The Private Health Insurance Market: Treatable or Terminal?
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Publication Date: March 05, 2002 Other Availability:  Printer-friendly summaryPermanent Link: http://www.urban.org/url.cfm?ID=900490 Share:       When individuals and families face life changes including moving, changing or losing jobs, or a young family member graduates from college and becomes independent, health insurance can be a problem. Our March First Tuesday panel discussed the current state of the private health insurance market. Questions they explored included: Is the private health insurance market functioning well? The panel included: Marilyn Moon, Urban Institute; Linda Blumberg, Urban Institute; Mary Nell Lehnhard, Blue Cross Blue Shield Association; Karen Pollitz, Georgetown Public Policy Institute; Ward Sanders, New Jersey Individual Health Coverage Program. Panel Highlights | Questions from the Audience | Full Transcript
Panel HighlightsBob Reischauer, Urban Institute:
Questions from the AudienceUnidentified Woman: "....I was wondering if you think the private health insurance market [could] work [if we instituted] reforms like the ones in New Jersey? Community ratings, standardized contracts, underwriting....If we mandated that people bought coverage and we gave people subsidies to buy that coverage—it seems like you need all three of those things together in order to get around these adverse selection problems. And I'm wondering what you think about that." Mary Nell Lehnhard: "There is no question that, if you mandated coverage, you'd go a long way to solving the problem in the individual market ...(and)...in the employer market. What you do is get your optimum mix of risks and....you can ask the....healthier people to subsidize the sicker people as much as you want to and nobody can leave. So, the answer is yes, it would help tremendously....The question is, is it politically feasible....But, with respect to your question on New Jersey reforms, I think you have to look at are they working? I mean, the coverage has gone from 170,000 to 90,000 and I don't know how much of that is within the small group market, but it couldn't be a huge amount of that. And the coverage for what we would consider the standard policy—$500 deductible, 80/20 copay—is $14,000 a year for an individual.... So, that HMO rate was way at the outer range of low cost. Most of the policies are much more expensive, again, than any other policies the people in the Kaiser study got. So, I wouldn't say that that's working optimally in New Jersey and they're, you know, trying to figure out how to deal with it. And it gets back to the high-risk—the healthy people are asked to heavily subsidize the sick people and they said no and they left the market...." Ward Sanders: "I would definitely agree with Mary Nell, that if you made this a mandatory market, that you would improve the risk pool, but that it's probably politically not feasible. In looking at New Jersey, one of the things that we found was that there had to be a range of products that are offered. The indemnity market, which the prices that she was citing for, you know, the carriers—the non-HMO carriers—the lower deductible options and so forth. There is an incredible amount of adverse selection and, as a result, indemnity-based plans—and there's really only Horizon that's offering the indemnity and a couple of others...." Ms. Lehnhard: "Excuse me, it's PPO.... It's just got indemnities in it." Mr. Sanders: "There are some managed care elements to the plan, but there's been a lot of selection against those plans. As a result, enrollment has really shifted to the HMO plan. You could look at a $250 deductible in New Jersey with a 20 percent co-insurance. The rates are going to be astronomical, there's no question. It's just that those got selected against pretty severely and, as a result, the enrollment has shifted. So, really managing the HMO plans.... is really where the enrollment is and.... it's feasible. The lower deductible options and the lower co-insurance amounts just have not worked at all." Linda Blumberg: "I think that the subsidies — in particular markets like in New Jersey and in New York — could be helpful for those individuals who are trying to find affordable...coverage....in those markets, where there is something that's available to everyone. In terms of the market, .... while politically—if we don't feel like we could mandate everybody....getting covered—can we mandate that everybody contribute to paying for the high cost? As I said, I don't think the high-risk pools as they're currently structured are sufficient for doing that, because of the way the funding streams work and what the premiums are. But, if we came up with a mechanism for paying for the coverage for these excess costs basically, for the high-risk population, or the less healthy population, then I think we could....come a long way to getting where we wanted to be by forcing universal pooling through mandated coverage. We need to get those dollars from the full population, in my opinion, and not just from those that are moving in and out of particular markets." Peggy Rhoades, National Coalition on Health Care: "Would the panel suggest a level of tax credit that they think would provide a significant increase in coverage for this group? There are lots of design issues when we talk about covering this group, but it seems to me that the one that is the most glaring is the size of the tax credit. How large would it have to be to make a significant number of people move into the ranks of the insured?" Ms. Pollitz: "If you go to the databases that talk about.... per capita health spending in this country, I think it's riding just above $4,000 a year, per person. ....that's what we spend on health care in this country per person. You