Tag Archives: PCIP

A tale of two states: Delaware and Connecticut

Two states, Delaware and Connecticut released data today providing contrasting pictures of the rollout of the Affordable Care Act. The news from Delaware is bad for supporters of the ACA; the news from Connecticut is much brighter. Taken together, the news confirms a point I believe bears repeating.

It is a mistake to write a single narrative of the rollout of the Affordable Care Act. There are in fact at least 50 different rollouts of the individual Exchanges and many different narratives, each of which may have elements of truth. Based on what we have seen thus far, there are likely to be some states in which the Exchanges and the policies sold in them are relatively stable and at least the goal of greater access to healthcare is substantially met. Connecticut sure looks like the first poster child for success. There are a number of others, however, such as Delaware, in which, unless there is a massive surge, the individual Exchange based system of policies without medical underwriting will not be increasing access to medical care as hoped and in which insurers are likely to feel increasing discomfort in continuing to write policies under the existing regulatory regime.

Delaware

As of last Thursday, December 12, 2013, only 793 people in Delaware had selected a plan on the individual Exchange and paid the first premium.  Since fewer than 431 had done so as of the end of November, this means that somewhere between about 25 and 62 people per day are selecting for a plan in Delaware and paying the premium.  This is better, of course, than when healthcare.gov was not working, but it is still an inadequate rate of growth in the insurance pool.  If the pace of this “surge” continues for the rest of the year, including the holiday season when attention may be elsewhere,  it means that fewer than 2,000 people in Delaware will have insurance coverage when it begins on January 1, 2013.  Delaware was projected to have 13,898 enrolled through 2014.

The number in Delaware is particularly troublesome for a variety of reasons.  First,  about 265 people from Delaware were previously enrolled in the federal Pre-existing Condition Insurance Program (PCIP), which will end as of December 31, 2013. This means that the number of newly insured Delawareans may be less than the 2,000 discussed above.  Some will just be substituting expiring PCIP policies. Moreover, to the extent the individual policies purchased in Delaware on an Exchange are comprised significantly of people evicted from the PCIP, it means that a significant portion of the purchasers in Delaware will be those known to have high medical expenses.

Second, numbers such as 2,000 on the positive side are troubling due to estimates that 12,000 Delawareans saw their individual policies cancelled in 2013 presumably due to failure to provide Essential Health Benefits. And, even though Delaware is among those states that is permitting insurers to “uncancel,” unless almost all of the insurers do so and unless almost all of their insureds re-enroll, the result in Delaware could actually be an increase in the number of uninsured persons. Moreover, the greater the proportion of Delawareans who retreated back to their faux-grandfathered policies as a result of the Nov. 11, 2013 change of mind by President Obama, the fewer of those mostly healthy individuals likely to offset the more expensive persons enrolling via the Exchange.

Finally, if there end up being, say 2,000 people who purchase policies in Delaware by the time coverage starts, the economies of scale that insurers need to make the system work may not be present.  Some insurers who have, say, higher priced Gold policies may find that there are fewer than 20 people in their insurance pool. Numbers like that don’t work well for the insurance industry.

Connecticut

The news from Connecticut should be at least as encouraging for supporters of the ideas behind the ACA as the news from Delaware should be discouraging. According to information released today, 1,400 people per day are enrolling in individual policies in Connecticut’s own Exchange and the total enrollment is surging up to 20,000. Should the pace of 1,400 per day continue, Connecticut could have 40,000  enrollees by January 1, 2014. To be sure, there is likely to be some shrinkage between enrollment and the actual payment of premiums — a figure Connecticut does not appear to have yet released. Still, having even 35,000 true insureds by the start of 2014 would be a show of great strength and stability for the ACA; Connecticut was projected to have 58,637 enrolled through 2014.

