A Costly Wrinkle in the Merged Market
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One of the more controversial elements of health care reform in Massachusetts is the so-called “merged market.” In most states, individual health insurance is bought and sold under one set of rules, and small group insurance (for firms with either 1-50 employees or 2-50 employees) is sold under another set of rules.
It used to be that way in Massachusetts, too, before health care reform. Individual insurance was guaranteed at the point of sale and the point of renewal, but the products were limited by state law, the price was based on the total medical expenses of the individual enrollees who bought individual coverage, and individual purchasers either couldn’t purchase coverage for pre-existing conditions or had to wait six months once they purchased insurance to access coverage. The final rule was designed to make sure that people who had open access to health coverage wouldn’t simply buy it when they knew they were going to need it, and then drop it after their procedure was completed and paid for. Insurance is, after all, insurance. It’s all about shared risk. When it works, the healthy subsidize the sick. If there’s no incentive to buy health insurance when one is healthy, that reduces the size of the population that’s willing to pay premiums without requiring services, and increases the total cost of the coverage.
Under health care reform, the Commonwealth of Massachusetts merged the individual market with the small group market - creating what is commonly referred to as the “merged market.” I’ve written about this before. As a result of the merger, the premiums paid by small businesses went up, and individual prices went down - because the medical expenses of small employers, on average, were much lower than the medical expenses of individuals. That’s due - in large part - to the fact that in Massachusetts, small businesses, their employees and their families had much lower medical expenses than individuals and their families. It’s as simple as that. Estimates vary, but my cut is that individual premiums went down by about 25%, and small group premiums went up by 2-3% to pay for the merger.
The outcome of a merged market would be different in different states, depending on the rules for individual policies and small group policies prior to and after reform. ‘Nuff said about that.
Now here’s the costly wrinkle. When the merger occurred, the state told the health plans in Massachusetts that we could no longer apply a pre-ex exclusion or waiting period to individual purchasers unless we applied it to all purchasers in the merged market (including all small businesses). No one was willing to impose such a condition across the entire merged market - primarily because it would be unfair to small businesses to impose such a requirement. In the end, we all hoped that the new state requirement on individuals to have health insurance - or pay a tax penalty - would encourage healthy individuals to purchase insurance every year, and offset this now wide open front door for individual coverage.
Long story short, I don’t think it’s working. A few months ago, brokers started posting comments on this blog site that implied that people - and some brokers and employers - were gaming that wide open front door - purchasing health insurance for a few months at a time, using a lot of services, and then dropping their coverage. The penalty for not having coverage isn’t all that steep - about $900 - and while a few months of coverage might cost $2-3,000 in premiums - that’s peanuts compared to the cost of many medical services, which can run into thousands of dollars in a matter of days.
After about the fifth broker comment, I asked our finance people to check and see if individuals purchasing insurance from us either directly or through the state’s Connector web site were buying for a few months at a time, and using a lot of services. The results were astonishing. Between April of 2008 and March of 2009, about 40% of the people who purchased individual insurance from Harvard Pilgrim stayed covered by us for less than 5 months. Even more amazing, they incurred, on average, about $2,400 per person in monthly medical expenses - roughly 600% higher than what we would have expected. It wouldn’t surprise me if other health plans have the same problem.
This is a problem. It is raising the prices paid by individuals and small businesses who are doing the right thing by purchasing twelve months of health insurance, and it’s turning the whole notion of shared responsibility on its ear. It’s also created a new way for people who don’t want to play by the rules to avoid them. The state needs to reconsider its policy to eliminate waiting periods and/or pre-ex exemptions for individuals purchasing health insurance in the merged market. That would be the simplest and easiest way to protect individuals and small businesses who are playing by the rules - and limit the very costly impact of this wrinkle in health care reform.
Charlie:
Thanks for looking into this. I even wrote a story in 2004 about it and it was published in Health Insurance Underwriters Magazine called it the “self-employed shuffle.” Even have a copy on my website:
http://www.advantagebenefits.com/forms/selfemployedshuffle.pdf
It detailed a friend of mine, who had bought health insurance for two months at a time over a 36 month period to have two minor surgeries.
What really blew my mind more recently, however, was when I sat down to review a health insurance policy with a self-employed well respected successful lawyer. The policy was a joke and I pointed out all the potential exposures to which he he replied “I will just switch to one of the HMO’s if I really need it”. Needless to say I am not surprised to see that you come up with the numbers that you did, although they are even hgher then I expected.