know, insured I could sell everybody in this room a health insurance policy right now that cost $1. Anybody want it? It will only cover a toothbrush. But, I will sell you a policy for $1 right now. So, your design issue has to really be, how insured do we want people to be? And then I think you can answer that question.... It is true that each of our hypothetical applicants in every market, with the exception of the HIV positive guy, who kept getting turned down—it is true that in every market, each one of our applicants got at least one offer that was "affordable." But, let me just tell you a little bit about what those inexpensive offers were. Alice, our lady with hay fever, in Tucson, got offered a policy that is $66 a month. But it didn't cover her allergies and it had a $1,000 deductible. So, she could get a cheap policy in Tucson, but those were the terms. Not what she was looking for. Bob was a 36-year-old who had a knee injury in Richmond, Virginia. He got offered a policy for $69 a month. Didn't cover his knee. His knee would never be covered. We had a breast cancer survivor named Denise, who's 48. She got offered a policy for $178 a month in Chicago. Didn't cover her breasts. They're just not covered. We had a depressed widow named Emily, who's 56. She got offered a policy in Corning, Iowa: $184 a month. Pretty affordable. Will never cover any mental or nervous condition, ever; that's excluded. And finally, we had a—oh, we had a 62-year-old who had hypertension and he was overweight. He couldn't get it for $300 a month, but in Chicago he got offered a policy for $394 a month. It excluded his circulatory system. I don't even know what's covered when your circulatory system is excluded, but that was the offer that he got. And finally, we had a family applicant. They—we called them the Cranes—and they were all healthy except for their little boy, who had asthma, and in Fresno, California, they got offered a policy that was $141 a month, but it excluded their little boy, all of him. So, there is affordable coverage out there in this market. There is no question about it. But, it is not what I would call complete coverage. It is not what I would call desirable coverage. People buy this stuff because they're desperate, and they buy what they can afford, but it's not necessarily good coverage. And if we're going to design a tax credit that lets everybody buy something affordable, I think we ought to also pay attention to what's covered, because otherwise, I think we're going to be spending a lot of money on a problem that won't really be fixed at the end of the day. Ms. Blumberg: There's a double bind in trying to figure out what the optimal tax credit—size of the tax credit would be. Because....you need to have a subsidy that approximates the cost for very low income people, the cost of an available premium. The problem is, is that if these credits are restricted essentially, for use in the non-group insurance market, you set up a situation where the more generous you become with the credit, the more attractive for some individuals the non-group credit's going to be. If you believe, as most economists do, that employers' behavior and their decisions to offer health insurance reflect the underlying demand for coverage from the workers in those firms, then once you start picking away of more and more of the individuals, particular types of individuals, the healthier individuals, in those markets, the lower the demand for employers providing health insurance would be. So, you set up the system where you are attracting more and making non-group coverage more affordable for many people in the non-group market, but at the same time, you're losing employer-sponsored insurance. And the truth, from what we know from looking at behavior today, [is] that the probability here in the non-group market of buying a non-group policy is substantially lower than the probability that you're going to buy a group policy if your employer offers it to you. And so what happens is we do pick up some of those people who'd rather be in the non-group market and have higher wages as a consequence, but we also lose a bunch of people who had employer coverage, now the employers drop because the demand in that particular firm went down, and they never pick up or they can't get the non-group coverage. So what we're finding in trying to look at this quantitatively, is that it's very difficult to increase the size of the non-group credit, without also doing substantial damage to the employer market at the same time. And you end up spending money on credit and getting very little net gain in coverage as a consequence. Mr. Sanders: In closing, if the subsidy has to approximate the cost of the coverage to make it effective for low-income folks, the individual market would not seem to be a really very good vehicle to do this. Because, as you've seen here today....people have tried different solutions, and no matter what model you use—there are certain difficult consequences. Because this is an expensive market to cover, folks. Kala Ladenheim, National Conference of State Legislatures: "....What kind of experiences have states had with making the individual market more affordable by mandating different sorts of reinsurance mechanisms after people who are pooled in the normal market, rather than being pooled into a high-risk pool?" Ms. Lehnhard: "We have looked very closely at this, because I actually think this might do more to make coverage more affordable and more comprehensive than—possibly than tax credits. If you could take that highest risk category, and say....we're going to subsidize this publicly. Not just for the high-risk pool, but we're going to take maybe that 5 percent, or maybe not even that much, and subsidize this, then insurers wouldn't have to be so worried about pricing recoverage