Not only are the absolute numbers encouraging in Connecticut, so too are the characteristics of the enrollees. Nationwide, at last report, only 41% of the enrollees had incomes below 400% of the federal poverty level that entitled them to a subsidy; 59% came from wealthier Americans for whom, perhaps, programs simpler than the stunningly elaborate ACA might have been more sensible. (Note: these figures may be off slightly because, it was released today, California had released its information backwards!)  In Connecticut, however, 70% of the enrollees apparently qualify for a subsidy.  The middle class and the lower middle class are buying to a greater extent. Moreover, the types of policies being purchased in Connecticut, mostly Silver plans, are inconsistent with fears that policies are being purchased primarily by those with higher projected medical expenses.  As discussed earlier on this blog, disproportionate purchases of Gold and Platinum plans could be a harbinger of adverse selection problems.

In short, Connecticut is behaving pretty much as the models used by those who promoted the ACA, thought the rest of the nation would behave. The question now, however, is whether Connecticut and perhaps a few other states will be outliers that happen to conform to the behavior of its neighbor, Massachusetts, on which some of the modeling was predicated. Perhaps, proponents of the ACA should hope, people from Connecticut just procrastinate less and the rest of the nation will rapidly come around to behaving the way that the ACA requires if its projections and aspirations are to bear out.

 Coda

Delaware is the first jurisdiction I have seen to publish the number of people who have both selected a plan and actually paid the first month’s premium.  Other figures tend to be the larger category of people who have selected a plan. As any electronic shopper knows, there is a big difference between putting something in one’s electronic shopping cart and actually getting the credit card out and hitting “Pay.” So, kudos to Delaware.  I would like to see other jurisdictions follow suit.

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The Two Million Scenario: What if the Affordable Care Act enrolls a lot fewer people in the Exchanges than predicted?

People can be blinded by dreams in many spheres
People can be blinded by dreams in many spheres

Many people who remain basically positive about the Affordable Care Act are viewing the enrollment statistics like the football fan whose team is 2-6 and who point out that the team could win 7 out of its 8 remaining games and still probably make the playoffs.  Yes, getting off to a really bad start doesn’t preclude a happy ending. Success may still be mathematically possible. But unless there’s good reason to think that the fundamental factors such as poor coaching,  poor game plans or unexpected injuries that have led to the bad start no longer apply, the more reasonable prediction is that things will continue more or less as they have.

It’s time to start thinking realistically about what happens if a core component of the Affordable Care Act, subsidized, non-underwritten health insurance available from private insurers, essentially fails to provide many with better access to medical care. This might not happen in every state — there might be a few whose Exchanges can be deemed “successful” — but it is looking more and more to me as if we are heading for enrollments in many states well, well short of that on which the arguments for the ACA were significantly premised. Indeed, some supporters of the ACA have started moving the goal posts, revising history to say that the real goal of the Act wasn’t to reduce the number of uninsureds but to have an actuarially sound pool. (So the purpose of the Act was to help insurance companies stay afloat?) And it hardly helps enrollment when President Obama urges his allies to hold back enrollment efforts so the insurance marketplace does not collapse this coming week under a crush of new users even after he earlier assured the nation  healthcare.gov  was supposed to be working much better by this time.

For purposes of this blog entry, I’m going to assume that enrollment in the Exchanges ends up being about 2 million for 2014 instead of the projected 7 million.  I can’t rigorously justify that number — but, of course, neither could the pundit who is now saying 4 million. And, if I had time and space I’d prefer to do this analysis under a variety of scenarios, but, for now, the 2 million figure feels about right. And if I were betting on which side of the 2 million we will fall, it would be the lower side. What are the consequences? I can’t address all of them in a single blog entry — and trying to predict matters past 2014 gets very treacherous — but here are some.

And, for those of you who don’t want to read further, here’s the headline:

Insurance sold through Exchanges without medical underwriting — a central promise of the Affordable Care Act — is likely to implode in a significant number of states by 2015 while limping along in several others but providing little net desired decrease in the number of people without quality health insurance.  The silver lining in this failure will be that the program will likely cost less than projected due to fewer number of people receiving subsidies, although this reduction will be partly offset by higher-than-projected subsidies to the insurance industry. Expect significant pressure to grow among supporters of the Affordable Care Act to use these net savings to increase the subsidies available to people buying coverage through the Exchanges and to lure insurers in the problem states back into the Exchanges.

