Saturday, March 1, 2014

ACA Health Insurers: What the Heck Did We Insure and the “Young-Vincibles”

“Insurers are rushing to gather health information from the new customers they won on public marketplaces in a high-stakes outreach effort crucial to their hopes of profiting from the health-care law.

Health plans need to know the health status of those signing up for coverage so they can project whether the costs are likely to outrun the premiums coming in. That information will be critical in figuring out prices for next year, among other things. But, under the law's new rules, enrollees don't have to disclose pre-existing conditions to buy insurance.

Insurers still generally have only early signals, including age and gender, on the four million people who federal regulators say have signed up so far for marketplace coverage. Those details don't paint a full picture of the insurers' potential risk and may even be misleading. That's partly because the young people who sign up for health coverage may be those more likely to have serious medical needs, insurance-industry officials say.

To fill in the blanks, insurers are calling, emailing and writing letters to new enrollees, urging them to divulge information about their conditions, prescriptions and even personal habits, often through online forms called health-risk assessments that have long been used in employer-sponsored wellness programs.” - Health Plans Rush to Size Up New Clients,, 02/27/2014


It should be self-evident that the above procedure is not how the insurance mechanism works. An insurer is not in the business of guessing what risk aspects are associated with particular risks and guessing a price. Rather, the insurer measures the risk first then assigns a price to insure the risk. For example, beach front property in Myrtle Beach, SC represents a different risk and associated price than property located in Billings, Montana.

One can quickly see that the one story brick ranch designed home in Billings, Montana is going to be overcharged to subsidize the beach front frame designed home in Myrtle Beach, SC.

One also needs to pay particular attention to this passage in the article: “That's partly because the young people who sign up for health coverage may be those more likely to have serious medical needs, insurance-industry officials say.” The problem expressed in the passage is that one may well end up with an inordinate amount of beach front property and few homes in Billings, Montana. Better yet, the insurer has no idea how many beach front properties it has acquired. Oops!

Upon further reflection, the passage “That's partly because the young people who sign up for health coverage may be those more likely to have serious medical needs, insurance-industry officials say” points out another possible trend/pattern. How so?

ACA/Obamacare, the supposed design thereof, is predicated on a cross subsidy [the least wealthy and most healthy subsidizing the least healthy and most wealthy] associated with signing up 40% of the insured’s in the category of ages 18 to 34. The current percentage is 25% in the age group 18 to 34. What if the lower than projected sign-up rates, 25% vs. 40%, in age group 18 to 34 is associated with the healthy people in age group 18 to 34 not signing up and the less healthy in age group 18 to 34 signing up?

Stated alternatively, age group 18 to 34 is the prize group in the supposed design of ACA/Obamacare. If the scheme designers can attract 40% of the total risk pool from the 18 to 34 age group everything will supposedly be great and grand and the scheme succeeds. But what if the prized group is not the “young invincibles” of stellar health but rather populated by the "young-vincibles" with non-stellar health that represent a much higher price to insure than the designers imagined? If the prize group, the plum as it were, is in fact populated by the young-vincibles then the cross-subsidy fails and more price pressure is exerted upon the total scheme.

This aspect of the ACA/Obamacare exercise ends as:

(1) the designers of the ACA/Obamacare scheme put much weight on a cross subsidy based on the young subsidizing the old. The scheme is predicated on 40% of the exposure units being in the age group 18-34. The scheme only attracted 25% in the age group 18-34,

(2) the same schemers assumed the exposure units associated with the age group 18-34 group would be, in the main, healthy and with low utilization of health-care and hence health insurance. The assumption is reasonable if one takes the group as a whole. A problem arises when the aspects of "the group as a whole" is supplanted with "the group as a hole",

(3) rather than "young invincibles" populating the 18-34 group, the group is populated by the "young vincibles". That is, rather than the 18-34 group having the health aspects associated with the group as a whole, the group is made up of the less healthy segment of the 18-34 year olds with the more healthy not participating,

(4) the cross subsidy of the young to the old, partially or fully fails in its mission as a subsidy, as the price to insure the actual group of 18-34 attracted to the scheme is much higher than designers imagined as the actual group insured does not exhibit the health aspects of the group as a whole.

Link to the entire Wall Street Journal article appears below:







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