or screening high-risk people to keep the coverage affordable for the best risks, so they don't lose them. The NAIC struggled for years on how to set that model up, and it is extraordinarily complicated. The equity issues are enormous, the administrative issues are enormous, but I think they spent about two years looking at it and I don't know of any state that ever implemented any kind of—except maybe New York did something, but I don't know how well it worked. It is just extraordinarily complicated." Ms. Moon: "....if you take the top 5 percent off—as from your earlier number—you're taking 50 percent of the cost.... Ms. Lehnhard: "Well....it's not the 5 percent, it's something short of that. You don't want to take all of that away, but a certain amount of that—if you look at the fact that our individual healthy subscribers are saying, 'we won't subsidize it.' When I first started working for Blue Cross, our individual and small group markets were merged together and they subsidized each other and the small employers said, 'If you keep doing that, we're leaving you.' Nobody wants to subsidize the sick as long as they're healthy. You know, tomorrow's another story." Mr. Sanders: "With respect to New Jersey—the assessment mechanism, that's the model that I really know—is that there is a requirement that all carriers issue individual coverage or ....(pay) an assessment to cover the losses of the carriers in the market. It's a little bit more complicated than that, but it's proven—one of the difficulties is that, at the state level, you can't get at an assessment of self-funded arrangements. I don't know what the percentage is in New Jersey of the folks that are self-funded, but it's a pretty big chunk. We can only go after the insurance companies that place the greatest burden on the Aetnas and the Horizons, Blue Crosses and so forth. At the state levels, it's difficult to spread that burden around. We're probably burdening carriers as much as we can, but to provide more of a subsidy, I think the solution will probably have to come from the federal government." Ms. Lehnhard: "Years ago, we used to ask—many of our plans used to ask —their large groups to pay a 1 percent subsidy to the individual market, because they all used to be pooled together. The thought was, when the larger employers started having their own pools, they should contribute to the individuals, but that's history now." Burt Seidman, the Alliance of Retired Americans: "....In industrialized countries all over the world that have what they call universal health insurance, many of them have employer-based programs, some do not. But, with respect to those that do have employer-based programs, there must be a group of people who, for one reason or another, don't come under the employer-based programs. And I wonder if anybody has looked at how they are able to cover the people who don't achieve coverage through the employer-based program, and whether it would be of any use to us to have that information?" Ms. Moon: "What? Americans look at what other people in other parts of the world do? What a radical notion. I think that's a very good suggestion and I don't have a clue. Does anyone on the panel? That's a topic for maybe another First Tuesday one of these times, but I think that's a very good question." Bob Lerman, Urban Institute: "I think there's a bit of a confusion about what is insurance. Some of the examples that Karen used are sort of ongoing payments, in a way. It's insurance in that you don't know exactly what it's costing, but it's not some unanticipated event that simply happens on a kind of random basis and then somehow, you know, comes out. It's far from random. I think that there is a confusion about what it means to say the market is or isn't working. Certainly evidence of 40 percent administrative costs means something is happening in which, for one reason or another, a lot of energy is put into things that don't have directly to do with health expenses. But, as far as the issue of the nature of subsidies....if somebody said....you have to subsidize somebody's housing because their normal housing is—they're not able to afford it, and you say, ...does the housing market work, you wouldn't use that as a criteri[on]. I think it's very important to separate these issues.... Third point has to do with the issue of life cycle. Some of these issues are problems because of the life cycle and we have sort of one-year enrollment periods. If you could somehow say, when I enter as a young person, ....part of that subsidy will go toward my policy when I'm older, or something like that—I don't know how you would link it. There is a very important life cycle component and somehow separating out these different things would be [an] important move toward clarity. Ms. Pollitz: "I think that that's actually the problem....That the randomness about....getting sick isn't a matter of if this will ever happen to us. This'll happen to all of us. It's not like your house burning down. A lot of us will go through our whole lives and our house won't burn down, thank God. Very few of us will make it from cradle to grave without being in the hospital. We're born in the hospital....That's your first big claim, is being born....And most of us check out through a hospital, and in between, things happen. So it's not a matter of "if," it's a matter of "when." We can be darned sure that, in the course of our lifetime, at some point, we're going to land in that little 5 percent pool that Mary Nell talked about. We may not stay there forever, but we'll do some time in bad end of the risk pool and then we'll get better and life will go on. We buy insurance a year at a time, or we buy insurance a job at a time, and then things change. We have a birthday, ....the calendar turns over, we change jobs, we retire, and then