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You are here: Home / Anderson On Health Insurance / Fixed costs, low AV coverage and barriers to entry

Fixed costs, low AV coverage and barriers to entry

by David Anderson|  March 14, 20179:15 am| 10 Comments

This post is in: Anderson On Health Insurance, All we want is life beyond the thunderdome

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SRW1 asked a good question this morning:

Is it possible insurance companies are as remarkably quiet as they are because they have been promised something like the opening up of the bundle of essentials at stage 2 or 3 of the process?

Besides the fact that the major insurer groups are screaming their heads off, insurers will have a very hard time making money on low actuarial value insurance that is priced to the flat age based subsidy. Jed Graham at IBD has a very smart piece that looks at the budgetary sleight of hand of the Ryan plan and makes a very critical if subtle point:

If ObamaCare’s essential benefits requirements were axed, health policy experts believe that insurers would inevitably offer people coverage that costs no more than the value of their tax credit under the GOP plan. In other words, people would find a way to use their tax credits, even if they could only afford to buy the skimpiest coverage — too little in many cases to be considered insured under CBO’s assessment. Still, if that’s the GOP’s eventual plan, it means that the CBO is underestimating the true cost of RyanCare by about $600 billion.

A 20 year old with a $166 a month subsidy in a low cost region can buy a 60% to 75% Actuarial Value plan. A 64 year old in a high cost region with a $333 a month subsidy and a 5:1 age band can afford a 30% AV plan with a $15,000 to $20,000 deductible.

Administrative costs are a bear for insurers. My former jobs at UPMC barely scaled. For my last position there, they needed one of me for every hundred thousand covered lives. For my first position at UPMC, they needed one of me for every half million lives but hey needed one of me after the first 5,000 to 10,000 covered lives. There is a fairly large bolus of costs that have to be absorbed to sell the first policy that are minimally variant. After that there are variable costs of claims processing, authorization, appeals, and member services. Younger and healthy patients tend to have a lower cost of maintenance than older or sicker members. People who never use their insurance outside of hit by the bus events don’t call, they don’t appeal their denials and they don’t send claims to get reprocessed because the bucket accumulators aren’t working right. Sixty year olds have already gotten hit by the bus of age. They use more administrative services to manage their care. And the health insurer uses more administrative resources to either deny care or direct care to lower cost or more efficient pathways.

Insurers can make money on a cherry picked low actuarial value covered population. That was the business model of the individual market. But the combination of high need patients and high administrative costs means making a bundle on selling minimal plans that are priced at the subsidy point a hard way to make unusually large profits. It could be profitable for some insurers but it will be a grind.

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Reader Interactions

10Comments

  1. 1.

    JPL

    March 14, 2017 at 9:27 am

    One of the complaints about ACA was some insured could not keep their insurance. One person complained that she was only paying fifty dollars a month, and that policy was no longer available. Of course, that policy did not cover hospitalization. So if that person fell and broke a leg, good luck with that.
    Under the republicans, I assume those policies would be offered.

  2. 2.

    David Anderson

    March 14, 2017 at 9:33 am

    @JPL: That would need 60 votes in the Senate to repeal the Essential Health Benefit rules but yes in a world where the AV bands are done away with, then those types of junk policies would be sold.

  3. 3.

    FlipYrWhig

    March 14, 2017 at 9:39 am

    So are the Republicans trying to say that their law will admittedly explode a lot of people’s current health insurance BUT WAIT BEFORE YOU GET MAD THERE’S ONE MORE THING it will unleash so many awesome new cheap insurance products that the tradeoff will be totally worth it? Because that’s the only way I can make any sense of anybody’s positive reaction to the CBO score.

  4. 4.

    Yarrow

    March 14, 2017 at 9:48 am

    Besides the fact that the major insurer groups are screaming their heads off,

    Screaming their heads off that they like this bill? Or don’t like it?

    I thought someone posted yesterday–was it you?–that Anthem had come out in support of this bill. Am I misremembering?

  5. 5.

    SRW1

    March 14, 2017 at 9:51 am

    @David Anderson:

    If the the Essential Health Benefit rules were repealed, that would presumably also affect people who get their health insurance via their job. Voila, religious objections to contraceptives and other icky stuff, here we come.

  6. 6.

    David Anderson

    March 14, 2017 at 9:53 am

    @Yarrow: Anthem is the only one who has come up in tepid support (IE they like the State Stabilization fund, they like the subsidies, they hate Medicaid expansion roll-back). AHIP the industry trade group is out and loud against the bill. Molina said it would raise rates 30% due to the bill

  7. 7.

    Yarrow

    March 14, 2017 at 9:58 am

    @David Anderson: Thanks! And great news!

    I would love to see a post listing every group that has come out against the bill, and I guess every group that has come out in support so we can hammer them. Probably already out there–I just missed it. Had a really busy end to the week, weekend and yesterday. Catching up today.

  8. 8.

    Another Scott

    March 14, 2017 at 10:22 am

    @David Anderson: I haven’t seen that AHIP is “loud against the bill”. It certainly doesn’t jump out at me at their blog, and lots of what I do find there (praise of ‘consumer choice’ and HSAs and ‘partnerships’ sounds like the usual GOP pablum to hide gutting of Obamacare to me. What I’ve read there (which I admit isn’t a lot) sounds like they are most concerned that the subsidies keep flowing, and that they’re freed of as many of the insurance cost-control regulations as possible. Shocking, I know. ;-)

    Linky?

    Thanks.

    Cheers,
    Scott.

  9. 9.

    Barbara

    March 14, 2017 at 12:51 pm

    @David Anderson: Just a clarification. If state regulatory over insurance companies is maintained, states could still prohibit the sale of these kinds of policies.

    @Another Scott: AHIP’s membership is often very conflicted over specific legislative initiatives because they occupy different market niches — national versus regional, significant versus insignificant government program business, lots of self-insured accounts versus none, etc.. That means they often end up pursuing a lowest common denominator strategy — keep the money flowing, keep the regulations to a minimum.

    With respect to both of these issues — EHB and regulation — as a practical matter, even if they think the EHB regime is insufficiently flexible, the kinds of insurers that constitute AHIP’s membership are not trying to make money by selling skimpy policies to people who can barely afford the premium. That would require a completely different business and marketing strategy. If I had to guess, the regulation that they hate the most is the MLR requirement. It was thrown in to the ACA at the last minute per the legislative wizardry of Jay Rockefeller, and it caught so many people and lobbyists off guard at the time that no one was able to implement a plan to keep it out.

    ETA: I know many people think MLR is a great thing, and it might help alleviate certain issues to a certain extent, but it only really works where there is a lot of competition in a market. Otherwise, it just becomes an incentive for insurers and big hospital systems to share monopoly rents.

  10. 10.

    Barbara

    March 14, 2017 at 1:59 pm

    @Yarrow: Anthem did come out in support. It will not be on the exchanges in 2018, and it is almost certainly hoping to get some kind of political fix in its effort to acquire CIGNA.

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