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You are here: Home / Anderson On Health Insurance / Choosing a pool

Choosing a pool

by David Anderson|  June 12, 20176:20 am| 26 Comments

This post is in: Anderson On Health Insurance

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There is a recent HHS video clip circulating that I want to respond to:

#Obamacare = rising costs. Obamacare = broken promises. It has meant that Gina’s #smallbiz can’t afford coverage for her employees. pic.twitter.com/z3WmjmPyN8

— Tom Price, M.D. (@SecPriceMD) June 9, 2017

My response is technical. What pool does someone want to be in. The ACA opened up the individual and small group market pools so that they are wider and more homogeneous. Previously, the individual market in a state would be extremely fragmented as insurers would underwrite on small blocks and segregate their population by premium, and probabilistic expected expense. Small group plans were also tightly divided. Pools that were young and healthy were paying much lower rates than similar looking pools with a single person with epilepsy or cancer or any one of hundreds of high cost diagnoses. Older pools of the same health status were more expensive than younger pools.

The ACA is fundamentally a spreading of the risk of sickness more broadly so more of the cost is borne by younger and healthier people than it had previously been borne. From this perspective, it is a great deal for sicker people and a worse deal than either the 2009 status quo or the AHCA probable future for very healthy people.

Insurance is the trade of a guaranteed small loss for protection against a possible massive loss. The policy question is how are those losses distributed. And the secondary question is which pool does an individual want to be in?

Let’s assume that any pool is fairly large and the pools are formed based on expected future health care costs. We will also assume that everyone in a particular pool pays the same premium without regard to the actual health care costs for the upcoming year. From there the insight is easy.

An individual wants to be the most costly person in the pool. The most expensive individual wants the pool to have large variance in costs. This provides the greatest gap between the single premium and the individual’s actual expense. It maximizes the net subsidy from the rest of the pool to the most expensive individual. Conversely, the least expensive person in the pool is sending more money out then they are getting. They want a low variance pool to minimize the cash flow they are sending to pay for other peoples’ care.

The ACA has a single large claims pool which advantages the most expensive. Under the pre-ACA status quo, quite a few of these people would have been underwritten out of the individual market or they would be paying massively higiher premiums on up-charges or shunted into ineffective high cost risk pools. At the same time since the average cost of the people who could have gotten into the pre-ACA pools has gone down as well as the cost variance within the pool decreased compared to the ACA baseline, it produced a great deal for the people who qualified for underwritten policies.

We knew this. In 2013, Oliver Wyman actuaries testified to the Senate:

The Society of Actuaries sponsored a study of the newly insured individuals that will be enrolled in the nongroup market as a result of the ACA’s provisions related to guarantee issue. This report estimated that the nongroup cost per member per month across all ages would increase by 32 percent after the ACA compared to pre-ACA.

A narrower, shallower pool is cheaper for the people who are in it.

The Democratic response was to broaden the pool and thow subsidy money to partially compensate the people in the previous pool transition to the new pool. The AHCA and the Republican healthcare vision is to segregate pools and cast expensive to treat people into inadequately funded high cost risk pools. In that vision, the benefits of the policy change accrue to the healthy.

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Reader Interactions

26Comments

  1. 1.

    aimai

    June 12, 2017 at 6:53 am

    Its almost like there is no sense of the common weal for these guys.

  2. 2.

    JPL

    June 12, 2017 at 7:01 am

    According to the AJC, the most important issue in the sixth district in GA is health care, and the new plan is not popular.

  3. 3.

    BretH

    June 12, 2017 at 7:18 am

    “An individual wants to be the most costly person in the pool….”

    I know everyone wants to get more for their money, but I’m not sure this is how they would want that to play out.

  4. 4.

    NorthLeft12

    June 12, 2017 at 7:29 am

    @BretH: I can’t agree with you more. This exercise of people “getting their money’s worth” does not really apply to insurance of any kind.
    I don’t think there are people who want to be sick enough to go to the hospital, crash their car, watch their house burn down, lose a limb or vision, or even die to collect on the insurance that they are paying for.

    The absolute best outcome for insurance is never having to collect it. The sooner that people realize that, the better.

  5. 5.

    NorthLeft12

    June 12, 2017 at 7:34 am

    BTW, when I opened this article I have to look at Deadbeat Donald’s ugly grinning mug and a question about who do I trust; him or the media.
    Is there some way that Balloon Juice can block these obnoxious right wing ads? I was going to say I prefer the ads about Russian/Asian women, but I actually do not. GAWD, the [people trying to make money off of the] internet sucks!

