“BCBS-IL won’t credit deductibles paid to failing insurance co-op” (Big issue for struggling #Healthcare consumers) https://t.co/jLvfy2aWK4
— Steve Sisko (@ShimCode) August 20, 2016
Going to be a mass adverse selection event for anyone that offers OOP credits https://t.co/iLmtt9dufm
— Richard Mayhew (@bjdickmayhew) August 20, 2016
What is the situation and why am I thinking it is an adverse selection event if anyone offers to write credits for the Land of Lincoln members.
Land of Lincoln was a Co-Op. It was placed under state oversight in July. It’s reserves had gotten too low due to a higher than expected risk adjustment bill and no compensating risk corridor asset. Coverage for people on the individual market will terminate on 9/30/16. That means people will be running without coverage from October 1 to December 31.
New York had a similar experience in 2015 when Health Republic was liquidated in the fall of 2015.
Normally regulators would prefer to allow an insurer under oversight to run until the next open enrollment period. That would allow their members to have continuous coverage with the least amount of disruption and added stress. However Land of Lincoln and Health Republic could not make it to the end of the current policy year. Instead, they ended mid-contract. This triggers a Special Enrollment Period as the members lost coverage due to no fault of their own.
In New York, there was an arrangement that people who were on Health Republic who signed up for a month of coverage would have their deductibles and out of pocket expenses credited to their new policies.
That is now not the case in Illinois. Blue Cross and Blue Shield is refusing to enter into a voluntary arrangement to credit deductible and out of pocket spending for any new policies it rights for any qualifying event. That is their right to do so. However, their refusal to do so pretty much forces every other Illinois insurer to also refuse to extend deductible credits.
Adverse selection is the cause of this race to mutually assured ugliness.
We’re more than halfway through the year right now. There are four classes of people in Land of Lincoln plans who will lose coverage in six weeks.
- Low utilizers — These people are barely touching the system. They may or may not have used their no cost sharing preventive care benefits and a few prescriptions but they still have most of their deductible left to satisfy. These are the people that all of the insurers want to attract for three more months of coverage as they are highly likely to be profitable as a class.
- Every year deductible busters — These individuals have long term, consistent chronic conditions where they will meet their deductible under any scenario. They as a class have already maxed out for the year under Land of Lincoln. These are the people that other insurers want to avoid as they are a guaranteed money loser.
- Surprised $25,000 claimers — these individuals had a single bad year. They could have been hit by a bus, they could have needed a knee replacement, they could have finished up their Hep-C treatments in April and been clean since. They are a one year shock where the shock has gotten out of the system and they already hit their annual maxes. Insurers are leery of this group if they have no more deductible or out of pocket spending left as it makes a lot of sense for someone who had a surprisingly bad year to decide that they might as well get a problem fixed that they had been putting off for years as that surgery will only cost them parking. Some of the people in this group will be very cheap going forward, but a good number will be expensive with preference sensitive procedures.
- Almost therers — these people have had a mediocre year in health. They are getting close to meeting their maximum share and will hit it soon enough. After that, they might get preference sensitive procedures done.
If all insurers in a state offer to hold the newly transitioning members whole, the distribution of membership probably won’t be too concentrated by any one segment on any one carrier. The low utilizers will probably choose the cheapest plan possible, the every year deductible busters will choose the broadest network possible, and the last two groups are a coin flip.
If one carrier does not offer deductible credits and forces everyone to start at zero again for three months, the low utilizers won’t care. They’ll still go there at the same rate as they would have under a deductible credit scheme. However the other three groups will avoid that insurer. Instead these three groups will go to any carrier that offers to keep them whole. For someone on a $5,000 a month prescription, that move saves them thousands of dollars for perhaps only a few bucks more in premium per month for the last three months of the year.
This could be addressed on the back end if we had perfect risk adjustment. But we don’t and the HCC model for Exchange could not be sledge hammered to allow for needed types of compensation in a short enough time to get through the federal comment period.
So the carriers that have not announced that they will not offer deductible and out of pocket credits to Land of Lincoln transfers will either need to not offer those credits, or be prepared to lose massive amounts of money due to a temporary adverse selection shock. They’ll not offer credits to protect their balance sheet.
