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You are here: Home / Anderson On Health Insurance / Fat tails

Fat tails

by David Anderson|  November 12, 20157:59 am| 23 Comments

This post is in: Anderson On Health Insurance

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Via Charles Gaba, some very interesting risk management details from a single insurer in Alaska that provides a great teaching moment:

Between the start of January and the end of September of this year, Coon said, 37 Premera members enrolled in individual health insurance plans generated $17.5 million in medical bills. In total, Premera had about 7,400 members during that time in the individual market with $68.3 million in claims….

In August, the state Division of Insurance approved average rate increases for next year of nearly 40 percent for Premera and Moda. That came on top of double-digit increases this year.

Half a percent of the covered lives generated 25% of the claims.  That cluster of individuals are costing 50 times average expense.

That is an extraordinarily fat tail but it is an extreme in degree but not an extreme in kind.

Insurance is needed to cover these types of fat tail risks.  These are the risks that keep the actuaries up at night and the cost control discussions animated.

Most health policy will be focused on managing the most expensive 2% to 5% and minimizing their costs while maximizing their health.  Insurance companies really don’t care about managing the healthcare spending of healthy people.   An insurance company that reduces the spend on their healthiest 10% of the covered population by 10% will see less financial gain and than if they manage to reduce the spend on their sickest 1% by 1%.  They won’t complain about healthy people diverting emergency room visits to urgent care visits, but there is limited gain here because utilization is so low.

Insurers start caring about care management once people start to use expensive prescriptions, develop significant chronic conditions or have catastrophic trauma events.  Managing care through either positive navigation assistance, wrap-around supports, network manipulations, bundled payments, gain sharing, global budgets starts to have pay-offs for the sickest and most expensive 10% to 15% of the insured population. The benefit design cost and care control measures such as deductibles, co-pays, cost-sharing, visit limitations, authorization limitations are applied to the entire covered population but they are mainly intended to change significant and costly treatments for a very small proportion of the covered population.  The healthy and the not too sick are brought along to scramble through barriers to care.

 

 

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23Comments

  1. 1.

    I'mNotSureWhoIWantToBeYet

    November 12, 2015 at 8:09 am

    We all hear horror stories about the 1/10M case that cost millions to treat. It must be terrifying for the people and (to a much lesser extent, of course) their insurance companies.

    But how does this fit with Dean Baker’s frequent reminder that the US pays ~ double per person what other industrial countries do for health care? It’s not just the “fat tails”, is it? What would it take for US medical costs to fall to more normal rates for the rest of the modern world? Lower pay to physicians and specialists? Cheaper drugs? No more “free” Hoverounds and catheters? Quasi-single-payer?

    (I believe I saw a report that the Rest of the World’s per-capital spending on medical care was rising faster and the US’s was rising slower, so there will apparently be a convergence in the not too distant future if trends continue. It’s just that the convergence will be at a much higher level than many think would be optimal.)

    Thanks.

    Cheers,
    Scott.

  2. 2.

    Kay

    November 12, 2015 at 8:10 am

    Richard, I know this not your job and you’re (of course) not responsible for it, but is there any effort to introduce some stability to prices on the exchange? One of the main selling points of the health care law was “security” and people cannot plan if prices swing so much. They don’t have the capacity to weather all this risk- they have tight budgets. This is really bothering them and I feel like it’s a perfectly reasonable complaint. I’m afraid that by the time it reaches some stability and predictability people will just give up.

  3. 3.

    Richard Mayhew

    November 12, 2015 at 8:20 am

    @I’mNotSureWhoIWantToBeYet: Controlling the fattest tails would be the biggest immediate win, and then the next biggest problem is just the very high cost per service in the US compared to elsewhere, not utilization on an age adjusted basis. I am not sure how to fix the high cost per service problem with such a fragmented payer market (so yes, single payer or a set of very large pooled payers with 20-30 million covered lives each and a new IP payment regime would be the way forward… no idea how to get there)

  4. 4.

    Kay

    November 12, 2015 at 8:20 am

    I don’t know- can people maybe (essentially) buy insurance on insurance rates? Do something like utility companies do with “budget plans” where they spread the higher costs of heating over the entire year so people don’t get whacked over three months? Pay a slightly higher but “guaranteed” rate instead of hitting them with 40% at once?

  5. 5.

    Richard Mayhew

    November 12, 2015 at 8:21 am

    @Kay: 2017 is when the markets will be fully stable as the insurers will have gotten enough experience to price risk reasonably well, and the transitional supports of risk corridors and federal reinsurance are no longer operating.

  6. 6.

