Wellpoint Premium Increases Provide Strong Case For Mandate
The 39% rate increase that some CA Anthem Blue Cross Blue Shield individual policy holders will see later this year has been the subject of much political debate this month. The Obama administration has used it to drum up more support for the floundering health care reform bills, and HHS Secretary Sebelius has ordered a federal inquiry. Wellpoint has maintained that the rate increases are justified given the claims expenses they incur in the individual market (the premium increases in question are only on individual/family plans, not group coverage).
Last fall, I wrote an article about what happens when health insurance is guaranteed issue but people are not required to maintain coverage. The large premium increases that Wellpoint is proposing are a good example of what happens when young, healthy people have the option to be uninsured. The recession has crunched budgets for families all over the country. For people who are healthy, health insurance might have been one of the first things to go. People who are sick and currently in need of care will go to much greater lengths to keep their coverage. And thus begins the vicious cycle. As more healthy people drop their coverage, there is less money to pay claims for people who are sick. So premiums increase, leading to more healthy people opting to go uninsured. The 25% – 39% rate increases happened because healthy people dropped their coverage… but there isn’t yet a guaranteed issue mandate requiring all applicants to be accepted. Imagine how much worse the rate increase would be if that were the case.
Group health insurance premiums increase every year too, but not as quickly as individual policy premiums. Group plans are partially (sometimes completely) funded by the employer. Premiums are automatically deducted from paychecks, and the whole process is somewhat out of the employees’ hands. There just isn’t as much incentive for a healthy employee on a group plan to go without health insurance as there is for a person who buys her own health insurance. People who buy their own health insurance must pay the whole bill, every month. When it’s time for their rate increase, there’s no employer shouldering part of the burden. The option to continue or drop coverage is there every month when it’s time to pay the premium… and if it comes to a decision between the rent or the health insurance, it’s easy to understand how a healthy person might opt to go uninsured.
Eye-popping premium increases will absolutely become the norm if we end up with a system that requires all health insurance policies to be guaranteed issue, without a strong, enforceable measure requiring everyone to be part of the health insurance pool.
I might be for mandate if the amount people were forced to pay in monthly premiums was based on actuarial tables. Obama’s plan forces the young/healthy to pay a wildly disproportionate share of the costs relative to what they use. That’s because the bill artificially restricts the ratios of what an old or unhealthy pays vs what a young or healthy person pays at at 3:1 or 2:1 ratio. Additionally, the healthy will be forced to pay for an bloated plan for coverage they don’t need because of minimum policy requirements. It’s like asking someone who drives a Ford Escort with no accidents to pay at the level of a BMW driver who gets in accidents all the time. Fundamentally Unfair. We would need to have forced physicals, etc. But then we will be on a slippery slope.
Those who will really be screwed are those that make too much money to qualify for subsidies but too little to afford the monthly premiums. I am healthy and young. If my premiums skyrocket, I’ll make it my goal to over-utilize our healthcare system because after all, what’s the point of throwing extra money away every month and getting very little in return?
Adam,
Thanks for your comment – you make some good points. There is some fundamental unfairness to any sort of health insurance system. People who make their health a priority (eating well, exercising daily, not smoking, driving the speed limit, etc.) will always be subsidizing care for people who don’t… and yes, that’s a frustrating subject for me too. But not all health problems are self-inflicted, some are just bad luck. If we don’t restrict the ratios in terms of how much higher premiums can be for older/sicker people, then we’re sort of defeating the purpose of health insurance. The idea is to spread the costs of care across a large population, not to place the burden of payment on the people who currently need care. And none of us knows when we might be in a situation that requires significant medical care. Could be tomorrow, could be 20 years from now.
I think a mandate would require a shift in how people think of insurance. I’ve never used my health insurance for anything more than a physical, and I’ve always paid premiums; paying them on my own without an employer’s help for the last seven years. But I don’t consider that money to have been a waste. What it gives me is peace of mind, knowing the IF something happens, my family won’t be bankrupted.
We pay for things like auto insurance and homeowners insurance, hoping that we won’t ever have to use them. But for some reasons, people look at health insurance differently, and we often hear people saying that the policy isn’t doing them any good if they don’t use it, or if they have a high deductible. We need to get back to the mindset of what insurance is all about – it’s not supposed to be something that we use. It’s there just in case, as a safety net.