1. The number of people without private health insurance may actually grow

This is so because, if 2 million obtain insurance through the Exchanges but more people (3.5 million is a prevailing estimate from sources ranging from Forbes to Jonathan Gruber) lose their current individual health insurance, that’s a net decrease in the number of insured.  And if we add in the loss of 100,000 or so people from the Pre-Existing Condition Insurance Plan that likewise is terminated or those who heretofore were in various state high risk pools, there is a serious risk that the Affordable Care Act will have decreased the number with private health insurance.

In fairness, I have not taken Medicaid expansion into account. Some may see it as unfair to count just the number of people with private health insurance rather than the number with access to health care through private insurance or public schemes such as Medicaid. And, indeed, in those states in which Medicaid has been expanded — one can’t blame President Obama too much if other states choose not to participate — enrollment has outpaced enrollment in private plans at about a 4-to-1 ratio. This suggests, by the way, that people are willing to use a web site, even some clunky ones, to sign up for health care if they think the price is right.

The rejoinder to the argument that we should consider Medicaid, however, is that an awful lot of political energy and an awful lot of monetary investment has been predicated on healthcare reform benefiting more than just the poor but the middle class too. If it turns out the middle class has, net, been hurt by the 2014 features of Affordable Care Act or has paid a large investment for the 2014 features of a law that, net, does provide little marginal benefit, it’s fair to criticize the 2014 features of the Act for their architectural shortcomings. And, yes, I know all about staying on your parents’ policy until you are 26 and limitations on rescissions, but none of those pre-2014 “achievements” should count in assessing the 2014 record.

2. The number of people with quality health insurance may stay about the same

Yes, there will be people who formerly had no health insurance or who had rotten health insurance who, thanks to the 2014 aspects of the ACA, now have health insurance that covers more.  There are many news accounts from pro-ACA forces providing evidence of this. Here’s one (although all the “success stories” are likely to have high medical claims); here’s another (notice again that the successes are likely to have high medical claims).

But it may well be that for every such success story apparently to be catalogued by paid grants from the government, there is another who had health insurance tailored to their needs (such as policies for the 50 and over set that did not cover maternity expenses) who now find themselves priced out of the health insurance market with its Essential Health Benefits requirement (section 1302 of the ACA). Here’s a website inviting people to post their cancellation notices.  Here are some anecdotes relating such problems (although one always have to be very careful about exaggerations in this arena; see here for a discussion of a particular case by Consumer Reports).  Here’s another.

On balance, though, it’s quite believable that, many of the gains due to subsidization may be offset due to government offering only products that have more “features” than many people are willing to pay for.  To analogize, consider a law that prohibited people from owning either a clunker car (defined somehow) or a car without four-wheel drive. The theory behind the law was that clunkers were unsafe and that four-wheel drive is sometimes useful: even if you don’t need it right now, you might need it or have needed it at some point.  Fair enough. But such a law might not actually increase the number of people driving quality cars that fit their needs. Some people just can’t afford a new car.  And others, who could afford a respectable car without four wheel drive and didn’t think they needed it right then (urban Floridians, for example), might simply decide not to get a car rather than use scarce marginal dollars for cars with features they don’t need. While such a result need not occur — it depends on all sorts of factors — my sense is that this is where we are heading with the Affordable Care Act and its fairly demanding and undifferentiated requirements for coverage in policies sold on the Exchanges.

3.  Federal mandate tax payments may be a little bit bigger than expected for 2014

The Congressional Budget Office estimates this spring that the United States Treasury would receive about 2 billion dollars as a result of the individual mandate tax (26 U.S.C. § 5000A). That figure was premised, however, on a belief that 7 million people would enroll in the Exchanges.  If only 2 million people get insurance through the Exchange that’s roughly 5 million fewer than anticipated who will not. There thus could be as many as 5 million more people who will have to pay the individual mandate (26 U.S.C. §5000A) and could lead to something like another $500 million in revenue next year.