  6. 6.

    Nunca El Jefe

    June 12, 2017 at 8:27 am

    When the right started squealing that Obama had decreased the military budget and what had actually occurred was a decrease in the yoy increase to defense spending, I think it’s legit to say that the ppaca has decreased healthcare spending. All the rest of that first tweet is just extra garbage garnish on top of a streaming pile of intentional stupidity.

    It’s a nice entree (see what I did there?) to your analysis, which is as good as ever.

  7. 7.

    Another Scott

    June 12, 2017 at 8:40 am

    @NorthLeft12: There are adblockers you can use, but they’re a broadsword when sometimes one wants a scalpel.

    Google recently started up Google Contributor which lets one send a few pennies per page to a site in exchange for not seeing ads. While I usually kick in a US Grant or so here every year, I would be happy to add GC to my browsing here as well if JC and Alain want to turn it on.

    People have tried micropayments for web stuff over the decades, but they never took off. Maybe the time is finally right now…

    Cheers,
    Scott.

  8. 8.

    Betty

    June 12, 2017 at 8:50 am

    @NorthLeft12: Sad is the day when they do get their money’s worth.

  9. 9.

    rikyrah

    June 12, 2017 at 9:10 am

    Anything Price says, I automatically believe is a lie, Mayhew.

  10. 10.

    MomSense

    June 12, 2017 at 9:20 am

    It occurs to me that of the 20+ million people who gained health insurance with the passage of the ACA, there must be millions of new diagnoses which would become pre-existing conditions. Isn’t that the ultimate sucker punch? You finally gain access to health care, trust that you are protected if you find out that you have an illness, and now will get massively punished through no fault of your own.

  11. 11.

    Jim, Foolish Literalist

    June 12, 2017 at 9:26 am

    eagle-eyed internauts were pointing out that this woman has been worried about O-Care driving her out of business since 2012. Her story raises a couple of questions, like: how many full time employees does her business have, and how do you found a business and wind up vice president?

    There was another woman at one of trump’s meetings– a rancher with six kids, which sets off a quiverful warning in my head. Her youngest was autistic, I think 10, and they lived in western CO far from any big city. so he may well have been diagnosed post-ACA, with protections for pre-existing conditions, and expanded coverage, and no lifetime limits, etc. I tremble to think what’s gonna happen to that kid if his mother gets what she thinks is her wish. Is she one of those who fell for trump’s ‘better cheaper terrific it’ll be easy’ scam, or one who doesn’t care what happens to her son if other people have to stop using birth control

  12. 12.

    Frank Wilhoit

    June 12, 2017 at 9:47 am

    This all comes back to why the insurance industry needs to be regulated in the first place. All of the incentives are perverse. This is why public entities need to get involved, but that case is never made; the only argument over government involvement that one ever hears is “how much money the government should give away”, which is (A) completely beside the point and (B) deployed with harmful intent.

  13. 13.

    FlipYrWhig

    June 12, 2017 at 9:48 am

    @Jim, Foolish Literalist: I just about guarantee that what she thinks is that black and brown people are getting a free ride. Because that’s what Republicans think about everything.

  14. 14.

    Jack the Second

    June 12, 2017 at 9:53 am

    @BretH: An investment transfers money from the unlucky to the lucky; insurance transfers money from the lucky to the unlucky. Or if you prefer, the winners to the losers.

    I honestly wonder how much the right-wing hatred of insurance programs (Social Security, Welfare, Obamacare) is because of simple greed (they’d personally maybe get more money) and how much of it is based in the prosperity gospel: if people who are healthy, rich and successful in business because God favors them, then people who are sick, unlucky in work, or who did not manage to build enough savings for their dotage must be disfavored by God, and doing anything to alleviate their suffering (especially at the expense of the chosen ones!) must be morally wrong.

  15. 15.

    Buskertype

    June 12, 2017 at 9:59 am

    I admire your persistence in bringing facts and sober reasoning to this debate. It’s depressing how little of that we actually hear. The insanity that prevails in the GOP rhetoric makes it tempting to fight fire with fire, but it’s not a good strategy in the long run.

    Related:
    The Capito staffer I spoke to this morning professed complete ignorance as to why people think Capito is wavering on Medicaid, and said they don’t expect to see a bill before July 4th.

    I don’t trust them, but that’s what they’re saying.

