers from financially better off people to financially worse off people. It is a hard ethical question (at least to me) whether and when cross-subsidization should go from healthy to poor and when it should (also?) go from financially advantaged to financially disadvantaged.

    • One thing to keep in mind regarding Massachusetts is that they had implemented CR and GI in the mid-nineties, so to the extent these policies drive (at least partially) ‘rate shock’ there was no shock in Massachusetts comparable to what we are now seeing.

      On a more fundamental level, while it’s not unreasonable to think that there is far more than richer benefits driving rising premiums, it’s a very, very tough sell to argue that those richer benefits aren’t part of the mix.

    • I like Robert Shiller’s conceptual approach to risk and risk sharing: that in a perfect world all risks would be shared, so the per capita cost would be very small. Shiller is an economics professor at Yale and teaches finance. But his approach, with a large dose of behavioral economics, is enlightening. And he applies this conceptual framework to both private finance and public finance, in both instances risk sharing in order to maximize overall well-being. That’s easier to see in public finance, but his framework makes me appreciate the same dynamic in private finance. Who says economics is the dismal science. [As someone nearly old, I also appreciate the allusion to age discrimination permitted by ACA, included not for better policy but to sharply reduce the cost of health insurance subsidies. Indeed, if discrimination based on the risk of getting sick were the better policy, then a 25 year old with leukemia should pay far higher premiums that I pay as an otherwise healthy 61 year old. The ACA authors should have consulted with Shiller.]

    • How many 60 year olds are able to buy insurance at the quoted premium before medical underwriting?

    • Health Actuary here – some observations I have about “rate shock”

      Note that in many states, currently, rating for families is based on a fixed rate compared to the rate for an individual – for example, a subscriber might pay 2.5 times the individual rate to add coverage for a spouse and children. Under the new rules, rates are set by the individual member. Some families, especially larger families, will experience rate shock based on that alone. The new rules require rating for up to three children under the age of 20, and rating for all children between the ages of 21 and 26, on a given policy.

      The change in the age curve generally works to the benefit of people over 50 and to the detriment of people under 30.

      The changes in the rating rules probably will lead to more ‘rate shock’ than changes in benefits. However, there are plenty of people currently with benefits that fall below the 60% AV, especially in the individual market.

      The change in the projected market morbidity is substantial, but also varies by state. In states that allow rating based on underwriting evaluation, the healthy people (who previously got a discount to the market average rate) will get an extra ‘rate shock’ for moving to community rating.

      tl;dr: it’s not the average that matters, it’s the distribution. If you think in terms of pockets of people impacted – there’s a lot of them.

    • I’m not a policy wonk by any means, but more of a philosophical observer. To me the idea of basing health insurance through “risk factors” is a major flaw in the system. Last year I was diagnosed with a brain tumor at the age of 32. Before the diagnosis I didn’t have any symptoms of the cancer. I wasn’t having seizures (I do have seizures now, but they are due to the biopsy). I was having headaches, but they were not attributable to the tumor. Once I went in for an MRI (my doctor and I thought I had a pinched nerve causing back pain) the tumor was found, It was at that point that I became a “risk”. If I elected not to go in for surgery the seizures would not have occurred. I would lead a normal life for several years since the tumor is slow-growing.

      My point is this: The term “risk” becomes relative in the sense of a particular route one wants to take when dealing with an illness. Also, one may be “at risk” without anyone knowing about it. Again, it all depends upon if one takes the initiative to have an MRI or some other test performed. Furthermore, everyone is “at risk” in some manner. We see young basketball players dying with heart failure or some other genetic defect.

      It is the market itself that creates the system of “at risk”. It is the profit margin and what a company is willing to invest in certain individuals. This is seen even more when we look at the fact that one’s premiums are not increased after a diagnosis is made. It is only if you lose coverage or, before Obamacare was implemented, you spend your lifetime limit.

      However, if we have Medicare for all we are all invested in the healthcare market. As young people we are paying into a system to equalize “at risk” older patients. Then the same will occur when we become older.

      Hopefully this all made sense.