The New York Time’s Reed Abelson and Katie Thomas have an incredible story earlier this week on one Ohio family’s four million dollar drug claim. The family is insured through their union. The union is a self-insured plan with sixteen thousand covered lives. And despite having a fairly large risk pool, this one family has a notable impact on total claims. We will dig into reinsurance and then extend this logic to the ACA individual market.
The drug, Strensiq, treats a rare bone disease that afflicted her with excruciating pain and left her struggling to work or care for her family.
A year after she began taking the drug, Ms. Patterson, 49, credits it with nearly vanquishing her pain, enabling her to return to workpart time for a hospital….At one point in 2018, for every hour that one of the union’s 16,000 members worked, 35 cents of his or her pay went to Alexion to cover the Pattersons’ prescriptions….Because Strensiq needs to be taken indefinitely by patients who need it,
The union is self-insured. That means they hire someone to handle the plan administration but the union or its welfare fund pays out all claims. When the welfare fund has a good year, the union members benefit. When the welfare fund has a bad year, the union members have to kick in more. A family cluster of three people with multi-million dollar claims is a good case example of a bad year. A family cluster of three with recurring multi-million dollar claims is an excellent case example of a very bad decade.
Most self-insured plans will buy commercial re-insurance. Reinsurance in the private sphere has a different function than ACA reinsurance. As we discussed last week, ACA reinsurance primarily serves as a way to partially segregate some high cost claims from general premiums:
an external source of state based money is added to the pool of money collected by premiums. This new pot of money is then used to pay claims and since, on a static analysis, the claim expense does not change, the average premium can decrease because it is displaced by some external funding. The theory of change can range from a political need to do something and this is something for high, non-subsidized premiums to a more technocratic justification that the ACA individual market is acting as a quasi-de facto high cost risk pool and it should be compensated as such by other entities.
Private reinsurance is funded through premiums and it serves to eat risk. Risk is a term of art for insurers. It means statistically possible but uncertain events. Certainty is the opposite of risk. Reinsurers will offer contracts to self-insured groups offering to take on some percentage of claims above a threshold. These reinsurance contracts tend to be renegotiated every few years. During negotiations, the re-insurer will look at the claims experience of the group and offer riders. Those riders can be exclusions for certain conditions, drugs or diseases, or they can be modified limits where the contract under most circumstances starts transfers at a quarter million dollars but for the case of the specific indications where transfers start at two million dollars. The union in this family’s case probably received some reinsurance payments for the first year as Strensiq was a statistical risk. However if the reinsurance was renewed, Strensiq had become a certainty. Reinsurers will not cover certainties. The same logic applies to insurers if the union attempted to convert their welfare fund to a fully insured plan; the insurers would use the claims experience to set premiums and the multi-million dollar drugs are part of the baseline.
The union has three basic choices. It can not cover the drug, it can raise premiums to cover the expected spend, or it can find a way to send the Patterson family (and many others) to the ACA individual market via the new HRA arrangements.
The ACA market has two very different sets of responses depending on the market structure.
If the ACA individaul market is a monopoly or a de facto monopoly where the dominant carrier has 95% of the membership and even more of the revenue, the insurer will welcome new people with multi-million dollar claims. Most of the line of business is subsidized so there is a huge cohort of folks who are mostly price insensitive or at least have a price ceiling on their premiums. A bolus of very expensive claims raises the index rates which mechanically increases the premium spreads. For subsidized individuals who are buying plans priced below the benchmark in a monopoly market, adding the Patterson family makes them incrementally better off. Non-subsidized folks are worse off as premiums increase.
If the ACA market is mostly competitive, then the insurers have a different strategic calculus. They know that whomever gets the Pattersons will receive some catastrophic reinsurance money. The Feds will pay out 60% of the tab per person from the nationwide ACA QHP premium funded catastrophic reinsurance pool once an individual claims hit $1 million. Net of federal reinsurance, the insurer who covers just the mother, Mrs. Patterson, could expect to need to pay out $1.6 million minus any state based reinsurance and any risk adjustment. Many conditions with orphan drug treatments either don’t risk adjust at all or poorly risk adjust.
If we assume that the combination of federal and state reinsurance payments plus risk adjustment payments plus premiums brings the Pattersons’ costs to close enough to revenue, insurers won’t behave differently. If there is a massive gap between net revenue and net expenses, insurers will strategically run like hell. There are a few forms of running; keeping high cost drugs off formulary, or adding significant administrative burden to getting these drugs are the softer forms of running while strategic exit from particular counties to dodge risk is a more explicit running strategy. The business logic is clear:
a problem given the market design. Rates have to be high enough to cover this individual’s costs. In a competitive market where the subsidies are tied to the second least expensive Silver and there is one super-outlier who can not be re-insured against, every carrier lives in fear of being chosen by the one outlier. If they set their rates low enough to be attractive to healthy people, they lose money on the catastrophic expected claims. If they set the rates high enough to cover …. no one buys their product.
As we see more and more treatments that are both recurring and extremely high cost, the insurance market design problem gets more difficult.