Insurance companies are very good at what they do.

The following has been included in the 19 August 2010 edition of Health Wonk Review.

Jonathan Cohn has a smart piece up at The American Prospect on the daunting task of getting insurers to comply with the new regulations of the PPACA:

First, the good news: The most important new restrictions on insurance-company behavior are also the most straightforward. These are the rules guaranteeing that people who represent high medical risks because of their personal characteristics or pre-existing conditions have access to policies at the same prices as healthy people do. For the most part, this is already true for people who get insurance through large companies — but not for people who buy on their own or through small businesses. As of 2014, under the law, insurers that sell to these markets will have to practice “community rating” (charging everybody the same rate for a given policy) and “guaranteed issue” (selling policies to anybody willing to pay the premiums).

The Affordable Care Act leaves relatively little to chance here. The law spells out the requirement unambiguously, allowing insurers to vary rates only by geographic area, tobacco use, and age (on a three to one ratio between old and young). In 2014, the prices for all policies will be publicly listed on the new insurance exchanges, where people can sign up for them. Enforcing the rule will be a simple matter of checking what insurers are charging for policies and investigating any reports of discriminatory pricing in policies sold outside the exchanges.

Anytime I hear someone claim that a law or regulation leaves relatively little to chance, I get a little shiver.  Give credit where credit is due.  Insurance companies are very, very good at what they do.  And, while many politicians and activists are still campaigning and crying for a repeal of PPACA, you’re not seeing that from the insurance companies.  They are (probably smartly) much more concerned with doing the best they can under the new landscape.

I have no doubt they will succeed.  I made this argument a while ago talking about the limits of the public option’s power, but it still applies here.

In an important paper in the New England Journal of Medicine in 1997, researchers examined how people moved in and out of Medicare HMO plans and traditional Medicare.  See, back in the 1990′s there was a swing to “managed care”.  Private HMOs began to offer their services to Medicare recipients.  If you were over 65, you could choose a Medicare HMO or regular Medicare on a month-to-month basis.  If you chose the Medicare HMO, you had to use their providers and hospitals, but otherwise it should be similar.  So, here were the rules if you were eligible for Medicare:

  • You could choose any plan
  • You could switch up and back
  • No one could deny you access to their plan
  • The benefits in the plans could go over a specific minimum (public Medicare), but not below

Got that?  No cherry picking allowed.  It’s Medicare, so it’s one big community rating.  This looks very similar to how plans would function in the exchange (except here, there was a public one).  So what happened when this was set up and let loose?  Guess:

Methods We used Medicare enrollment and inpatient billing records for southern Florida from 1990 through 1993 to examine differences in the use of inpatient medical services by 375,406 beneficiaries in the Medicare fee-for-service system, 48,380 HMO enrollees before enrollment, and 23,870 HMO enrollees after disenrollment. We also determined whether these differences were related to demographic characteristics and whether the pattern of use after disenrollment persisted over time.

What did the researchers do?  They looked at Medicare billing records for over 375,000 elderly Americans over a number of years.  This allowed them to look at how much inpatient care those people used.  They also looked specifically at how much care they used in the year before anyone went to an HMO and the three months after they left an HMO.  If there is no cherry picking, then they should find that the amount of care used should be the same in all of those groups and times.

Results The rate of use of inpatient services in the HMO-enrollment group during the year before enrollment was 66 percent of the rate in the fee-for-service group, whereas the rate in the HMO-disenrollment group after disenrollment was 180 percent of that in the fee-for-service group. Beneficiaries who disenrolled from HMOs re-enrolled at about the time that their level of use dropped to that in the fee-for-service group.

What did the researchers find?  People who wound up joining the (private) HMOs used 66% less care before joining than those who stayed in the (public) Medicare group.  Somehow the private insurance HMOs figured out a way to get the healthy people to jump ship out of the another plan into theirs!

Not only that, but people who left the (private) HMOs and went back to the (public) Medicare used 180% more care after leaving than the people who stayed.  Somehow the private insurance HMOs figured out a way to convince the sicker people to jump ship back to the public plans.

So we had a system where plans were in an exchange like environment.  Regulations prevented cherry-picking.  And yet, the insurance companies figured out a way to preferentially cover healthy people.  And this was competing with a giant government program.

Insurance companies are very, very good at what they do.  I don’t doubt that they will find ways to remain profitable. That’s not a moral judgment.  I don’t hate them for it; it is their nature.

The Medicare-HMO revolving door–the healthy go in and the sick go out. Morgan RO, Virnig BA, DeVito CA, Persily NA. N Engl J Med. 1997 Jul 17;337(3):169-75.

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