Monday, November 2, 2009

State Experiments in the Individual Market

There are really only a handful of states that have tried to put serious restrictions/regulation into their individual insurance market. We saw in the previous post about the individual insurance market how most states, like Texas for example, favors the currently healthy. The most extreme example of a state that favors the currently sick is New York. This state has both pure community rating and guaranteed issue requirements. This means that everyone buying individual insurance in the state pays the same price (community rating), and that insurance companies can not deny you if you apply for insurance – even if you are already sick (guaranteed issue). That may sound great and fair in principle, but once you dig deeper into what the effects are, it’s simple to see that it too is a broken market. Today, the cost of a New York insurance premium is $1,300 per month for an individual (not family). Only about 44 people of the 19.5mm New York residents have individual insurance. Most just go uninsured and many delay minor-moderate care needs. I have friends that are one sports accident or an apartment-moving injury away from wiping out their savings and moving back home. For comparison’s sake, in Kentucky the premiums are as low as $95/month – clearly more affordable for the average person.

Understanding what happened to New York isn’t that hard. If you’re guaranteed to be able to get insurance, then you’ll only buy it when you know it’ll be more beneficial to have it than not. So a rational person would wait until a tangible need arose. Since only sick people are buying insurance and using more services than they’re paying for, the insurer then raises rates the following year to make up for the losses. The marginally healthier people subsequently drop out, and the cycle repeats. This is the classic spiral of adverse selection: the higher the premiums drive out the healthier population leaving the sicker population to pay ever higher rates.

Herein lies the problem – how do you get someone to pay for something they don’t (think they) need? Well the answer is pretty easy, even if it is unpopular. You force them to get it (taxes anyone?). The same has been true in auto insurance for decades. Auto-insurance is a prerequisite for driving (even if compliance is lower than the 100% hoped). In my humble opinion, there has been only 1 state to date that has tried with any amount of success: Massachusetts.

In 2006 Massachusetts passed one of the most ambitious healthcare reform bills to date. Its reforms had several elements, but here are the key features:

• Insurance “Connector” for individuals and small groups
• Guaranteed coverage for people in the connector – insurance companies must either offer insurance to everyone or not sell insurance to individuals at all
• Penalties for not having health insurance (individuals relinquish the $219 state personal exemption and/or non-exempt employers pay a small penalty if they don’t offer insurance)
• Insurance companies must contract with providers (hospitals and physicians); in other words, it is voluntary participation for providers
• Subsidies for the poor

The result was that a lot more people got coverage. Employers felt obligated to offer insurance (possibly from the pressure from their employees), individuals purchased coverage to avoid the penalty, and coverage was kept affordable since healthy members bought in and broker commissions were eliminated. Step 2 of the reform was reining in the costs of the program. Unfortunately, the recession hit at the same time that step 2 needed to take place, and the dual impact put an incredible strain on the state. Some might argue that Massachusetts was one of the only states that could have pulled this off. It happens to have a few built-in advantages in executing its version of universal coverage.

• It already had a high insurance coverage rate to begin with (~94% pre-reform/ ~97% post-reform)
• It has an affluent population (median income of $62,365 vs. $41,994 national average).
• Many of the residents culturally believed that insurance was a necessity/right/basic need etc. It is, after all, one of the most liberal states in the US.

I’d say that Massachusetts was successful in achieving the second goal of covering the uninsured (See: What’s wrong with the individual market? A look into the uninsured.) It failed pretty miserably at achieving what is the first goal of US reform: controlling costs. One of the ways that is repeatedly cited as a way to control costs is a national public plan option. After all, if England can do it, can’t we do it too? (Yes, we can!)

Sources: Interviews with Blue Cross Blue Shield insurance executives, US Census Data

Next Post: What is a public plan? What are its advantages? Disadvantages? Is one feasible in the US?

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