you have to hit it again. And it's those changes that tend to bring people into this market, and then you are what you are, you're not random anymore. You either are a breast cancer survivor or you're not. You either have a kid with asthma or you don't. You either have high blood pressure or you don't. But you're not random anymore; you're just trying to stay covered. You had coverage before but things changed and now you have to get new coverage. This is where a lot of people kind of fall out of the system. So, I think you're right, that part of the problem is that we buy insurance —it's like buying toothpaste, a squeeze at a time. Who does that? But we buy health insurance one day at a time, or one month, or one year, or one job at a time, instead of just saying when you're born you're covered and then that's it — you're just covered. And that, I think, is part of the dynamic that makes this market particularly difficult...." Ms. Moon: "I think another way that insurance is different in health care than in some of the other insurance markets is the fact that Americans have shown....that they value first-dollar coverage, even though that's not insurance. But first-dollar coverage is not what's driving [the] cost [of] health care. First-dollar coverage—if we had a $200 deductible for everyone or a $500 deductible for everyone, the cost of health care wouldn't really go down that much. It's that 5 percent that's spending 50 percent that's really the problem. As economists, we spend an awful lot of time worrying about whether insurance is providing first-dollar coverage....sometimes missing the point. It's also the case that there's not very much first-dollar coverage left out there....certainly not in the small group or individual insurance market, where you're more likely to be talking about $1,000 or $2,000 deductibles in many cases. And remember, that's for covered services only. If you go to the doctor and the doctor charges you $70 and the insurance company says $35 is what they should have charged you, your 80 percent—the 80 percent contribution they're making is on the basis of the $35, not on the basis of the $70 — you can very quickly end up paying 60 or 70 percent co-insurance and not have very much count towards your deductible. So, we're not talking about really generous insurance policies in many cases out there at the first dollar anymore. Not even for HMOs, which used to be where people would go if they wanted first-dollar — absolute first-dollar — coverage. Almost all HMOs now have co-pays. They have all sorts of other aspects, because that's the easiest way to hold down the cost of care, rather than doing the other kinds of management. Anyone else want to add anything? Let me give everybody on the panel a chance to have one last word on what they'd like people to take away as a message, or something they didn't get to say...." Ms. Blumberg: "I think the point that I would have you take away is that when we're thinking about mechanisms for expanding coverage, we have to think in a two-pronged approach. We have to, number one, provide subsidies to the individuals who are low income and, because of their low income, cannot afford a health insurance policy. But, the second prong, that sometimes we forget, is that the risk pool matters a lot. And if we're going to be able to do this in an effective way, to expand coverage to individuals in a long-term way, we need to find a much broader way to spread the risks—the costs of those individuals whose expenditures are above average. And I think that that mechanism for spreading those costs has to go well beyond the insured population, in order to make subsidization in a private market work effectively." Mr. Sanders: "I guess my take-home message is that the individual markets, no matter how you construct them, are necessarily nasty and brutish — there's really no magic bullet, that's incremental in nature, that's going to solve this problem. If you're looking at tax credits or subsidy mechanisms, this is probably not the vehicle for expanding coverage significantly. Existing....(programs) like the Medicaid platform and KidCare ....the CHIP programs, probably provide a better vehicle for expanding coverage." Ms. Lehnhard: "I guess I would leave with the message of unintended consequences, since there's a lot of discussion about reform — because we're looking at tax credits for displaced workers and just tax credits in individual markets. I can think of four states where, because of the reforms in the state, we were the only carrier left and, finally, we shut down. In Washington, there's no individual coverage available....And that is extraordinarily rare for us. We stay in there till the bitter end. But again, if you ask the healthy to do too much to help the unhealthy, they'll leave and that's how you pay for everything." Ms. Pollitz: "Okay. I guess I would end by saying that, as difficult as this market is—and I agree with virtually everything that's been said about that—even if you decide that maybe these tax credits aren't such a hot idea and you don't want to do that, this is still a market that you need to contend with. Because it is what's left for people when they don't fit into the other boxes in our system. And it is a market that many of us will spend at least a little bit of time in, at some point in our life. So, at some point, as awful as it is, I think we're going to have to reconcile ourselves to doing something to either make this market work better, or to replace it with something that works better."
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Marilyn Moon, Urban Institute:
Karen Pollitz, Georgetown Public Policy Institute:
Ward Sanders, New Jersey Individual Health Coverage Program:
Mary Nell Lehnhard, Blue Cross Blue Shield National Association:
Linda Blumberg, Urban Institute: