Inside the Black Box:
Special Considerations in
Individual & Small Group
AcademyHealth - June 8, 2004
Jerry Winkelstein, FSA, MAAA
Blue Cross of CA
5/29/2016
1
Individual/Small Group/Large Group Comparison
Individual
Small Group
Large Group
1. Issuance
May decline
Guarantee issue
May decline
2. Individual medical
underwriting
Yes
Depends on group
size
None
3. Level of anti-selection
High
Medium
Low
4. Rating restrictions
Varies by state
Usually +/- X%
None
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2
Individual Medical Underwriting → Claim Cost Duration Curve
1.16
1.2
1.02
1
0.85
0.93
0.95
0.77
0.8
0.6
0.6
0.47
0.4
0.2
0
1st Qtr
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2nd Qtr
3rd Qtr
4th Qtr
Year 2
Year 3
Year 4
Year 5+
3
Claim Cost Duration Curve → 3 Different Rating Approaches
1)
Aggregate Rating – All insureds with same attained age pay same
rate
Monthly
Premium
$120
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Monthly
Premium
$120
Male Age 45
Male Age 45
Insured Since 1984
(20 years of coverage)
Insured Since June 7th, 2004
(1st year of coverage, just completed
medical underwriting)
4
Claim Cost Duration Curve → 3 Different Rating Approaches
2)
Durational Rating (with Re-Entry Underwriting) – More recently
under-written business pays less
Monthly
Premium
$114
Monthly
Premium
$171
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Male Age 45
Male Age 45
Insured Since 1984
(20 years of coverage)
Insured Since June 7th, 2004
(1st year of coverage, just completed
medical underwriting)
5
Claim Cost Duration Curve → 3 Different Rating Approaches
3)
Experience Rating – More recently under-written business pays
less, amplified by prospective evaluation.
Monthly
Premium
$105
Monthly
Premium
$315
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Male Age 45
Male Age 45
Insured Since 1984
(20 years of coverage)
Insured Since June 7th, 2004
(1st year of coverage, just completed
medical underwriting)
6
Aggregate Rating → A Closer Look
 Primary rating scheme of Blues




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Pros:
Protects insureds against large premium increases if they become
“un-healthy”
Encourages “lifetime partnership” – basically saying “we will not
discriminate against you rate-wise if you become chronically ill”
Con: Higher initial premium rates
7
Durational Rating → A Closer Look
 Primary rating scheme of non-Blues






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Pros:
Lower initial premium rates, in a very competitive market
More equitable
Cons:
More administrative work involved with re-underwriting evaluations
Raises sicker insureds’ rates at a time they can least afford it/leads
to “closed block” problem/encourages regulatory intervention
8
Experience Rating → A Closer Look
 Rating scheme used by a small minority
 Every renewal year, every insured is placed in 1 of 3 buckets:
Healthy –
Given only a
trend increase

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Less Healthy –
Given a trend
increase +5%
Least Healthy –
Given a trend
increase +25%
Total premium rate limited to 300% of new business rate
9
Experience Rating → A Closer Look

Pro: Lowest initial premium rate

Cons:


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More administrative work
Ethical/Morality issues/strongly encourages regulatory intervention
10
Uninsured Issues – Does Guaranteed Issue/Community Rating Work?

New Jersey implemented
Guaranteed Issue several years
ago, so that all residents have
access to “affordable” Individual
Health

The more appropriate way to reduce the
“sicker” uninsured is through a State-run
pool with assessments; maintaining
affordable rates for the majority of
insureds who could pass medical
underwriting
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11
Uninsured Issues – Does Guaranteed Issue/Community Rating Work?

Due to Assessment Spiral caused by several years of healthier insureds
exiting the market, current monthly premium rate for a $5,000 deductible,
50/50 MM coverage for age 42 single male = $376
 In a medically underwritten environment, it would be approximately $77, or
80% LESS!
$400
$350
$300
$299 less or
an 80% Savings
$376
$250
$200
$150
$100
$77
$50
$0
Guarantee Issue,
Assessment Spiral
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Medical
Underwriting
12
Uninsured Issues – Is Pooling the Answer?
 Many politicians tout Pooling as the answer to
reducing the risk of covering the uninsured under
Individual Medical
 Pooling reducing the variance of the claim loss
expected. Pooling claims above $50,000/year will
reduce the overall claim level by 18%, if no Pooling
charge
 Pooling does little to reduce the overall level of the
claim
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13
Uninsured Issues – Is Pooling the Answer?
 Claim variance is not even a minor concern to the
major Individual Medical cariers in a State.
 It is the overall claim level that is of concern to
Individual Medical carriers, especially if they asked to
provide guaranteed issue in return
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14
Small Group – Late 70s/Early 80s, The Time of Abuse
 There were few State laws protecting the




marketplace
Small Group Carriers became increasingly
“cannibalistic”
JALIC Experience – Slamming 5% of the Worst
Groups was worth 8% to entire block
“Where did the ‘bad’ groups go?
Uninsured MEWAs were “pyramid schemes”
who went bankrupt, leaving “insured” Small
Groups uninsured!
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15
Abuse → Small Group Reform
 Regulations vary by state
 Rationale
 Small employer market is not as sophisticated or
powerful as the large group market and therefore
needs regulatory intervention
 Purpose
 Promote availability of health insurance to small
employers
 Prevent abusive rating practices
 Limit use of pre-existing condition exclusions
 Improve fairness of small group market
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16
Small Group Reform Mandates
 Guarantee Issue
 Definition of Small Group Employer
 States typically specify what rating variables must be
part of the +/- X% restriction




