Thursday, August 16, 2018

Options on health insurance

Alex M. Azar, U.S. secretary of health and human services, published an interesting OpEd in the Washington Post, describing a clever health insurance innovation. HHS will allow "temporary" health insurance, including a guaranteed renewability provision. The HHS announcement is here and the official rule on the Federal Register here.
Americans will once again be able to buy what is known as short-term, limited-duration insurance for up to a year, assuming their state allows it. These plans are free from most Obamacare regulations, allowing them to cost between 50 and 80 percent less.
Insurers will also be able to sell renewable plans, allowing consumers to stay on their affordable coverage for up to 36 months. Consumers can also buy separate renewability protection, which will allow them to lock in low rates in their renewable plans even if they get sick.
The big news to me is guaranteed renewability. You sign up now, and you are guaranteed rates don't go up if you get sick.

The last sentence is the most intriguing. Long ago, before the ACA made all of this sort of innovation illegal, United Health started offering the option to buy health insurance. Pay money now, and any time you get sick you can still get health insurance, at the pre-stated rate. (Under the ACA that option is now called a cell phone, but the insurance is a lot more expensive and many doctors and hospitals don't take it.)

It sounds like HHS is allowing this again. But I couldn't figure out from a quick read whether the guarantee only lasts 36 months, or if they can sell that option for a longer date. It sounds like the plain guaranteed renewability is only 36 months, the length of the contract.

For newcomers to this blog, guaranteed renewability and the option to buy health insurance is the key to escaping the preexisting conditions problem in a free market for health insurance. I'm delighted to see the idea take hold, if at the edges. Great trees grow from saplings.

The trouble is, that most of the things you worry about happen in a time frame more than 36 months. I want guaranteed renewability for life! If I get cancer in 22 months, knowing I can keep health insurance for another 14 is not that helpful. (Much more here, especially "health status insurance.")

You may ask, then, why only 36 months? As I piece it together, the ACA, which is still law, has a little carve out for temporary insurance, defined as a contract that last 12 months. Anything longer must meet the list of mandates. It sounds like HHS was pretty clever within the constraints of the law, allowing them to be renewed, so 12 months can turn in to 36. I presume you can sign up with another company after 36 months? But you lose the guaranteed renewability so the new company may charge you a lot.

Unless, perhaps, they really are letting insurance companies offer the right to buy health insurance as a separate product, and that can have as long a horizon as you want? If they haven't done that, I suggest they do so! I don't think the ACA forbids the selling of options on health insurance of arbitrary duration.

I also notice "if their state allows it." Many blues states likely will not, on the illusion that they can keep healthy wealthy people buying Obamacare policies to cross subsidize the others. (Or just out of pigheaded "resistance.") The oped addresses that nicely. People are increasingly not buying unsubsidized exchange policies. (Or, buying them, getting 3 months of doctor's appointments out of the way, then quitting, see here.) So, most people buying these plans will be currently uninsured, not defectors from exchanges. (And the wisdom of funding charity care by massive cross subsidies (here and here) is questionable anyway.)
The law’s skyrocketing subsidies have kept subsidized insurance enrollment fairly steady — although more than 50 percent below what was once expected. But Americans who make too much to receive subsidies have begun to opt out of the insurance market en masse. An independent analysis found that the entire unsubsidized individual insurance market shrank by more than 40 percent from the first quarter of 2016 to the first quarter of 2018. In other words, Obamacare has forced unsubsidized Americans to choose between unaffordable insurance and no insurance at all. 
Some have raised concerns about the possibility that short-term plans will pull healthy consumers out of the Obamacare exchanges, driving up premiums. But estimates from the Centers for Medicare & Medicaid Services actuary suggest any such premium increases would be minimal and would not affect subsidized consumers. This is, in part, because those without subsidies who were previously enrolled in Obamacare plans have already left those plans in droves because of premium hikes under the law. For these consumers, short-term plans can offer an affordable option. Our decision to allow renewability and separate premium protections could also allow consumers to hold on to their short-term coverage if they get sick, rather than going to the exchanges, which improves the exchange risk pools. 
Let us see if, say, California, says "what a nice idea!"


A correspondent sends this:
If you go to page 38 of the official rule, you will see that they are saying that current law does not prohibit the selling of options to buy health insurance for longer than 3 years, since these do not fall under the official definition of a “health insurance contract” (see also p.30). So yes, it does seem that companies would be allowed to offer this. The rule emphasizes this reading of current law. You would have to string together different STLD plans however, since each plan can only last up to three years.
But with health status insurance, you can get a different one.
One problem is that if you have a plan and then find a job, you would probably want to change to the employer’s plan. Tailoring an option contract to deal with this contingency might be complicated.
Indeed. Though United health sold the option to people who were employed and might want to quit someday. The tax deduction for employer-provided group plans -- but not employer contributions to individual insurance -- is one of the original sins of health insurance.
Of course, ideally you’d want to keep the same insurance from job to job (and between jobs). ...[If the administration allowed] tax-free contributions to HRAs, which can then be used to pay for insurance premiums....
John Goodman covered this option in an excellent Forbes essay. 
The Trump administration has now reversed those decisions, allowing short-term plans to last up to 12 months and allowing guaranteed renewals up to three years. The ruling also allows the sale of a separate plan, call “health status insurance,” that protects people from premium increases due to a change in health condition should they want to buy short-term insurance for another 3 years.

By stringing together these two types of insurance, people will likely be able to remain insured indefinitely. The new plans will probably include most doctors and hospitals in their networks. And they are likely to look like the kind of insurance that was popular before we had Obamacare.
So, in John's view the health status insurance can last forever. (Life insurance is guaranteed renewable as long as you live, so this is entirely possible.)

On cross subsidies, a favorite theme of mine these days:
the Obama administration and Democrats in Congress wanted to give a gift to a small number of high-cost patients who migrated from group plans to the individual market and faced exclusions, riders or outright denial of coverage. The goal was commendable, but they didn’t want to pay for it with taxpayer dollars. Instead, for the last four years, they have been trying to pay for this benefit by pushing the cost off on other insurance buyers.
Similarly, I think the Obama administration was right to offer free birth control to anyone who wants it. But they shoved it on insurers and got into a needless fight with religious organizations. Really, how much would it have cost on the Federal budget?

A very interesting observation:
So, who could be against this welcome opportunity? Answer: Almost everyone, except the people who plan to buy the insurance, that is.
The opponents include Blue Cross, AHIP (the insurance industry’s trade group) and virtually every other stakeholder. Before finalizing the rule, the government received about 12,000 comments. According to an analysis by the Los Angeles Times, 98% of them were negative. “Not a single group representing patients, physicians, nurses or hospitals voiced support,” the newspaper noted.
Think about that. Roughly 2 million people are about to get the opportunity to buy insurance that meets their needs for a fair price and virtually every special interest in the entire health care system wants to stop them.


  1. In the insurance industry "guaranteed renewable" does not connote guaranteed premiums.

    But guaranteed renewable policies may not be cancelled by the insurer if the policyholder continues to pay premium.

    So I don't think this statement is correct: "The big news to me is guaranteed renewability. You sign up now, and you are guaranteed rates don't go up if you get sick."

    Companies selling these products have the ability to file higher rates with the regulating State and implement those higher rates if approved.

  2. Would you have the same view if exchanges had been successful for unsubsidized consumers?

    i.e. is your view "exchanges are already failing to serve unsubsidized consumers given price increases, and while this will make the pool more toxic, there aren't that many people affected"? Or would you still think this would be a good proposal if exchanges were effective risk pools for both subsidized and unsubsidized consumers?

  3. Will this be complete insurance that covers all conditions or is it a limited "faux" policy that has many exclusions giving a false sense of security for lower premiums?

    1. It's complete enough for me - a healthy 61 year old female. My price will drop from 1,400 a month to 250 a month for my husband and I. It's more like catastrophic insurance but for the savings, I'll take it!

    2. It's more like catastrophic insurance but for a price savings of 1,200 a month my healthy husband and I will take it!

  4. Brilliant application of the Black-Scholes option pricing model. For longer time horizons, one could buy an insurance LEAP option!

  5. The short term plans are usually medically underwritten and do not cover existing or in many cases prior health conditions for at least 12 months an you pay a premium. If you are a healthy, not overweight and do not engage in risky behaviors ie motor cycling, scuba etc and you are young you can get inexpensive “major medical”type insurance for 50-80% less but that will be the case for only that cohort. This is a smoke screen for the upcoming election since these plans will not be widely available until after that time. The time bombs in these policies historically are many... it will be interesting to see what our friends at the insurance companies will come with.

    1. It's going to save me a lot of money and I currently get nothing from the ACA until I pay the 6,650 deductible. So, for a healthy active 60 year old who wants to keep her savings for fun stuff, it's perfect.

