A death spiral scratchpad

This tweet and a few other conversations that I’ve seen has me thinking hard.  I’m method agnostic as long as preferred ends are met. This is a scratchpad post as I am trying to figure out the model.

Hearing that analysis by insurance companies projects individual insurance market will deteriorate and collapse under House GOP health plan

— Ed Lorenzen (@CaptainPAYGO) February 26, 2017

One of the plausible pool participation mechanisms is the use of late enrollment penalties.  Medicare Part B uses a late enrollment penalty for people who do not sign up.  Those penalties are significant, scaled to time and persistent.

if you don’t sign up for Part B when you’re first eligible, you’ll have to pay a late enrollment penalty. You’ll have to pay this penalty for as long as you have Part B. Your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn’t sign up for it. Also, you may have to wait until the General Enrollment Period (from January 1 to March 31) to enroll in Part B. Coverage will start July 1 of that year….EXAMPLE

Your Initial Enrollment Period ended September 30, 2009. You waited to sign up for Part B until the General Enrollment Period in March 2012. Your Part B premium penalty is 20%. (While you waited a total of 30 months to sign up, this included only 2 full 12-month periods.) You’ll have to pay this penalty for as long as you have Part B.

Medicare Part D is similar in using a late enrollment penalty. The Part D penalty is 1% of the national average premium cost per month of non-coverage. Both penalties are persistent as they are permanent increases in premium for the rest of the life of the Medicare beneficiary.

The House Republican Repeal bill has a late enrollment penalty but it is not persistent. Their late enrollment penalty for non-continuous credible coverage starts on p.41 of the bill. It is a 30% surcharge for a single twelve period. After that point, the individual gets the standard rate.

Update as the rest of my post was cut off

So what is going on here that causes health insurance actuaries to potentially freak out about a late enrollment penalty as the pool participation mechanism in the individual market while the Medicare LEPs seem to work well enough?

I’ll advance a story that could make sense.

We’ll assume that all of the people who know that they are expensive to treat will buy insurance at effectively any price. The question is whether or not low cost and low utilization people will buy insurance. We know under the leaked bill that quite a few people who are both healthy and relatively low income (at 5:1 and 60 years old or higher, “low income” is a big number) who will have a massive gap between what they are subsidized for and what they can afford to buy. And that policy will have a $7,000 or more deductible. So the question becomes how do healthy people get in the pool? Medicare uses persistant late enrollment penalties. One bad decision follows you for life. The House bill has a temporary late enrollment penalty that fades quickly.

To make the math easy, let’s assume that the cheapest policy for me costs $5,000 per year after my subsidy. The deductible will be high and I will be buying hit by a meteor coverage. In 2016, I incurred $250 in claims, in 2017, I’ll incur $300 in claims as my likeliest projection. At some point due to soccer, I will need work on my knees. Hopefully, I can delay the $15,000-$20,000 per knee for as long as possible.

The actuaries would be worried that under the proposed late enrollment penalty structure, the incentive for me would be to stay out of the pool in 2018 while incurring low claims expenses, jump into the pool in 2019, pay a 30% penalty for a total premium of $6,500 while getting $30,000 worth of work on my knees, and then run naked in 2020 as I have a claims expense of $500 or less. As premiums get lower, that decision to jump in and out of the pool and stitch together coverage with underwritten plans gets even easier to run like hell from the community rated, guaranteed issue coverage.

That I think is where the death spiral concern is coming from. I need to think about this some more.