Medicare- Insights from Risk Pool Analysis

Risk Pool Analysis Foretells the Future and Explains the Successes and Failures of the Following:

1. Private health insurers before the Affordable Care Act

2. Private health insurers in Medicare Advantage plans

3. Private health insurers in Obamacare

4. Why the Paul Ryan voucher-premium support plan will ultimately be a Medicare train wreck in regards to providing sufficient funding for the sicker more costly patients

5. What will happen with the Paul Ryan premium support plan to Medicare
participants who currently have traditional Medicare
            When bad things happen to good people…

General comments on risk pools:

An insurance risk pool reflects a mix of low cost participants with high cost participants in relation to the plan’s compensation for covering those individuals. The number of high cost patients in a medical risk pool is a very major determinant of a plan’s success. Too many high cost patients make a plan unviable and will result in a private insurer leaving the market. Obtaining a favorable risk pool in relation to compensation is the key goal of private insurers and the key to their profitability. For government-provided medical coverage, a high cost risk pool of sicker patients makes funding of medical costs much more expensive.

Each insurance plan functions as its own individual risk pool. Insurance plans have a financial incentive to always strive to obtain a favorable risk pool since this is the key to a profitable plan. However, if there is a general risk pool to be covered, selecting out the favorable patients from this pool leaves the remaining patients in an unfavorable high cost risk pool. This unfavorable risk pool is difficult to insure and providing care is quite expensive. A private insurer will discontinue a plan with an unfavorable risk pool when this leads to losses or insufficient profitability.

In summary, “bad risk pools” kill insurance plans. Favorable risk pools guarantee profits and make covering medical expenses easy. Selecting out the favorable, low cost patients from a general risk pool needing coverage leaves the remaining patients in a high cost risk pool with high medical expenses and less funding to provide care for those expenses.

1. Private health insurance before the Affordable Care Act- A very favorable setting for the selection of subsets of favorable patients to make a good risk pool

The private insurers in this era had many opportunities to select out favorable risk pools. Private insurers could obtain a favorable risk pool by excluding individual applicants with preexisting medical conditions. And if an individual applicant was accepted with a preexisting condition, insurance was frequently offered to the applicant that excluded payments for expenses that related to their preexisting condition.

Another favorable group to insure is an employee group. An employee group, including their families, is healthier on average than a group of individuals of similar age that don’t qualify for employer insurance. Employee groups, in general, are a favorable risk pool to insure. There are a number of exceptions, such as certain union groups, but those groups are well known to the insurance world. These higher risk groups are offered insurance at higher rates to compensate for their history of higher expenses. The higher rates result in a favorable risk pool in terms of compensation compared to future projected medical expenses compared to compensation. Providing insurance to these groups by a private insurer only occurs if that insurer thinks the risk pool and projected medical expenses are adequately covered by the planned compensation.

2. Medicare Advantage plans- Another favorable setting for obtaining favorable risk pools.

Initially from 1982 to 1999, private insurers using HMOs (similar to Medicare Advantage plans but with a different name) were compensated on a per capita basis that was not adjusted for the medical status of the patient. This financial incentive naturally resulted in considerable cherry-picking by private insurers, with selective recruiting of healthy patients and the discouragement of sicker, more expensive patients from joining the plans. The plans obtained favorable risk pools and were over compensated. This situation was recognized as not being satisfactory because the federal government still had to cover the expense of caring for the sicker patients while the private insurers were being overpaid for caring for the less expensive healthier patients.

Private insurers followed the financial incentives and selectively enrolled (“cherry-picked”) the healthier patients. Since chronically ill high cost patients can easily have medical expenses 10 times that of low risk patients, removing them from the plan proved quite profitable to those insurers most efficient at cherry-picking healthier patients. The government paid the full capitated amount for the healthy patients’ care by managed care but also had to pay for the full expenses of the sick patients.

Legislation was enacted, and in 2000 Medical Advantage plans began having their payments for the care of patients adjusted by a disease severity index. Subsequently, after a period of time, Medical Advantage plans became more profitable as plans followed the financial incentives and learned to better upcode diagnoses and select favorable risk pools.

Currently, private insurers do very well with the current Medicare Advantage program. Private insurers have improved compensation for their risk pool by consistently upcoding the severity of disease index of patients in their plans. Since higher risk codes increase the amount of money the plan receives, the plan becomes more profitable. Furthermore, Medicare Advantage plans have features that repel a subset of ill, very expensive patients and lead to high cost, more ill patients leaving plans at higher rates than healthy individuals. In addition, at the time of enrolling in a plan, many patients contact the private insurance companies directly, giving the insurers the opportunity to guide what type of plan the applicant selects. All of the above improve the risk pool in regards to profitability.