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States typically allow +/- 25% variance for health status
or claims experience, with additional factors allowed for
industry (e.g. +/ 15%) or group size
Some States allow complete rating freedom
Other states are community rated—no rate variation
allowed
California: Allowed rate variance is +/- 10%, including
health status, claims experience, industry and group
size
17
Why AHPs Would De-stabilize the Small Group Marketplace
 Proposed Association Health Plan regulations would seem
to set the stage for a return to the abuses rampant in the
late 70s and early 80s, by eliminating State oversight.
 AHPs would self-report problems and rely on the US DOL
for oversight. The US DOL has testified that it could review
each health plan only once “every 300 years”.
 Multi-State AHPs could be exempt from State Reform
rating rules leading to the following:
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18
Why AHPs Would De-stabilize the Small Group Marketplace
Assume that the Small Group marketplace consists of the
following 4 types of groups, in equal numbers, and is in a +/20% State:
Group A [60% of Average Cost]
Group B [95% of Average Cost]
Group C [105% of Average Cost]
Group D [140% of Average Cost]
Total
Average Cost
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Underlying Cost
$120
$190
$210
$280
$800
[$200 x 60%]
[$200 x 95%]
[$200 x 105%]
[$200 x 140%]
$200
[$800/4]
19
Why AHPs Would De-stabilize the Small Group Marketplace
Before AHPs enter the market, carrier having equal
numbers of A, B, C, D price as follows:
Group A
Group B
Group C
Group D
Total
Underlying Carriers Pricing with +/Cost
20% Restriction
$120
$160
$190
$190
$210
$210
$280
$240
$800
$800
Average Cost x RAF
[$200 x 0.80]
[$200 x 0.95]
[$200 x 1.05]
[$200 x 1.20]
Carriers are able to price
appropriately to cover costs
with A’s subsidizing D’s
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20
Why AHPs Would De-stabilize the Small Group Marketplace
AHPs will enter market and will be able to under price A
and overprice D versus the market. Eventually, the AHPs
will get all A and no D
Group A
Group B
Group C
Group D
Total
Underlying
Cost
$120
$190
$210
$280
$800
Carriers Pricing with
+/- 20% Restriction
$160
$190
$210
$240
$800
AHP Pricing Not
Restricted to +/- 20%
$120
$190
$210
$280
$800
AHPs under price Group
A versus the market
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21
Why AHPs Would De-stabilize the Small Group Marketplace
AHPs will be able to rate all Groups (A, B, C, D)
properly!
But, look what happens to the rest of the market
that has to obey State Small Group rating
regulations
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22
Why AHPs Would De-stabilize the Small Group Marketplace
After AHPs enter the market, carriers will get no A and B, only C
and D
Carriers Before AHPs
Group A
Group B
Group C
Group D
Total
Average Cost
Percent in Group
Before AHP
25%
25%
25%
25%
100%
Cost
$120
$190
$210
$280
$800
Price
$160
$190
$210
$240
$800
$200
$200
Carriers After AHPs
Percent in Group
After AHP Enter
Average Cost
the Market
Cost Price
x RAF
0%
$120 $196 [$245 x 0.80]
0%
$190 $196 [$245 x 0.80]
50%
$210 $210 [$245 x 0.86]
50%
$280 $280 [$245 x 1.14]
100%
$980 $980
$245
Carrier loses Group A and Group B because they cannot
compete with AHPs. For Example, the lowest they can charge
Group A is $196 while the AHP can charge $120.
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23
Why AHPs Would De-stabilize the Small Group Marketplace
The bottom line:
 A’s and B’s will get lower rates, at the expense
of C’s and D’s
 Avoiding State benefit mandates adds small
amount to increased AHP competitiveness; Is
this desirable?
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24
Individual / Small Group – Rate Increase Anti-Selection
Assumptions:
 10% rate increase causes 1.5% additional lapses
 The additional lapses have morbidity 80% of the
average for the plan
 Prior claims pmpm = $200.00
 1,000 Prior Members
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25
Individual/Small Group – Rate Increase Anti-Selection
Before Rate Increase
$200 PMPM Average Claim Cost
1,000 Members
After 10% Rate Increase
$200.61 PMPM Average Claim Cost
985 Members
15 Members
($160 PMPM)
Total Claim Cost
$200 PMPM x 1000 Member
= $200,000
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Total Claim Cost
($200.61)(985) + ($160)(15)
= $200,000
26
Individual/Small Group – Rate Increase Anti-Selection
 Prior Monthly Claims pmpm = $200.00
 New Members Claims pmpm = $200.61
 $200.61 is 0.3% higher than $200.00
 Therefore, for each 10% of rate increase, there will
be a 0.3% additional claims pmpm increase (on top
of normal trend)
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27
Thank You
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28