    2. There are options. I sell health insurance individual policies not on the ACA exchange. They are medically underwritten plans so the risk pool is better. Most times, premiums are half the cost of ACA plans and some policies have $0 deductible. Contact me here.

  6. John
    I would be interested in a fun prediction. How long before employers with “Cadillac” plans (like my university employer) say “here is a $10K raise. Go buy your own insurance.”?

    1. About 5 minutes after they stop making employer provided health insurance tax-deductible. Employers pay you money and you buy your own house and car insurance. Also it would take $15k. (My quote for Cobra for a 26 year old male in perfect health was $12k per year.)

    2. Egads! $12k a year for a 26-year-old male perfect health?

      I am afraid to ask what some 55-year-old guy with the normal collection of maladies would pay.

      You know, a lot of people are for free markets "except for." Say property zoning.

      I have just decided I am for free markets except for healthcare. Bring in the bust of Karl Marx.

    3. 12k is not a bad price! In Ohio I paid 15k for a plan with a $7000 deductible last year. After a health scrape that ate up the deductible, the insurer went bankrupt and I was back to zero....

    4. COBRA is simply a buy in to the employer plan which prohibits any preX beyond a short initial exclusion, including the preX of every year you get a year older.

      Obamacare includes rating for the universal preX, ie, every year you get a year older, and the only lifestyle choice to prevent it boosting premiums is suicide.

      Note, the only way young people never pay the costs of old people is by committing suicide.

  7. Let us return to a citizen soldier military and universal conscription. Then everybody qualifies for the VA.

    The right-wing loves the VA and the left-wing loves the VA.

    Problem solved by communism.

    1. As the comic said, That's pretty funny, I don't care who you are! But seriously, a bi-partisan (vs bi-polar) plan would be welcome. I have Medicare for health care and ChampVA for meds. I read some of the other comments and the cost for individual health insurance policies floors me. No wonder so many self employed and low income folks don't have coverage. A lot of people don't seriously consider it a priority until they get seriously ill.

  8. Oh, please don't be naive. 50-80% less expensive policies. What does it mean? Well, it means they have to pay 50-80% less in benefits than Obamacare policies. I suggest you drop health insurance policy you and your family have now and buy one of those. Why don't you do that. Your comment about cross-subsidies, i.e. that wealthy people who buy Obamacare policies subsidize the others is misleading. They pay the full cost, the others on Obamacare are subsidized by wealthy taxpayers (extra tax on high incomes).

  9. "I want guaranteed renewability for life! If I get cancer in 22 months, knowing I can keep health insurance for another 14 is not that helpful."

    Here is one thing I don't understand. Why don't insurance companies insure you for (say) a year, and if you get cancer they pay you the projected future cost in a lump sum?

    That is, instead of paying for the treatment right now, they give you a lump sum equivalent to the present value of (treatment + increase in future premiums)?

    1. That's exactly "health status insurance!" It doesn't emerge thanks to the legal and regulatory thicket. It solves preexisting conditions if there is a market for one-year insurance that is fully rated -- everyone can get insurance, but sick people have to pay a higher price. Then the lump sum pays for that higher price. Under exchange policies, everyone can get "insurance" but they all pay the same (high) price, so the health status insurance doesn't do you much good. Also if you are planning to get a job then you go on your employer's (tax deductible) plan, so the health status insurance doesn't do you any good.

    2. Thanks for the explanation!

    3. What is the usefulness of insurance? Is it so that we can all share the cost of risky behaviours that we all share in some way? (e.g. living, operating a car, being responsible for a house....). Or is it just to be a lottery? (i.e. placing bets on unfavourable events)(hedging our bets).

  10. Employer based insurance is a barrier to an effective insurance market as it absorbs a large portion of relatively healthy, young (working age), responsible adults who should be the backbone of any risk sharing group. It is not surprising that insurance exchanges do not function when a large portion of participant are either poor and unemployed or with chronic disabling illness or sometimes both.
    I question the assumption that tax deductible policy is the main driver of employee based insurance. Most large employers are self insured. They may contract with a large insurance company to utilized their networks however the cost of care is absorbed within the company. The reason this type of plan can be competitive is because employers can control their risk pool. If you develop a serious chronic illness (cancer, stroke with long term residual deficits) you usually lose your job and are removed from the risk pool. Employer based health insurance in this case is not providing the basic function of health insurance which is financial protection against unexpected catastrophic events.
    I would love to see an efficient, transparent, individual based insurance market and perhaps health status insurance can be a solution.