Before we spend the money of 5 million more Americans who might have to pay extra in tax, however,  we need to we need to subtract off two categories of people.  (1) We should subtract off those who acquire faux-grandfathered policies created by President Obama’s recent turnabout to let people who like their (potentially cruddy) coverage keep it under some circumstances and not have to pay the individual mandate.  (2) We should subtract off the small number of people who were projected to purchase policies on the Exchange but, because of poverty or otherwise, would not have had to pay the mandate tax had they failed to do so.

So, let’s say on balance that 3 million fewer people than projected pay the tax under 26 U.S.C. 5000A. It’s hard to know exactly what sort of tax revenue would be involved, but it is likely in excess of $285 million per year because each such person would have been responsible for at least a $95 per person penalty. (I know, I know, there are lots of complications because the penalty is difficult to enforce and because you only have to pay half for children, but then there are complications the other way in that $95 is a floor and one may have to pay 1% of household income). Why don’t we use round numbers, though, and say that the government might get about $300 million more in tax revenue for 2014 (although they may not get the money until 2015) due to lower-than-projected enrollments in the Exchanges.

4. Before the federal government subsidizes them, insurers in the Exchange will lose billions

4. Before consideration of various subsidies (a/k/a bailouts) of the insurance industry created by the Affordable Care Act, insurers could lose $2 billion as a result of having gambled that the Exchanges would be successful.  Here’s how I get that figure. No one knows for sure but, if the experience under the PCIP plan is any guide, when about 1/3 of the projected number of people apply to a plan that is not medically underwritten, expenses per person can be more than double that originally expected.  Even if we assume that experience under the PCIP is not fully applicable, given an enrollment 1/3 of that projected, it would shock me if covered claims were not at least 125% of that expected. If so, on balance that means that losses per insured could total roughly $1,000. If we multiply $1,000 per insured by 2 million insureds, we get about $2 billion. If the Exchanges lose money at the same rate as the PCIP, insurer losses could be upwards of  $7 billion. Again, I make no pretense of precision here. I am simply trying to get a sense of the order of magnitude.

5. The federal government will subsidize insurers more than expected but insurers will still lose money

The Affordable Care Act creates several methods heralded as protecting insurers writing in the Exchanges from claims that were greater than they expected.  One such method, Risk Corridors under section 1342 of the ACA, could end up helping insurers in the Exchanges significantly. But, if, as discussed here, enrollment in the Exchanges for 2014 is 2 million persons, the cost of helping the insurance industry in this fashion will be another $500 million for 2014. Risk Corridors, which have recently been aptly analogized to synthetic collateralized debt obligations (CDOs), requires the government to reimburse insurers for up to 80% of any losses they suffer on the Exchanges.  It also imposes what amounts to a special tax (again of up to 80%) on profits that insurers may make on the Exchanges. The system was supposed to be budget neutral but, as I and others have observed, will in fact require the federal government to pay money in the event that insurer losses on the Exchange outweigh insurer gains. The basis for my $500 million computation is set forth extensively in a prior blog entry. It will only be more if, as discussed in another prior blog entry, the Obama administration modifies Risk Corridors to indemnify insurers for additional losses they suffer as a result of President Obama’s decision to let those with recently cancelled medically underwritten health insurance policies stay out of the Exchanges.

If claims are, as I have suggested 25% higher as a result of enrollment of 2 million, insurers will lose, after Risk Corridors are taken into account, about 9% on their policies. It would thus not surprise me to see insurers put in for at least a 9 or 10% increase on their policies for 2015 simply as a result of enrollment in the pools being smaller than expected.

The relatively modest 9% figure masks a far more significant problem, however.  It is just a national average. Consider states such as Texas in which only 2,991 out of the 774,662 projected have enrolled thus far.  If, say, Texas ends up enrolling “only” increasing its enrollment by a factor of 16 and gets to 50,000 enrollees, I would not be surprised to see claims be double of what was projected.  Even with Risk Corridors, insurers could still lose about 24% on their policies. A compensating 24% gross premium increase, even if experienced only by that portion of the insurance market paying gross premiums, could well be enough to set off an adverse selection death spiral.

