How the CBO projects market failure

The Congressional Budget Office projects that the AHCA will lead to 15 % of the population living in destablized insurance markets because of the MacArthur/Upton amendments.

he agencies estimate that about one-sixth of the population resides in areas inwhich the nongroup market would start to become unstable beginning in 2020. That instability would result from market responses to decisions by some states to waive two provisions of federal law, as would be permitted under H.R. 1628. One type of waiver would allow states to modify the requirements governing essential health benefits (EHBs), which set minimum standards for the benefits that insurance in the nongroup and small-group markets must cover. A second type of waiver would allow insurers to set premiums on the basis of an individual’s health status if the person had not demonstrated continuous coverage; that is, the waiver would eliminate the requirement for what is termed community rating for premiums charged to such people. CBO and JCT anticipate that most healthy people applying for insurance in the nongroup market in those states would be able to choose between premiums based on their own expected health care costs (medically underwritten premiums) and premiums based on the average health care costs for people who share the same age and smoking status and who reside in the same geographic area (community-rated premiums)

What does that mean and how does that happen? Let’s work through an simple model of a state with 1,000 people in its individual market.

Health costs are not uniformly distributed. 3% of the costs are driven by 50% of the people. 80% of the costs are borne by 20% of the people. This is the key.

In year 1, there is a single community rated, guarantee issued risk pool. Everyone is offered the same premium. There are significant subsidies to help people afford to join. It is a great deal for the 20% of the population driving 80% of the costs. It is a bad deal for someone in the bottom 50% of the cost pool. Average premiums equal average cost of the entire pool.

In year 2, the state elects to go full waiver. Essential Health Benefits are dramatically pared back, actuarial value is pared back and medical underwriting is allowed. An enterprising insurance company offer an underwritten product. An individual qualifies if they can power walk a twelve minute mile and had no more than three professional claims in the previous year. The guarantee issue pool is still available for people who are continually enrolled.

In this scenario, The least expensive 50% of the previous year’s pool qualifies for the new underwritten product. The premium is 10% of the previous guarantee issued premium for the people who qualify. That is enough to cover normal medical expenses and a few random high cost events while making a nice profit. Everyone who qualifies in this pool is happy. They get coverage that statistically they are highly unlikely to use and they barely pay anything for it.

The problem is the guarantee issued pool. It now contains 50% of the premiums and 97% of the previous years claims. Some of that 97% of previous years claims will naturally go away as one-off events tend not to repeat themselves to the same individual. But a good proportion of the claims will be recurring as an individual with Multiple Sclerosis in Year 1 will still need their medicine in Year 2. This pool will see an 50% to 75% premium increase to cover the recurring claims costs of the chronically and expensively ill.

In Year 3, another insurer decides to be smart. They’ll offer a product at a premium between the low cost pool and the high cost pool. It is targeted at the 30% of the population in the high cost pool who are either chronically but not expensively ill or the people who were in the high cost non-underwritten risk pool because they failed underwriting in Year 2 because they had a one-off event in Year 1.

This is the dynamic the CBO projects. Anyone who knows that they need high cost care will be segregated into a continual coverage, community rated risk pool that is only comprised of people who know that they need high cost care. The stabilization funds in the AHCA are grossly insufficient to make premiums even remotely affordable in a community rated pool when there is an underwritten pool right next to it that can cherry pick eight days a week.

So that is how the CBO sees markets collapsing for 15% of the country.