Next it would be interesting to see how many people joined CommonwealthCare after they dropped their private unsubsidized private plan. I know alot of self-employeed people, who do not declare alot of income, who have joined up with CommonwealthCare. There needs to be an asset test added to eligibility just like one would have to pass for medicaid for nursing home coverage.
Thanks for looking into this!!!
Bill Randell
Advantage Benefit
78 Pleasant Street Suite 300
Worcester, MA 01609
Bill@AdvantageBenefits.com
How about instead of making things more difficult and possibly devastating for the people who are playing by the rules, prosecuting those who are fraudulently playing the system? Waiting periods when insurance is mandated isn’t fair. That means you’re forced to pay in money when you won’t be covered, and for someone who is seriously ill, that could mean the difference between life, death, and bankruptcy.
Thanks for showing us yet another reason that we need a single-payer health system. The problem you describe goes away entirely if everyone in Massachusetts is part of a single ‘merged market’ and all insurance companies are abolished.
Jodie:
I have an idea, kiddin of course.. Why don’t we let people decide at the end of each month whether they want to pay their health insurance premium.
a) If they have a month where they have no claims then they do not have to pay…
b) If they have a month where they have alot of claims, then let them pay their premium and have the insurance company pay the claims.
You may think this is a ridiculous example, but that is what that is what guarantee issue has given us.
Now lets get to your comment “prosecuting those who are fraudulently playing the system”? Who are you referring to??? There is no fraud going on….
The current rules allow people to get away with this and they do not have to commit fraud. People can come and go as they wish via the guarantee issue and CommonwealthCare does not ask any asset question.
FYI, the people playing by the rules would like to see these holes plugged.
Bill Randell
Bill@AdvantageBenefits.com
Advantage Benefits
78 Pleasant Street
Worcester, MA 01609
Charlie:
It would be interesting if you could get a list of people on CommonwealthCare and cross reference with 5 or 6 top (subscriber count) HMO’s. Bet you there would find a rather large percentage of CommonwealthCare subscribers today would have been subscribers to one of these unsubsidized plans two years ago.
Bill@AdvantageBenefits.com
Charlie,
Interesting post, as always.
Another, and I think less “draconian”, option would be to hold an an annual statewide open enrollment period for individuals, except for those who had prior coverage and then lost it for reasons beyond their control (e.g., lay-off, divorce, etc)–the usual events that make someone eligible for employer coverage outside of the open enrollment period. For many people, individual coverage is a stop-gap between group coverage so it’s not surprising that many people (most of whom probably aren’t trying to game the system, I would add) have short periods of coverage. And of course, in a voluntary insurance system–which we continue to have despite the individual mandate–people who are more likely to need insurance are more likely to buy it.
I feel compelled to note that there are lots of opportunities for small employers to “game” the system as well…such as adding relatives/friends as employees to help them get coverage. In my experience, these things do happen and they come from a compassionate place of trying to help sick people get access to health care without bankrupting themselves. And of course some number of the individuals who are joining the merged market are doing so because they have lost employer coverage, or never had it, even though they are employed.
It seems that the more we try to patch the current financing system, the more ludicrous it seems to be…but it’s the one we are stuck with for now. I hope we can find other ways to fix the problem we’ve raised without going back to the days of medical underwriting.
Nancy
Nancy T. makes a great point.
As a new state employee, I had to wait three months until I was eligible for coverage.
I had Harvard Pilgrim under my last job. So I simply (perhaps not the right word - the system is an incredible pain to navigate):
1) Canceled my Harvard Pilgrim with employer #1
2) Signed up for an individual plan with Harvard Pilgrim for three months
3) Canceled that plan and joined the GIC (Harvard Pilgrim again!) once I was allowed to do so.
Now that doesn’t necessarily explain the spike in costs you’re seeing (I didn’t, as far as I remember, incur any costs during my 3 months on an individual plan), but I think folks hopping onto individual plans in between jobs is probably a very common occurrence.
(Something you can thank health care reform for. I doubt I would have shelled out the $1000+ I paid in insurance costs for those three months if I wasn’t required to do so — which means free money for you guys.)
Although there are some people, who are between jobs and their COBRA coverage has ended, that go with the individual coverage. They are not responsible for the “$2,400 per person in monthly medical expenses - roughly 600% higher than what we would have expected” that Charlie Baker referred to.
Nancy made a good recommendation!! Maybe a once per year open enrollment, like any other company, would help unless of course a person can provide a HIPAA loss of coverage letter.
Bill@AdvantageBenefits.com
I think Nancy’s recommendation is a good one. I’ve often thought that an annual open enrollment period could provide the kind of structure that the individual market requires. I also understand that the move from one employer to another - with time as an individual in between - happens, but that’s not the rule. It’s the exception.
