Friday, February 12, 2010

What is going on with Anthem Blue Cross in California?

Anthem Blue Cross/Blue Shield (a for-profit BCBS entity owned by the national insurer, Wellpoint) recently announced rate hikes in the individual insurance market in California. Some of the hikes were as high as 39% - and people are outraged. The Obama Administration pounced on Anthem, with Katherine Sebelius, the Secretary of Health and Human Services, demanding that they explain their rate hikes.

As Johathan Cohn explains in his blog on The New Republic website what happens when insurers sell in the individual insurance market:

When insurance companies sell coverage in the individual market--that is, when they offer polices to people one-on-one, rather than through employers--they don’t typically put everybody’s premiums into one big pot. Instead, they usually break up their business into different “blocks.” A block could be everybody living in a particular area, everybody fitting a certain demographic profile, or everybody buying a particular type of policy, just to use a few examples. And after enough people are in a block, the insurer will often “close” it, meaning they don’t add new beneficiaries to that particular group.

Insurers will set the premiums in each block based on their projection of what kinds of medical bills people in the block are going to incur. And so, for example, a block that has a a lot of young, healthy men will probably have really cheap premiums--since, on the whole, young, healthy men tend not to have very high medical expenses.

(Young, healthy women are another story. They have the actuarially unfortunate habit of getting pregnant and having babies.)

Over time, the blocks evolve. And, inevitably, some of those young, healthy men will develop medical problems. They’ll get injuries or develop life-threatening illnesses--the type that require extended hospitalizations, long stints in rehabilitation, and all sorts of prescriptions. Rates in the group will start to go up.

At that point, people in the block will seek better deals. And the healthy ones will find such deals quickly. But the ones with the medical problems won't have such an easy time. If they shop around, they're likely to find only policies that provide way too little coverage or cost way too much. Whether they stick with their existing coverage or decide to switch, they're going to end up paying a lot more for their medical care.

In other words, it is likely that the blocks of business receiving the rate hikes have deteriorated significantly, in that many of their healthier members have left due to affordability concerns. Anthem explained that the rate hikes were due to a combination of this process, known as adverse selection, and general medical cost inflation. Indeed, Bob Laszewski of the Health Care Policy and Marketplace Review finds Anthem's explanation not implausible:

Falling back on my industry experience it is probable:

The “39%” headline is anecdotally the biggest increase the press has found—the average is probably less albeit in the high 20% range.

This is likely driven by a combination of increasing medical cost trend, a bad economy, and anti-selection as healthier people disproportionately drop their coverage leaving a sicker group in the pool.

The rate increase is probably “defensible,” at least actuarially, based upon the actual experience in that block.

Even if Anthem were non-profit, it would likely have had to make significant hikes to its rates as well. Of course, we don't know their profit margin on those blocks of business. We can say that the hikes averaging 20% can't be due to health care inflation, and the bulk is probably due to adverse selection.

This does underscore the need for national reform. While California could reform the rating and issue rules on its own, it does not have the budgetary power to subsidize individual market purchasers enough to get them to buy insurance. The proposed reforms will make premium increases in the individual marketplace far more stable and predictable. The reforms would give people considerable subsidies. The reforms also give the insurance exchanges the explicit authority to disallow unreasonable charges - plus the ability to assess whether the charges are reasonable. Congress must act now.

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