  11. So much complexity! How about Medicare For All and be done with it.(with supplemental "Cadillac Plans" for rich folk.)

    Easy Peasy!

    1. Except for getting the money to pay for it

    2. That's not an issue at all. The sovereign that issues, borrows in, and floats its own currency can never run out of cash. Although spending $3 Trillion of additional dollars into the economy certainly increases the spending power of consumers who don't have to pay for healthcare and so risks inflation if the spending hits and exceeds the productive capacity of the economy.
      Inflation is controlled by fair and equitable taxation, perhaps temporary increases in:
      * Income Taxes,
      * Sales/VAT taxes, and
      * Asset Value Taxes.
      That will cool things down pronto. But these are not dollars to "pay-for". They are just a tool to manage inflation, IF it becomes an issue. And that's a big IF.

    3. The money that is no longer paid to insurers (employment based) would instead be available to fund, directly, basic health care for all. There would be a significant amount of left over money that could be used to pay unemployment benefits to the now unemployed insurers. No need to magically conjure up new money.

  12. Health Insurance Exchange
    Health Insurance Exchange is an option to provide consumers with access to innovative plan choices.

  13. What is the maximum payable benefit on one of these plans?

  14. "“Not a single group representing patients, physicians, nurses or hospitals voiced support,” the newspaper noted.

    Notice the absence of "patients" in that list."

    "Patients" is in the list.

  15. How do cheap plans save any money paying for health care for any population over multiple decades?

    Are you arguing that comprehensive group insurance plans have high rent seeking costs, which insurers suddenly stop rent seeking when the get to game insurance by excluding high cost benefits that buyers don't think are costly?

    I argue that the total cost of 1000 people over 30 years will be the same with cheap limited insurrance and costly comprehensive insurance if both populations live equally long and well.

    Note, very few people save for retirement on their own, based on actual data of how few have any savings at all, and the number who spend 401K and IRA savings well before 50 due to unforeseen, but likely life events.

    That makes rational sense only if you assume most people expect to be killed by age 50, or plan to commit suicide.

    Or the fail to understand the universal preX: every year you are a year older. Ie, the only way a 25 year old can avoid paying the medical costs of an old person is by committing suicide, or otherwise being killed.

  16. Actuaries will tell you that people who are super healthy today will have above average health for quite a few years. The person who has no health history, perfect blood pressure and cholesterol etc may indeed make it to age 65 without having a heart attack or cancer.

    So, health insurers can indeed offer longer guarantees if they underwrite very, very carefully at the time of issue.

    However -- selling health insurance to healthy people is not difficult. Making a profit on such sales is easy, since premiums will vastly exceed claims for several years.

    The hard task is insuring sick people. As you point out, the ACA tries to do with guaranteed issue. This tactic caused death spirals in every state where it was tried between 1980 and 2000, and what do you know, it has happened again.

    One solution would be to let sick people in the individual market join Medicare. The cost of doing so could easily exceed $30 billion a year, but that is less than one half of one percent of payroll if we were honest enough to raise the Medicare tax. The general rule of health insurance is that visible costs are unpopular, so absorbing people into Medicare would be a quiet solution.

    We have done this with kidney dialysis for over 30 years.

  17. As I'm venturing into a new semester, I'm taking a class on Government and its role in the microeconomy. It's interesting that I found this post at this time because we're laying the groundwork for determining market failures and what the Government can realistically do to remedy them.

    So, yeah, we're getting all into the business of MSB, MPB, MSC, and MPC and trying to optimize social well being. This article certainly gives food for thought on thinking about these issues.

    Financing health care seems like the impossible Gordian Knot, as the whole issue of Paretto Efficiencies comes to mind - improving the welfare of one at the cost of another. Is it really a zero sum game when modeled this way? This is why I like economics because it ultimately speaks to the question of what's valued in a society. Is the accumulation of society's health really that important to society? Questions, questions.

    1. Mykel: Paretto Efficiency is only applicable in an economy where all resources (people) are being utilized, which is not the case in most economies. If there are underutilized resources (unemployed folk) putting them to work is essentially creating wealth. Cost is minimal since its calculation has to be reduced by the monies saved by not having to keep the unemployed alive. (No one but Ron Paul and his followers believe in letting people die in the streets.)


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