But let’s not forget that the reason we have an employer-based system has nothing to do with any market failure that needs to be solved. This system was created by the federal government in the 1940s when the feds made employer-purchased health insurance federally tax deductible. At the time, most people worked for the same company for a long time, and the tax benefit appeared to make sense. It didn’t really keep up with the times, as people’s worklives changed, and we’ve been adding ad hoc solutions to it ever since - without really addressing the changing nature of work or employment.
Thanks for the comments.
Charlie - thanks for a great topic. Your blogs on the intricate challenges of the HMO world (group vs individual) as well as the federal failures (bankruptcy) have been educational.
The greatest take-away I’ve read is that there are still many challenges in creating a system of health care to which everyone can receive health insurance. Bill and Nancy’s points are well-taken. It would be interesting to find out the reasons why those HPHC found to have dropped their insurance actually left the plan.
How do we create a plan in which, to your point, the HMO/market isn’t handicapped by premium-stream interruptas?
How do we create a policy in which individuals do not have to decide on whether to feed their family or pay for health-insurance?
How do we insure everyone?
James - Thanks for reading, and for your comments. I’ll ask if it would be appropriate for us to ask folks why they left. I know we’ve done disenrollment surveys in the past, but those were blinded, third part surveys and usually associated with group coverage, not individual coverage. There might be some privacy issues involved in asking people directly.
Your broader questions are the ones people wrestle with all the time - and the answers vary from state to state and from country to country. I think the effort in MA is a good faith attempt to extend the existing system - with all of its warts - to previously uninsured populations. I don’t agree with many of the details of policy and implementation - and in some cases, I think our approach makes the cost problem worse. But generally speaking, the plan is doing most of what it was intended to pursue when it was enacted. We still haven’t faced up to the cost question in a meaningful way, and in this economy, we probably have to. I’ll write another post on that shortly.
Charlie - I think the “cost question” you talk about made its way on to the front page of the Boston Globe today. Too many people joining Commonwealth Care so they are slowing enrollment numbers by turning off the plan auto-assignment for new members…. basically making people actually choose a plan in order to be covered as opposed to the Connector auto assigining people into a plan and to a PCP even if they make no decisions. To keep costs down they are simply making enrollment more difficult which will make for fewer covered members and lower costs…. a solution typical of a government run entity. I think this move goes to show they have no real cost control options available to them at this time.
I don’t believe that a waiting period achieves the expected objective, providing coverage for all. In effect, you have people who would be counted as insured, but are not actually covered. Any healthcare cost liability would still be theirs, and now they have less cash to pay the bills. The problem is solved by increasing the fee for not being covered to a number HIGHER than the premium. Who would want to drop their coverage. If they change policies, because they change jobs… so be it. At least the loop hole would be closed and the premiums recovered would more closely match coverage costs.
Sean:
Below are the income numbers below for the corresponding family size; for example, a family of 4 earning under 66,156 you are eligible for CommonwealthCare.
First I think that these income limites are too high and encompass too many people–they need to be lowered. Secondly, more importantly, there is no asset test. There are alot of self-employed people (cash businesses) that do not declare alot of income who are eligible for CommonwealthCare.. An asset test needs to be added just like Medicaid for a person trying to get their nursing home bills paid.
Family Size Income at or below
1 $32,496
2 $43,716
3 $54,936
4 $66,156
5 $77,376
6 $88,596
7 $99,816
8 $111,036
Great article Charlie. I agree that an annual enrollment period and/or a 12 month lock in (with some exceptions) would make sense. That is why Medicare Part D has it’s annual enrollment period - you get in and if you want to switch, you do so for next year. Of course, that also required plans to keep their plans the same for the year - but I believe the Connector already requires that.
I think that one solution is to provide a means for pre-existing conditions ot be billed to the individual, but as the state has the power to collect, Harvard would bill the state, notifying the patient that this has been determined to be an excluded pre existing condition, and the tax collect would use its power to collect those costs.
Let the politicians figure out how much of those costs would come out of the uninsured fund and how much would be billed to the taxpayer, and at what recovery rate. For someone earning $200,000 a year, the legislators would certainly call for immediate payment of the $5000-10,000 you are seeing.
I take it these short policies are intended to be bridges between one job and the next, or some other situation. In such a case, a pre-existing condition’s required care should be paid by the previous insurer. The patient on applying should provide proof of continuity of coverage which would allow that insurer to pay. That would address the switching between the lower cost, terrible service plan to a high service plan and then back.
Otherwise, the policy should have a minimum three year contract, or something similar, a requirement in Switzerland, I believe.