  16. 16.

    Just One More Canuck

    June 12, 2017 at 10:07 am

    @Jim, Foolish Literalist: they show 15 people on their website. Someone named Cary Martin (husband? brother?) is listed as “President”

    Doesn’t seem that they’re doing too badly, in spite of the hardship and oppression imposed by Obamacare

  17. 17.

    MomSense

    June 12, 2017 at 10:10 am

    @Buskertype:

    But it’s also that you start paying into the pool when you are young and healthy (lots of young people are not) so that as you get older and require more care you are drawing from a well funded, established pool.

  18. 18.

    Jim, Foolish Literalist

    June 12, 2017 at 10:13 am

    @Just One More Canuck: forgot about that whole “internet” thing…

    did you notice the first reference on their webpage?

    “Your tour was a lot of fun. It will receive many recommendations from the Clinton Presidential Center.”
    -William J. Clinton Foundation

  19. 19.

    Brachiator

    June 12, 2017 at 10:47 am

    @Jim, Foolish Literalist:

    ..There was another woman at one of trump’s meetings– a rancher with six kids

    The question is what kind of insurance did she have before Obamacare? How much did it cost and what did it provide.

    Then, what will the magical replacement plan do for her and her family? How much will the replacement plan cost.

  20. 20.

    RobertB

    June 12, 2017 at 11:56 am

    @Brachiator: This is sheer anecdata, but I’ve seen this on Facebook: “That damn Obummercare done ruined my business because it cost me too damn much!” It would turn out they either had no insurance at all, or $50/month for catastrophic coverage that they never had to use.

  21. 21.

    RSA

    June 12, 2017 at 12:20 pm

    @RobertB:

    “That damn Obummercare done ruined my business because it cost me too damn much!” It would turn out they either had no insurance at all, or $50/month for catastrophic coverage that they never had to use.

    I’ll occasionally see a statement like that from friends/acquaintances of friends, about the cost of the ACA, but I’ve NEVER seen it followed up with numbers or any kind of evidence at all. It’s as if they’re just parroting what they’ve heard.

  22. 22.

    NorthLeft12

    June 12, 2017 at 12:28 pm

    @RobertB: I sort of get the group of people who feel like they are indestructible, and will never need health care thus want to either go without any health insurance or insurance that is very cheap and nearly useless.
    If they do have health issues that are expensive to treat, they will go bankrupt and either die or impoverish their closest relatives, or get covered by the state [ie. taxpayers]. None of those options are desired by society in general.
    Not sure how many of these people are okay with expecting their families to pay for them, or whether they expect the state to end up paying. But then I remember that these people are most likely big into personal responsibility [like the party they support] and thus would just admit their mistake and then refuse any medical care they could not personally pay for and slowly die. Where is the sarcasm font when you need it?

  23. 23.

    Camembert

    June 12, 2017 at 1:35 pm

    This isn’t a great analysis in a lot of ways. Insurance company risk pools come bundled with, well, insurance companies. This isn’t like auto insurance, where the different companies have all essentially mastered the basics of providing service. There are differences in the amount of time I spend haranguing my reps, the likelihood that I will have an appropriate doc in-network, and even the culture of the GPs the insurance company tends to pick. Especially given that choice is relatively rare, the bundles themselves express a lot more than the independent and identically distributed assumptions embodied herein.

    I mean, it’s fine as an absolute baseline. But the real decisions faced by real people have a lot more than this associated with them.

  24. 24.

    NJDave

    June 12, 2017 at 2:34 pm

    All this clever internet advertising delivers an ad for summer pools at the top of the page about insurance pools.

  25. 25.

    RobertB

    June 12, 2017 at 3:34 pm

    @RSA: That was my take on it: that these folks were pissed mainly because they heard ACA sucked on talk radio. And @NorthLeft12, some of them were pissed that they couldn’t gamble with their health. “My business now sucks because I can’t legally take the chance that I’m ruined financially if I get hit by a bus.”

    I saw some other unusual things in these conversations. “Who ever heard of a company that offers you health insurance sooner than 90 days/6 months?” I’ve been lucky enough that any company that offered me health insurance at all offered it to me from Day 1.

  26. 26.

    Daddio7

    June 12, 2017 at 7:16 pm

    Per person health-care cost in the US is $8000. You don’t need more healthy people in the pool, just richer people. The average American can not pay for his health care needs, rich people and corporations have to make up the difference. For that we need single payer.

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