    Kay

    November 12, 2015 at 8:33 am

    @Richard Mayhew:

    Thanks. I think this is really difficult for people. They’re essentially in the position that employers traditionally occupied, where they’re trying to anticipate what health insurance will cost next year, but they don’t have the resources or years of experience navigating this of employers and they don’t have the market clout of big employers. As you know they’re not a huge group. Most people are in the employer-based or Medicaid section, but it’s the old saw about how the 1 angry customer has ten times the impact of 100 happy customers.

  7. 7.

    cosima

    November 12, 2015 at 8:33 am

    We moved back to the UK approximately 3 years ago. Our oldest was attending university in AK, and we had her covered under COBRA at over $500/month. As soon as the ACA was enacted we started hounding her to enroll — it didn’t happen until she was here with us for the xmas holidays and we could physically sit down with her at a computer and get it all sorted. The MODA plan that we enrolled her in (maybe the highest coverage, or close to it) was approximately $450/month. She’s now living in a state that is part of the Medicaid expansion, and as an intermittently-employed youngster qualifies for Medicaid (she’s substitute teaching as often as she can, which isn’t as much as she’d like). I cannot imagine paying nearly $1000 for a MODA plan, but I also cannot imagine throwing her to the wolves in terms of healthcare, and not paying something.

    I’m not sure that MODA will have many takers at that sort of cost. And I’m a bit surprised that a 40% increase was approved given that AK’s new governor has signed on for the Medicaid expansion, so a lot of those high-cost patients may be put on the Medicaid list.

    But then I freely admit that I know very little about insurance these days, having been on a beautiful socialised medical plan for most of the past 12 years. Richard’s my medical insurance wikipedia.

  8. 8.

    Scratch

    November 12, 2015 at 8:42 am

    Richard, I want to thank you again for yesterday’s post. I tried to use the contact author in the sidebar, but nothing happens when I do that, so maybe Tommy needs to notified that contact author isn’t working.

    If anyone wants to know more details about my fun with the thumb yesterday, I wrote a blog post about it. https://becomingshoeless.wordpress.com/2015/11/11/would-you-believe-i-got-hit-by-a-car/

    And again thank to all who contributed. The only thing that made me cry yesterday was seeing such generosity.

  9. 9.

    Richard Mayhew

    November 12, 2015 at 8:52 am

    @cosima: A sick population in a very expensive market (Anchorage is 25% more expensive than US average cost of living, and Nome is probably 2x national average http://voices.nationalgeographic.com/2013/09/06/16-breadsticks-the-high-cost-of-living-in-nome-alaska/)

    It is the same problem that the Dakotas have and parts of Appalachia, sick populations with very few providers and those providers get paid a lot because who really wants to be in the middle of nowhere if they have better options.

    As an example, a friend of mine is a board certified dermatologist who is on a skin cancer research contract at a top research university. When he finished his fellowship, he was headhunted by hospitals in North Dakota, Montana, Kentucky and northern Maine. The minimum offer was $450K plus retention bonuses because he would be the only dermatologist within 150 miles for most of those locations.

  10. 10.

    Villago Delenda Est

    November 12, 2015 at 9:21 am

    Gosh, the market solves everything, doesn’t it? It’s amazing that throwing money at people may not work to convince them to live in the middle of nowhere.

  11. 11.

    japa21

    November 12, 2015 at 9:39 am

    @Richard Mayhew: This is a constant issue. As I have mentioned, I work in the Network Development department for an insurance company. My specific areas of responsibility include Minnesota and North Dakota. Management a couple levels above me always have difficulty when I tell them the rates I have to concede to in order to get providers to agree to participate in the network. I will hear how providers in NYC or Chicago are willing to accept a lot less and I have to explain, over and over, how those providers are in competition with other providers in the area for our customer base.

    Rural states are especially unique because Medicare, the basis for much of reimbursement, will usually pay providers in those areas less because the cost of operating a practice is generally less (Alaska is different). So paying 110% of Medicare to a provider in ND is less than 110% of Medicare in Chicago. Those providers look to the insurance companies to pick up the differential and then some.

  12. 12.

    satby

    November 12, 2015 at 10:05 am

    @Scratch: That picture of your thumb looks really ouchy. That’s why you will finish a half marathon and I never will, because you kept running where I would have turned right around and gone home. I was happy to chip in my bit and to see that you’re pulling closer to your goal. Hope a few more people get you all the way, this crowd is a generous bunch!

  13. 13.

    Villago Delenda Est

    November 12, 2015 at 10:14 am

    @japa21: So management a couple of levels above you don’t get how markets work in rural areas. You’d think that those MBAs would prepare them for something like that, wouldn’t you?

    /heavy sarcasm

  14. 14.

    japa21

    November 12, 2015 at 10:30 am

    @Villago Delenda Est: Believe it or not, not MBAs. They just never worked rural areas before.

  15. 15.

