• The Hidden Costs of Publicly Financed Private Health Insurance

    This is a re-post of my Kaiser Health News column of Monday, 26 April 2010.

    The Patient Protection and Affordable Care Act continues the American tradition of privately provided, publicly subsidized health insurance. It’s how most Americans’ health insurance is financed today. But despite its advantages, there is a hidden cost to this arrangement: insurers have more information about health care coverage, spending and utilization than the taxpayers that help fund them. The system’s opacity gives insurers the upper hand in debates over government payment rates.

    Public funding of private health insurance is ubiquitous. Employer-sponsored coverage is provided by private insurance companies and is publicly subsidized through the exemption of premiums from payroll and income taxes. Recently, private insurers announced their interest in increasing their participation in state Medicaid programs. Private plans participating in Medicare Advantage or Medicare’s prescription drug program are taxpayer-subsidized, as are those offered through Massachusetts’ Health Connector–the precursor to state exchanges that will be established in 2014 under the new health law.

    Recent events in Massachusetts and years of experience in Medicare reveal that the opacity associated with public financing of private coverage is a set-up for conflict. A few weeks ago, Massachusetts insurance companies filed suit after the state’s Division of Insurance rejected proposed rate increases of hundreds of insurers.

    In justifying their proposed rate increases, one of the claims made by Massachusetts health insurers is that they’re experiencing adverse selection (enrollees are sicker than expected). They claim that individuals are taking advantage of the state’s ban on preexisting exclusions and low penalties for violation of the state’s individual mandate. The way the game works, insurance firms say, is that an individual signs up for insurance in advance of an expensive procedure, paying the premium for just a few months. After the procedure the individual drops coverage and pays the lower penalty.

    Unfortunately, no publicly available data are sufficient to test Massachusetts insurers’ claims or those of the Division of Insurance. The data exist of course. Insurers have it; the public does not. Survey data sources are a second best, but no surveys with a sufficient sample ask the right questions to measure the degree of adverse selection experienced by Massachusetts plans.

    With no way to validate the assertions of insurers or regulators, the public–those that actually fund the low-income insurance subsidies–can’t know the extent to which insurers are exaggerating the level of adverse selection or if regulators are unfairly dismissing it. Since Massachusetts’ health reform is so similar to that which will be implemented nationally under the new health reform law, it is a tremendous loss that we don’t know more about precisely how it is working (or not).

    A similar lack of data prevents researchers from fully analyzing the risk selection experience of private Medicare plans. There is indirect and self-reported evidence that Medicare Advantage plans experience favorable selection (enrollees healthier than expected). Because plans are not required to release all utilization data the issue cannot be analyzed head-on. As a consequence, the perennial clashes over payment between the industry and budget-conscious politicians and watchdog groups occur in a climate of incomplete information. Medicare Advantage plans are overpaid, but by how much? Taxpayers can’t fully know.

    At the heart of these conflicts are empirical questions: Are payments sufficient to cover costs? Are taxpayers getting a fair deal, a bad deal or a bargain? Not surprisingly, insurers and regulators generally provide opposing answers.

    How can we tell who is right? With the necessary data so closely guarded by insurers and not available to the public, academics and consumer and taxpayer advocacy groups, who might provide valuable checks of claims made by insurers and regulators, are locked out of the debate.

    The hidden data imposes a hidden cost on taxpayers. Though it can’t be fully quantified, there is a likely cost in the form of inflated payments. Insurance companies know far more about their costs and enrollee characteristics than regulators or academics. The information asymmetry plays to their advantage and can only drive up taxpayer costs. Unless plans are compelled to provide data, their advantage is likely to continue as the public begins paying a substantial sum to subsidize exchange-based coverage in every state.

    The American tradition of public financing of private coverage is alive and well, and so is the practice of hiding the facts about what taxpayers are getting for their money. Wouldn’t you like to know what you’re paying for? Me too.

    • All 3 Mass insurers are not-for-profit and lost money in 2009. So the notion that they do not need rate increases at least equal to current medical trend is not credible. The question of adverse selection could be easily answered by the MA Dept of Insurance. They have an office at Blue Cross of Mass, and could walk down the hall and compare member churn in 2009 versus pre-reform. They analysis would take about a day.

      The positive selection theory on Medicare Advantage plans is dated by about ten years. All MA enrollees are compensated by CMS based on health status as reported by the plans. This data is reported in detail and audited by CMS. The risk adjusted compensation is designed to guard against positive selection by health plans. I am not sure what is driving the insurance company conspiracy theories.