Unintended Consequences and Guarantee Issue

I’ve written a lot in this blog about unintended consequences. Like the law of gravity it is ever present, impacting everything. Simply put the law of unintended consequences is that whatever the intent of any given piece of legislation, among its impact will be things unhoped for. No matter how well intelligent and savvy the authors, no matter what intended consequences result, any piece of legislation will have unanticipated, unwanted and unwelcome results.

Proof that the unintended consequences is a strong force can be found in a report conducted by Milliman, Inc., a respected independent actuarial firm on behalf of America’s Health Insurance Plans, an industry trade group. Putlished in July, the report takes on special significance in light of the health care reform initiatives put forward by Governor Arnold Schwarzenegger, Speaker Fabian Nunez and Senate President Pro Temp Don Perata. (The Impact of Guaranteed Issue and Community Rating Reforms on Individual Insurance Markets).

The study demonstrates that while the goals of reforms which established guarantee issue and community rating were laudable, “they frequently had unintended consequences that disrubted the individual marketplace,” according to Leigh Wachenheim. a Principal and Consulting Actuary at Milliman.

This result shouldn’t surprise anyone. These reforms bring into the insurance system individuals with higher costs than those previously in the pool. This is what is these laws intend to do and, personally, I believe it is a good thing. However, where there’s no offsetting incentive or requirement for lower risk individuals to buy insurance, the result is higher claims than previously experienced. This means rates go up for everyone. This in turn drives some low risk consumers out of the insurance market. Which means further increases are required for what is now an even higher cost pool. This antiselection process leads to substantially higher premiums as only high risk individuals remain in the pool. There’s nothing sinister about this. It’s the way every medical coverage pool works whether it’s for-profit or non-profit, government-run or private.

And it’s what happened in the eight states studied by Milliman. In two of the states, New Hampshire and Kentucky, the results were so negative and severe the guaranteed issue and community rating laws were repealed. A similar dynamic occurred in Washington leading to a significant weakening of its guarantee issue provisions. In other states, carriers fled the individual market where they can and the cost of coverage has skyrocketed. Another impact the study identifies is that the reforms do not appear to be effective in increasing the number insureds in these states.

This report should be required reading for every legislator and the governor, too. Hopefully they will come to the logical conclusion: guarantee issue can have a very positive impact on the market, but only if it is done correctly. This means linking guarantee issue not on the promise of an effective mandate to purchase coverage, but on a mandate to purchase coverage proven to be effective.

That’s why the California Association of Health Underwriters, in its Healthy Solutions health care reform plan, recommends triggering guarantee issue only after 90 percent of California’s population has medical coverage. Until then, CAHU recommends expanding the current state pool for high risk individuals so it can serve as an effective  insurer of last resort. Even after the 90 percent threshhold is met, carriers should be permitted to raise the rates and exclude from coverage pre-existing conditions of the 10 percent who fail to abide by the law. (The length of time these penalties could be applied would be commensurate with the length of time the individual remained outside the insurance system).  

Without an effective mandate to purchase coverage, the guarantee issue provisions being pushed by the Legislative Leadership and the Governor will do more harm than good.  Premiums will increase, carriers will leave the market, and the number of uninsured Californians will remain untouched.  This obvioulsy is not their intent, but it would be the likely result. Afterall, just because consequences aren’t intended, doesn’t mean they’re not foreseeable.