It is a collective action problem which will produce a stable, socially negative outcome where no carrier will want to move off of the no-credit position unless everyone else is forced to do so.
Another Holocene Human
Sounds like you’re saying the insurers should be forced to credit.
Richard Mayhew
@Another Holocene Human: What I am saying is that it is individually rational for insurers to either all offer deductible/OOP credits or for no one to do so.
Anything in between leads to massive concentrated losses for the insurer(s) that are trying to not screw people over.
So this would be an excellent case for state or federal level regulation.
dr. bloor
This has been another episode of “Sometimes the Silent Hand of the Free Market Passes the Buck to the Gummint.”
Just out of curiosity, what sort of deductibles were the Land of Lincoln folks paying? Far be it from me to sympathize with the insurers, but I’ll bet a huge chunk of the insured were responsible for annual nuts they had no business taking on.
WereBear
Another way GOP voters seem to miss the point of regulations. They keep honest folks competitive, by screening out the cheaters.
EmpiresEnd
You also have a rating issue, not just a collective action problem. For the first half of the year, Land of Lincoln collected checks and charged members cost sharing. The second half of the year is more expensive. When the other carriers filed rates for 2016 they would not have assumed that they would have to pick up a bunch of members midyear who had already exhausted their cost shares. Even if all carriers acted together, they would lose.
Richard Mayhew
@dr. bloor: I’m assuming the Land of Lincoln deductibles and out of pocket maxes were similar to other plans in Illinois and in so much as people were taking on too much risk, that is a design problem in the ACA as the subsidies are not high enough.
@WereBear: Not even cheating. Regulations are often required to change problem structures where the initial incentive set leads to individual rational behavior that when everyone does it, a clusterfuck emerges
Richard Mayhew
@EmpiresEnd: Yep, I did not even think about that angle… good catch!
EmpiresEnd
One way to approach this and both allow members to get credit and to avoid a rate increase or losses for any one carrier would be to (1) provide a payment to each carrier that takes on a LOL member in an amount that would, on average, cover the additional cost increase and (2) get the money for the payments by charging a fee to every carrier in the marketplace in an amount proportional to that carrier’s share of the market. The carriers could then build that one time fee into rates in the next year, and it should be quite small when spread out over the whole market. This is a variation on how insurance guaranty funds already work.
Applejinx
So, I’m assuming the message here is ‘if you turn health care over to private profit-seeking companies, when presented with situations where NOT wrecking people’s lives is a competitive disadvantage, every single one will automatically choose to wreck people’s lives and not a single one will (or could possibly) do a right thing when it would risk their profitability relative to immediate competitors’?
Noted. The logic of it is pretty clear.
Why do people think this is in any way good, again? Sheesh.
Richard Mayhew
@Applejinx: yep but if it is that choice or not getting to 218/60/1/5 w a status quo of fuck you if you are sick, I take it and then work to improve incentive structure
jl
@Applejinx: Non-profits would have to worry about adverse selection as well. T;hey have to set rates and have to worry about covering costs, even if what they are (supposed) to be maximizing is different.
Edit: and what is BCBS’ status in IL, anyway? For- or non-profit? I assumed from post that they were for-profit.
Interesting that EmpiresEnd brings up the topic of insurance guarantee funds. Reminds me to whine about fact that health insurance industry is much less regulated and its finance much more ‘primitive’ than other lines of insurance. I assume historical and institutional reasons for that in the U.S., but don;t know.
Prescott Cactus
@jl:
Yes they are !
I’ve got a pony in this race. Bastards !
From Wikipedia
In 1994, BCBS changed to allow its licensees to be for-profit corporations.[4] During 2010, Health Care Service Corporation, the parent company of BCBS in Texas, Oklahoma, New Mexico, Montana and Illinois, nearly doubled its income to $1.09 billion in 2010, and began four years of billion-dollar profits.[10] In the final spending bill for FY 2015 after much lobbying since 2010, nonprofit Blue Cross and Blue Shield plans continue to have special tax breaks that were understood to be threatened by the Affordable Care Act of 2010.[11]