    Central Planning

    November 12, 2015 at 11:10 am

    Richard, is this the first year that AK has had the ACA? I wonder if it’s a bubble of people that have never had insurance that were finally able to get the treatment they need (i.e. people with expensive, pre-existing conditions).

  16. 16.

    mtiffany

    November 12, 2015 at 11:14 am

    I have a “is it possible/what happens if…” type question: What happens if an insurance provider gets extremely and improbably unlucky and the amount they have to pay out in claims greatly exceeds not just their cash on hand, but also the all the cash they can reasonably expect to take in as premiums for the next ‘x units of time’ (eg, they have $100 million on hand, they can expect $400 million in premium income over the next 12 months, but somehow their sickest 1% used $1 billion in services/devices/pharma and that in total all that money has to be paid out in 90 days?

    Do they get a government-backed loan from a bank or group of banks? Does the insurance provider go bankrupt? And if they do, what happens to the policy holders? What’s their recourse? Does the ACA require other insurers to ‘pick up the slack’ and step in and make good on the policies with some government reimbursement? I realize that this may seem like the most-improbable worst-case scenario of the 2008 financial meltdown variety, but the 2008 financial meltdown did happen…

    ETA: I realize there’s such a thing as reinsurance, but what happens if they blow through that/it’s inadequate to cover the claim?

  17. 17.

    piratedan7

    November 12, 2015 at 11:23 am

    @japa21: sounds like you should ask them to road trip with you so they can start to understand how Pierre isn’t like Chicago… some people… smh

  18. 18.

    Richard Mayhew

    November 12, 2015 at 11:26 am

    @mtiffany: It depends on the state.

    In some states, there is a guaranty fund where all the insurers in the state kick money in for the OH MY GOD WE FUCKED UP scenario as one insurer closes down and has insufficient reserves to pay out all legally incurred claims.

    In other states, there is a state back-stop.

    In other states, the regulators look at how many incoming claims there are, and how large the reserves are, and applies a haircut. Some states might apply a 10% across the board haircut, while others might threshold things where providers with $20,000 outstanding or less get 95%, providers with $20,000 to $200,000 gets 92%, providers with more than $200,000 outstanding claims get 88% etc. I think the Iowa/Nebraska co-op fell into this category.

  19. 19.

    Richard Mayhew

    November 12, 2015 at 11:28 am

    @Central Planning: There probably is some catch-up care element but we’re not sure if this is a spike and then drop to a cheaper and healthier baseline, or a high plateau, there is not enough data to be sure.

  20. 20.

    cosima

    November 12, 2015 at 11:50 am

    @Central Planning: My experience of AK and insurance in AK has been that there is a disproportionate number of uninsured people (crazy red state, don’t get me started on this, since this is an insurance thread), but that the ACA did lead at least some of them — probably the most desperate & in-need health-wise — to sign up for insurance.

    When signing up our daughter I can think of only two insurers as options offered. We chose MODA (mentioned in the post). I don’t know if that’s usual. AK does have a small population (I think it’s #49).

    It does have, as RIchard said in his response to my comment, a high cost of living, and that is exponentially inflated in the number of towns/villages well outside of areas that have ready access to a hospital or other healthcare facilities. It’s 500,000 sq miles. However, I find it difficult to believe that a lot of people living on the fringes, those who are struggling with costs of heating & food, as is the case in most of rural AK, enrolled, as the cost for a good plan was at least $400/month. That’s a lot of extra scratch to come up with each month.

    The new gov has put them into the medicaid expansion group of states recently (one of his first acts after being elected), so there are likely to be a lot of people who will move from MODA/Premera to Medicaid, and a lot more people who will now qualify for Medicaid.

    In my opinion there’s not much about AK that can be used as a benchmark in any area. As someone who was born & raised there, I can tell you that they have a lot of issues that are basically unrepeatable in other states, the rural issue being at the top. There are a lot of places with significant population numbers that are accessible only via plane. I have two siblings who are MDs with the Public Health System, and they both do a lot of traveling to bush villages on a rota of sorts.

  21. 21.

    Richard Mayhew

    November 12, 2015 at 12:07 pm

    @cosima: Agreed, almost nothing can be used in Alaska in the contiguous 48 but I thought it was an excellent published and safe for me to use real world data example of the nature of the fat tail in insurance.

  22. 22.

    cosima

    November 12, 2015 at 12:46 pm

    @Richard Mayhew: It’s a very useful discussion/exploration — specifically, in my opinion, to advance discussion about public options, single-payer, and medicaid expansion.

    Are there similar published pieces about states that are more in line with the other contiguous states — i.e. number of providers available, new enrollment, lack of medicaid expansion, etc?

  23. 23.

    Starfish

    November 12, 2015 at 4:44 pm

    @Villago Delenda Est: If you are a foreign born doctor, you can get H1-B status if you go serve a community in need.

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