3. Obamacare and Affordable Care Act (ACA) Exchanges
Private insurers have problems with the ACA risk pool for three reasons:

a. The healthier, low risk patients, who pay more in premiums than their medical expenses did not sign up in expected numbers. (This group had been expected to help fund the general insurance pool. This same principle will be important to consider in the use of vouchers for Medicare.) The group that did enroll in the ACA exchange had more medical expenses than initially expected.

b. Private insurers can’t structure plans that repel high cost expensive patients at time of enrollment. The plans each have the same features, except for the amount of the deductible, and the cost the insurer charges for the policy. Also, private insurers usually did not directly enroll patients, so private insurers could not routinely directly influence which individuals selected their plan at time of enrollment. (Individual state-run exchanges or enrolled most patients.)
c. Private insurers can’t create plans that lead to more expensive patients leaving the plans as they can with Medicare Advantage plans.

In summary, for the insurance plans on the Affordable Care Act Exchange, private insurers can’t selectively attract a lower risk more favorable pool from the overall risk pool. Profitability for private insurers always results as a function of the risk pool of those insured in relation to the compensation received. The ACA exchange is much more difficult for private insurers because they do not have the ability to select out favorable risk groups. The overall group of patients is also more expensive to insure than initially expected.

4.  Medicare as a Voucher- Premium Support Program: Problems apparent from risk pool analysis. Why this proposed plan will ultimately be a Medicare train wreck in regards to providing sufficient funding for the sicker more costly patients in the Medicare system:

Private insurers in the Medicare system already have a history of cherry-picking the healthier lower cost patients and avoiding the sicker higher cost patients, both in the past and present. The increased variability and flexibility in plans in Ryan’s Medicare premium support proposal is a marketer’s dream to facilitate creating and marketing plans that selectively attract healthier lower cost participants. Private insurers will always follow the existing financial incentives. In this case, there will be the strong incentive to select out the low cost healthy “over funded” enrollee and the tools will exist to do so. Similarly, the enrollment of sicker more costly patients will be avoided just as intensely.

Hence, the favorable patients will go selectively to plans that are best able to devise and market plans with features attractive to them. The risk pools of these plans will be very favorable. If a payment of $8,000 from the government goes to the private insurer and medical expenses are only $2,000, the plan will be quite profitable. By selectively avoiding the higher cost sicker patients, the $6,000 cost differential does not need to be spent on the care of sicker patients.

The problem is that the risk pools that are not able to attract these healthier patients will be left with the sicker higher cost patients without the funding provided by the healthier patients. Further worsening the situation is that the sicker higher cost patients are often underfunded in terms of the money that the plan receives from the government for their care. These patients can frequently have medical expenses of $20,000-$50,000 per year. The plans that end up with a concentration of these sick costly patients and a scarcity of healthy low cost patients will have major shortfalls in the money available for the care of these sicker patients. A leading candidate to be this sort of unfavorable plan is the traditional Medicare program, which is retained as an option in the Ryan premium support plan.

5. What happens to the large number of individuals who currently have traditional Medicare and are allowed to keep their current Medicare plan?

The Ryan premium support plan allows individuals currently in the Medicare program to continue in traditional Medicare. The Ryan plan will give future Medicare enrollees the choice of private plans as well as traditional Medicare in a newly created Medicare exchange. There will therefore be new enrollees coming into the traditional Medicare program. The characteristics of these new enrollees will be crucial in determining the long-term health of the traditional Medicare program. Since the Ryan proposal offers private insurers much greater flexibility in offering a variety of plans, private insurers will be better able to cherry-pick the more favorable patients and avoid enrolling sicker higher cost patients. (The cost effects of this situation are detailed in the prior section.)

Traditional Medicare as an option is likely to selectively attract the sicker more expensive patients, driving up the costs of the legacy Medicare members that remain in traditional Medicare. Furthermore, the healthier less expensive patients will be selectively cherry-picked out of the entering pool of new enrollees (as detailed in the prior section) by private insurers.

This will result in a progressive worsening of the traditional Medicare risk pool. This situation is like a ship with a hole letting in water. Traditional Medicare, and those participants in it, will be slowly weighted down by the incoming sicker more costly patients, while the healthy crew of lower cost patients, who had been maintaining the vessel, will abandon ship.