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You Can Lead a Horse to Water, but… Creating a Health Care System that Could Work for America

Posted on Date: Mar 26, 2019

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While I don’t profess to have all the answers for creating a perfect healthcare system, I do have an advanced degree in health-related studies.  And since the health care universe has been a major part of my professional life for the past 35 years, I feel as though I have acquired some unique insights into the workings of the business of health.  It is with this knowledge that I read with interest and, sometimes, great amusement, the proposals for replacement of the PPACA, colloquially knownas Obamacare.

The foundation of health insurance is built upon one, simple core principle:

There must be a large enough pool of younger, healthier individuals in a plan to offset the claims that will be incurred by older, sicker individuals.

If younger, healthier individuals leave or don’t enroll in a plan and only the older, sicker individuals remain, this is what is known as “adverse selection.”  Taken to its logical end, adverse selection can result in a health care “death spiral,” where the rates chase the claims until the rates are so high that they are unaffordable, even for those most in need of health care.  These are the facts of health insurance.

As writer Bob Hermand explains in an article he wrote for Modern Healthcare, “At its core, adverse selection is an imbalance of information. Aside from emergencies, people can reasonably predict how much healthcare they will use during a year. Older people with cancer or heart disease know they will use a lot more services than able-bodied young adults at the outset of their working lives.”   However, for a plan to thrive, it requires a disproportionate number of younger, healthier people to pay the healthcare premiums to offset the costs of older and sicker patients (the 80/20 rule). It's a core requirement, if the country's fragmented health insurance marketplace is going to work.

If these are the facts, then the question becomes, “With what mechanism do you offer health insurance to all, remove mandates, yet encourage mass participation of young, healthy individuals?”

As we have seen, both political parties have proffered their own solutions to this problem.  But since one party currently controls the presidency and the Senate, I will limit my comments to their plan.  In a nutshell, the main components are:

  • Remove the individual mandate
  • Retain a family’s ability to keep children on their plan through age 26
  • Remove state Medicaid expansion (subsidies) and replace with block grants
  • Creates a 5:1 rate differential between youngest and oldest plan participants

I want to concentrate on the 5:1 old-young rate differential because this is where I believe any voluntary plan is most likely to fail.  The reason I think this is simply because without some significant incentive, “young invincibles,” the demographic between the ages of 18-34, will simply not step up to the plate to fork over their money for something that they don’t believe they need.  I base this statement on the findings from a number of studies on the psychology of youth. One such paper (Human development of the ability to learn from bad news– National Academy of Sciences; October 8, 2013)found that that young people have greater difficulty in learning from bad news and using it to interpret their risk of future events. This might explain why they often do not respond to warnings and engage in risky behavior.

“Human decision making is markedly influenced by beliefs of what might occur in the future. We form and update those beliefs based on information we receive from the world around us. However, even when we are presented with accurate information, cognitive biases and heuristics restrict our ability to make adequate adjustments to our prior beliefs.  One such bias, with important implications for well-being, is the human tendency to discount bad news. For instance, highlighting previously unknown risk factors for diseases is surprisingly ineffective at altering an individual’s perception of their medical vulnerability.”

So, how would I propose attracting the desirable 18-34 consumer?  For any voluntary plan to succeed, it will require adherence to five pillars:

  1. Affordability: If there is going to be a 5:1 rate spread between young and old, there needs to be the following additional components:
    1. The ability to create a risk corridor, based upon a person’s individual health. Statistically, a morbidly obese young person with a sedentary lifestyle is at greater risk of having heart disease, COPD, or diabetes than an older, active, healthy person. I would propose an age-banded rate, along with a 0-25% (+ or -) rate adjustment factor, based on responses to a few core health questions.
    2. Rates for young and healthy individuals should be reflective of the associated risk and should start at $50-$75 per month for a basic plan.
    3. No plan should offer an individual deductible option of more than $2,500 (or $10,000 if coupled with a Health Savings Account) and a maximum out-of-pocket limit of no more than $5,000 (or $20,000 with an HSA).
    4. Every plan should cover preventive care services at 100% (deductible waived).
  1. Flexibility: Consumers should be able to find plans that work equally for their individual health and their financial situation.
    1. Health Savings Account (HSA) rules should be expanded:
      1. Pre-tax monies earmarked for individual HSA accounts should be increased to $10,000 per year (rather than today’s $6,500 max contribution).
      2. HSA funds should be allowed to be used for the purchase of over-the-counter medications and medical supplies.
  • HSA funds should be able to accumulate in an IRA or other tax-advantaged, interest bearing retirement vehicle, with unused fund distribution rules consistent with those of any other retirement vehicle.
  1. Fixed Indemnity, Limited Medical Benefit Plans should be an option:
    1. No deductible, no coinsurance, basic benefits with an annual/lifetime cap, or
    2. Same basic plan design with no annual/lifetime cap, but requiring applicant to pass a series of health questions.
  1. Choice: Individuals should have the ability to choose a plan that meets their individual needs.  I would propose that individuals have the ability to choose from at least four plans of differing price points and benefit designs.
  1. Plain-Written Text: Every plan summary should be written in Plain English(similar to the language mandated for life insurance policies), with each benefit and benefit limitation clearly spelled out.
  2. Rate Stability: In order to mitigate the cost ascribed to covering extreme medical claims, such as certain cancers and some severe chronic medical conditions, the federal government could create a national specific stop-loss risk pool that caps an insurer’s total liability at a fixed number per claim (i.e., $1 million).  This would enable actuaries to model worst case cost scenarios, creating a more stable rate renewal structure.

In summary, people do not change habits, beliefs, or values unless there is a real, compelling reason to do so.  Health insurance created by the heavy hand of partisan government will never reach its goal of comprehensive health care for all who choose to purchase it.  Some part of the populace will be disadvantaged, causing a continuation of the use of our health system safety net of last resort:  The emergency room.  Both political parties seems to believe that speed to market is more important than addressing the needs of the market.  I submit that this is the time to slow down and give more thought to the intricacies of this program before opening what could turn out to be another Pandora’s box.

About the author

Steven Chapkin is a 35-year veteran of the health insurance industry, 26 years of which he spent in senior sales and executive management positions at companies such as Aetna, Cigna, and Lincoln National Life, among others in the managed health care sector.  He has published numerous articles on managed health care in periodicals such as Best Reviewand Health Insurance Underwriter. Steven holds a degree in business from the University of Miami and resides in Boca Raton, Florida.

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