Managing Health Insurance Risk
Patrick Ryan, F.S.A., M.A.A.A.
Sr. Actuary
Wellmark Blue Cross Blue Shield of Iowa
Managing Health Insurance Risk: Basics
» It’s critical to maintain random mix of risks:
• 1% of individuals generate 20% of costs
• 5% of individuals generate 50% of costs
• 20% of individuals generate 80% of costs
» Attraction of disproportionate share of high risk will raise
average costs – higher premiums for everyone
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Managing Health Insurance Risk: Basics
» Different risks have different incentives to purchase
coverage
Higher risks:
• Sicker individuals, or individuals vulnerable to illness (i.e., older)
1) Are less sensitive to price
2) Tend to select policies with broad benefits, lower cost sharing
Lower risks:
• Younger, healthier individuals
1) Are highly price sensitive
2) Are less interested in broader benefits
3) Are less concerned about a higher level of medical management
(i.e., an HMO)
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Managing Health Insurance Risk:
Avoiding Adverse Selection
» Disproportionate share of high risks lead to the most
problematic and most predictable insurance problem:
Adverse Selection
– As more high risks enroll, the average per member cost increases
so premiums increase
– The premium increases (triggered by the enrollment of relatively
higher risks) triggers dropping of coverage – or a decision not to
purchase – by younger, highly price sensitive enrollees
– Loss of or failure to enroll younger, healthier risks results in a
further increase in the average per member cost and further
premium increases
– This continuing set of dynamics – referred to as an Adverse
Selection Spiral – leads to increasingly higher average per member
costs –– and higher premiums for everyone
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Managing Health Insurance Risk:
Avoiding Adverse Selection
» Insurers are constantly sensitive to the need to avoid
triggering an adverse selection spiral
» Insurers try to avoid triggering the adverse selection
process by:
1) Trying to attract young healthy enrollees (to moderate overall
costs) by adjusting premiums for younger healthy enrollees to
reflect their predictably lower health care expenses (i.e., lower
premiums)
• Strategies that keep prices affordable by adjusting premiums for
risk
2) Underwriting (e.g., turn down highest risk) and relying on
broader-based funding (high risk pools) than just individual
market enrollees to subsidize highest risk
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Managing Health Insurance Risk: Making
Coverage as Affordable as Possible
Greatest challenge health insurers face: attracting balanced pool
of risks to keep healthcare as affordable as possible
Key Challenge: How to convince healthy
individuals to buy insurance coverage?
• Many healthy individuals: “Insurance is expensive and
unnecessary”
• Older and sicker individuals very motivated to buy
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Managing Health Insurance Risk:
Using Age Rating
Age Rating in Individual Market: Insurers offer lower
premiums to younger individuals
Community Rating (CR): All ages charged same premium
Age
Monthly Age
Rated
Premium
Monthly
Community
Rate
CR if
Youngest
20% Leave
CR if
Youngest
40% Leave
19-24
$149
$267
$301
$354
25-34
$169
$267
$301
$354
35-44
$218
$267
$301
$354
45-54
$268
$267
$301
$354
55+
$350
$267
$301
$354
C/R Increases Premiums by 79%
for 19-24 Year Olds
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Managing Health Insurance Risk:
State Experience w/Community Rating
Guaranteed issue and community rating can have
unintended consequences:
• Fewer Insured: Maine/New Jersey 50% of individual
enrollees dropped coverage
• High Premiums: Premium for a 25 year-old is:
– $1,269/month in New Jersey
– $924/month in Maine
• Reduced Choice:
Underwritten
Iowa premium:
$169/month
– Lowest deductibles in NJ and Maine: $1,000;
– The majority of insurers have left these states
Guarantee issue encourages individuals to delay
purchase until they become sick
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Managing Health Insurance Risk:
Pooling
» Pooling protects individuals and small groups
purchasing coverage from the extraordinarily high costs
of highest risk enrollees
» States have recognized this and have required all
insurers to pool their small group market
• States require health plans to pool all small firms and cannot
vary premiums by more than a specified amount (e.g., 25% in
most states) from average due to health status
• A large claim for a small firm is spread over the entire pool – not
just the small employer
• Premiums cannot increase based on claims experience more than
specified amount (e.g., 15%)
• Result: In the small group market, low-risk firms pay higher
premiums to subsidize high-risk firms
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Managing Health Insurance Risk:
Pooling
» Some states have tried to build on the value of pooling
by establishing state purchasing pools
» Experience with state purchasing pools shows:
• No additional pooling occurs; pooling is still at the
insurer level not at the state purchasing pool level
• Average per enrollee – premiums – costs in any
purchasing pool is determined by health status of
enrollee
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Managing Health Insurance Risk:
Effect of Pooling Arrangements
State purchasing pools do not address cost drivers for premiums
Provider
Payment
Rates
Utilization
Enrollees’
Health
Status
Benefit
Package
Administrative
Costs
Risk/Cost of Care (83-90%)
Health plans negotiate
on behalf of all
members
Risk Selection Issues:
– 5% enrollees = 50% costs
– 20% enrollees = 80% costs
– Small employer risk volatility
Marketing
Agents/Brokers
Billing
Claims Processing
Disease Management
Customer Service
Network Management
Risk/Profit
Taxes
Compliance Costs
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Managing Health Insurance Risk:
Pooling Small Employers
Health Plans Required to Pool All Small Employers
• Health plans required to pool all small firms; cannot
vary premiums by more than 25% from average due to
health status
• A large claim for a small firm is spread over the entire pool – not just
the small employer
– Premiums cannot increase by more than 15% due to claims experience
Community Rating Would Increase Premiums by 30% for
healthy groups
Health Status
NAIC Rules
Community
Rating
Community Rate
if 20% Drop
Tier 1
$346
$454
$476
Tier 2
$399
$454
$476
Tier 3
$447
$454
$476
Tier 4
$526
$454
$476
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In Conclusion
Greatest challenge health insurers face: attracting balanced pool
of risks to keep healthcare as affordable as possible
Key Challenge: How to convince healthy
individuals to buy insurance coverage?
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