AB 8 and Unintended Consequences: Guarantee Issue

AB 8 requires individual health insurance carriers to accept virtually all applicants for coverage (a practice called “guarantee issue”). Because it empowers the Major Risk Medical Insurance Board (MRMIB) to establish criteria which would divert three-to-five percent of applicants to a high risk pool MRMIB manages, there’s a small safety valve. But it is small indeed — too small to avoid creating dramatically higher premiums and increasing the number of uninsured among self-employed and unemployed Californians.

Health insurance is about spreading risk. Insureds who incur lower than average claims subsidize those who incur higher than average claims. Why? Because the “healthier” group expects their costs to be covered if they’re ever on the subsidized end of the equation.

But if individuals know they can get coverage as soon as they need it, why would they buy it when they’re healthy? A system that incents healthy individuals to forgo coverage, but encourages those incurring heavy expenses to buy insurance is called adverse selection. It can devestate a health care market and AB 8 is a recipe for doing just that.

This isn’t just theory. In Kentucky when a guarantee issue market was created 45 carriers left the market and premiums skyrocketed. Things got so bad Kentucky lawmakers had to reverse their “reforms.” In Maine, guarantee issue, along with other reforms, means only one carrier offers individual coverage.  Significantly, even after the state agency regulating rates approved rate increases totaling 124 percent over six years, the lone carrier left in Maine still loses money in this market segment.

Then there’s New York and New Jersey. As noted in an earlier post, citizens of those states pay, on average, a “health care reform surcharge” of 350 percent. That’s how much more the average annual premiums in those states exceed the average annual premium in California.  Adverse selection will do that.

There’s other ways AB 8’s mandate to sell provision could increase premiums in the individual market. For example, it could result in non-Californians facing surgery or expensive treatment to establish residency in the state just tenuous enough to qualify for coverage. (It appears even opening a California-based post office box might work). Once the treatment is completed, they could “move” back to their home states having paid a fraction of the cost of their care. The majority of their medical expenses would be paid by Californians in the form of higher premiums. And as premiums increase it would make it economically attractive for even more individuals to drop their coverage until they need it, increasing the amount of adverse selection in the system and driving costs up further. The process would repeat in a death spiral that could undermine the entire system.

The problem with AB 8, as it is in Maine, New York and New Jersey, is its creation of a mandate to sell coverage without a corresponding and enforceable requirement that consumers buy coverage.  Guarantee issue, when coupled with mandates to purchase, could go a long way toward achieving universal coverage. This is precisely what Governor Arnold Schwarzenegger proposed and it’s what the California Association of Health Underwriters calls for in their Healthy Solutions plan. Another previous post describes how Healthy Solutions approach to guarantee issue would help mitigate against the adverse selection and higher premiums AB 8 will create.

The proponents of AB 8 are not trying to increase premiums and encourage people to drop their coverage. Unfortunately, as written, the legislation is likely to have that very result. Let’s hope supporters of the bill will slow down and enable the Legislature to reconsider some of its provisions before Californians pay the unintended consequences.

The Misguided Health Care Reform Surcharge

The last couple of posts have dealt with the guarantee issue requirements in the individual health insurance market, a central component of several health care reform proposals. What I’ve suggested is that guarantee issue, which simply means health insurance carriers have to accept all applicants regardless of their health risk, if done right can lead to universal coverage, but if done wrong can lead to disaster.

The line between right and wrong in this context concerns requiring consumers to be insured. If it’s required, and that requirement is effective, guarantee issue can work. In systems where consumers can wait until after a need for insurance develops you wind up with a mess. The poster children for disaster are New York and New Jersey. Consider the results of a 2005 study conducted by the America’s Health Insurance Plans (AHIP):

Average Annual Individual Health Insurance Premiums:
                                          New Jersey        New York      California
Single Coverage:                $  6,048               $ 3,743         $ 1,885
Family Coverage:                $14,403               $ 9,696         $ 3,972

New Jersey and New York have guarantee issue (and community rating) without a mandate to purchase coverage. California does not — at least, not yet. The result: a consumer in New Jersey buying coverage just for herself pays surcharge for the state’s misguided health care reform of over $4,100. If she moves to New York, the surcharge falls to approximately $1,850.

Families suffer more when health care reform goes bad. A family in New Jersey buying their own coverage pays over $10,400 more than a California family; New Yorkers pay over $5,700 more.

Think of the impact of a 350% surcharge on a family’s budget — or on a state’s economy. Promoting guarantee issue in the individual market as a key to achieving universal health care coverage is both noble and reasonable — if it’s done right. If done wrong, the state and its citizens will pay the price.