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Insurance migration and counter-migration

Posted Jan 31 2013 9:28pm
I bet that if you were to look at the trends in medical insurance premium growth for companies in the US, you would find a bimodal distribution.  Some will have experienced a rate of premium growth lower than the average, and others will have experienced a rate above the average.  What might account for this?

It certainly is not the presence of wellness programs, sponsored by some companies but not by others. As Al Lewis and Vik Khanna documented in a recent Health Affairs Blog article , "the industry consistently mis-measures and overstates the direct healthcare cost savings" of wellness programs.  They continue, "The current wave of wellness programs are taking us wildly off course by promising substantial short-term reductions in health spending. This is clear whether one looks at the peer-reviewed literature, outcomes measurement generally, marketing claims, or the 'face validity' of the broader impact of wellness on population health status."

I'd like to suggest that a factor in the differential premium growth rates relates to whether companies have affirmatively counteracted the strategic plans of health insurers to migrate employees to plans that correspond to greater use of health care services.  Yes, you heard me.  Notwithstanding public pronouncements to the contrary, it is evident that insurers have persuaded plan fiduciaries (i.e, companies who offer health insurance to their employees) to adopt plan designs that are priced to diverge from the rates that would be based on actuarial calculations.  Plan designs for high-cost subscribers are subsidized by plan designs for low-cost subscribers.  I believe the insurers do this for strategic reasons, to migrate customers to those plans that create the most income for the insurers.  The plans that create the most income for insurers are the ones that generate growth in claims:  Insurers want larger groups to insure and they want to insure unhealthy populations.  After all, claim adjudication is the major source of income for the insurance companies.

Firms that are alert to this phenomenon are able to counteract it by modifying the relative contributions required by employees for the different plans offered.  A small amount of "counter-migration," especially among the high risk, high cost subscribers, goes a long way to mitigating the damage than can occur from pricing that is not reflective of actuarial risk.  Let me dive in further.

Let's start with the simple premise that health costs are overwhelmingly dominated by the average age of a risk pool.  Sure, there are other factors, but age trumps them all.  If we look at the various tiers of plans offered to employees, the average age of single people is roughly from 27 to 35, and their cost of health care is very low.  Moving to families, the average age of people rises to the mid-40s, and they are roughly 40% more expensive to take care of than single people.  For a family with two children, the rate should be roughly 3.8 times that of a single person.
But the underwriting benchmark prevalent around the country for the family plans is well below what would correspond to the actuarial predictions.  To make up the required amount of dollars, the premiums for singles are overpriced relative to their actuarial basis.  The rate for a single-plus-one policy, for example, should be about 2 times that of a single person's, but the industry benchmark is 2.5 or 3 times the single rate.    Strategically, the insurers want to shift business towards their preferred segments by subsidizing those segments and overpricing the other segments.

Firms often aggravate the problem by offering premium reductions for a deductible laden plan.  They hope by doing this to reduce their overall premium burden over time.  The problem with this is that consumers know what kind of claimant they are likely to be.  While consumers cannot predict accidents or the onset of an acute disease, they know if they have a chronic disease or cancer or some long-lasting malady.  Accordingly, those high claimant employees will never pick the high deductible plan, and so there are no savings to the employer.  (Why, then, are they offered?  Mainly, I'd suggest, so that the insurance company can then offer health savings accounts to the healthier families.  Administering those HSA's is remarkably profitable.)

In summary, risk is not a function of plan design.  Risk is a function of who is in the plan.  When plans are mispriced relative to actuarial risk, a less healthy population migrates into the pool, and that population is chronically underfunded.  This phenomenon is compounded when the low risk subscribers are encouraged by overpricing to move out of the risk pool, for it raises the cost of the residual population.  The insurer comes back at renewal time and says, "We're sorry, but your utilization has grown, and so we need to increase premiums by x percent," where x is dramatically above the average trend of health care costs in the region.

The way to fix this is to reverse the subsidization so that the effective pricing to consumers more closely reflects actuarial risks.  This can be done by adjusting the employees' contribution to the overall premium.  You don't have to do this by much to cause some counter-migration among the highest cost subscribers, and you don't need a lot of counter-migration to have a large dollar impact on the company's overall costs.  After all, the customers involved are the highest cost, so a movement of relatively few can make a big difference.

You may ask, where will they go? Well, here is an unpleasant aspect, but one that is inherent in the employer-based insurance system we have in the US.  As a colleague has said to me, "If I invite bad risk, it comes from somewhere.  If I encourage it to leave, it goes somewhere.  This is a zero sum game."  Specifically, a working couple will sit around the kitchen table comparing the health plans offered by their respective two employers.  They will transfer coverage to whichever spouse's firm offers the larger subsidy for their high-risk plan. That company will find itself shifted to a higher cost curve and will find itself moving up that cost curve at a rate greater than the average trend.  The company that has systematically acted to reduce untoward subsidies will find itself shifted to a lower cost curve and will find itself moving more gradually up that cost curve.  Simple mathematics drives this result. Firms have to understand that their strategic interest is at variance with that of the insurance companies.
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