From what I’ve seen, it looks like a family of four would qualify for subsidies with an income up to $88,000/year. It’s hard for me to picture a scenario in which a family earning more than that amount would be unable to afford monthly premiums.
Thanks Louise. I am probably being a little selfish in hindsight and do understand the goal of spreading the risk. If you have a pool of all sick people, of course the premiums will be high!
A family earning 88K a year would definitely not need assistance. However, I am envisioning a young single person just starting out in life. Some of my friends are earning in the low 40′s and paying over $400/month in student loans,(That’s a whole other issue), trying to save for a house, and starting families. Living in Chicago, the sales tax is 10.25%, the highest in the nation, rents, and the cost of living are exorbitant. An added monthly bill could be a budget buster for some. (Others can afford it.)
I really think the pharmaceutical industry needs to be reigned in, tort reform needs to occur, and the admin costs/waste needs to be cut in the healthcare industry. That coupled with a mandate might lower the costs across the board. I’m not an expert. I’m also wondering if at least some of recent the rate hikes are partially a result of the insurance companies strategy to push for a mandate that would result in a glut of new healthy customers who pay in but take very little out. Just some thoughts.
Adam,
I agree completely that we need to address the costs that are driving health insurance premiums into the unaffordable range for a lot of people. The pharmaceutical industry is a great place to start, as their profits exceed pretty much every other sector in healthcare. Tort reform also needs to be addressed, although most of the data I’ve seen indicates that even solid medical malpractice reform wouldn’t have much of an impact on costs. It remains to be seen what will come out of the investigation into the recent premium spikes in the individual market. The individual market is a lot more volatile than the group market – people purchase their own policies, and thus the coverage is much more likely to be dropped if the family budget takes a hit. And it makes sense that people who are healthy will drop their coverage in larger numbers than people who are sick. So it makes sense that Wellpoint could very definitely have lost money in the individual market that is facing the rate increases.
I agree that it will be a challenge for young people who are just starting out to pay for mandatory health insurance. But my concern is that if we don’t make it mandatory, young people who are sick will be completely out of luck. It seems more fair to make it a challenge for everyone, rather than an impossibility for those who need it most. Hopefully, if we have enough healthy people paying into the system, combined with income-based subsidies, health insurance will become more affordable due to true cost sharing.
Thanks for stopping by and being part of the discussion!
Very interesting. Those are some good points. It’s hard for young people starting out to afford high premiums with a lower income, student loans, etc. But I think it’s irresponsible for the to opt out, because they are going to age and their usage will increase. I drive an older model Honda Civic, but have no plans of ever owning a BMW. I’m also young and healthy with no plans of getting old or sick or hurt either, but I don’t have complete control over that one.
Trosenkoetter,
My plans for my health are much the same as yours, but I agree – we don’t have as much control over that one. I’m hoping that my health insurance never gives me any benefits at all other than peace of mind, but it’s definitely an expense that I consider to be essential.
Louise:
I feel the same way about insurance, particularly car or homeowners, which is a fraction of their market values.
But, when one is paying more than $1,000 a month for “insurance,” one’s expectations are a bit higher than ” I hope I never use it.”
Even whole life insurance (which is much more expensive than term life) has a cash surrender value.
Don Levit
Don,
Definitely a good point about the cost of health insurance versus the cost of auto or homeowners insurance. For my family, our health insurance costs about four times as much as our auto insurance, and about six times as much as our homeowners policy. But people who pay $1,000 a month for for health insurance are still the exception to the rule. Most of our clients have policies that cost less than $600/month, even for families (for a single individual, the cost is usually less than $200/month). $1,000 a month for a family on a group policy is very typical, but those costs are usually partially covered by the employer.
My feeling is that if more healthy people join the pool of insureds, the premiums will become more affordable for everyone. But if people feel like they need to get some “value” out of their health insurance policy, we end up in a cycle that continues to perpetuate itself… basically, the more we utilize health care, the more our policies pay out in claims, and the more premiums increase. And as premiums increase, more people are unable to afford coverage and drop their policies, which in turn triggers rate increases for the people who remain insured.
There aren’t any easy solutions…