Footnote: For reasons I have addressed in an earlier blog entry, one of those methods, transitional reinsurance under section 1341 of the ACA is best thought of as a premium subsidy that induces insurers to write in the Exchanges. Because the government’s payment obligations are capped, however, the provision is unlikely to help them significantly if the cost per insured ends up being particularly high throughout the nation.

6. The federal government might save $19 billion in premium subsidies

The Congressional Budget Office assumed that premium subsidies would be $26 billion in 2014, representing a payment of about $3,700 per projected enrollee.  If the distribution of policies purchased and the income levels of purchasers are as projected, but only 2 million people apply, that would reduce subsidy payments down to $7.5 billion.  And if the policies sold in 2014 cost a little less than projected, that might further reduce subsidy payments.  I think it would be fair, then, to estimate that low enrollment could save the federal government something like $19 billion in premium subsidies in 2014. This savings coupled with heightened tax revenue under 26 U.S.C. §5000A — could we round it to $20 billion — would be more than enough to cover insurer losses resulting from the pool being smaller and less healthy than projected.

The Bottom Line

I suspect my conclusion will make absolutist ideologues on the left and right equally uncomfortable.  What I am wondering is if the Affordable Care Act might not die in 2015 with a giant imploding bang but rather limp on with a whimper. On balance, what we may well see if only 2 million enroll in Exchanges pursuant to the Affordable Care Act is a system that fails to function in some states and remains fragile and expensive elsewhere. On the one hand, it will be an expensive system because of the enormous overhead incurred in creating a highly regulated industry that provides assistance to a relatively small number of people. On the other hand, precisely because it will be helping far fewer people than projected, it might well cost significantly less  than anticipated. I would expect this departure from what was projected to lead to two sorts of pressures:

(1) There will be a claim from ACA supporters that we can use the savings to increase subsidies or the domain of the subsidies beyond the 400% of Federal Poverty Line cutoff  and thereby reduce the adverse selection problem that will already be manifesting itself.

(2) There will be a claim from ACA detractors that all of this confirms that, apart from ideological considerations, the bill is an expensive turkey and that, if  the only way to save it is to impose more and more regulation and spend more and more money, it ought simply to be repealed.

Complicating factors

Rules

There are many factors that could result in the estimates provided in this entry being quite wrong.  I do not want to fall into the same trap as others who have ventured into this field and claim that there are not very large error bars around all of these numbers.  And I do not believe the system is necessarily linear. It may be that small changes have cascading effects. Here are several reasons my estimates might be wrong.

1. The rules change in 2015. There are at least three significant rule changes in 2015.

a. The tax under 26 U.S.C. 5000A for not having government-approved health insurance increases significantly, going from the greater of $95 per person or 1% of household income to the greater $295 per person or 2% of household income. Insurers may therefore assume that enrollment will be greater in 2015 than in 2014.  Some people will be pushed over the edge by the higher tax rate into purchasing health insurance. If so, insurers may feel less pressure to increase prices because they believe their experience in 2014 will not be repeated in 2015.

b. The employer mandate will presumably not be delayed again by executive order which may have two offsetting events: employers reducing the number of full time employees thereby adding more to the Exchanges or employers maintaining health insurance thereby reducing the potential pool for the Exchanges.

c. As discussed in an earlier blog entry, there will be a decline in transitional reinsurance now provided free to insurers in the Exchange which, in and of itself, will put significant pressure on premiums

Realities

Finally, this is a field where events just frequently overtake predictions.  All of these predictions go out the window, for example:

a. if there is a major security breach in the government computer systems and people’s personal information is disclosed;

b. healthcare.gov continues to seriously malfunction during the critical pre-December 23 sign up period

c. if the yet-to-be-built payment system for insurers does not function and people become dissatisfied as a result;

d. if people find, as some are projecting (here and here), that the set of medical providers available in the Exchange policies is drastically reduced over what they expected; and

e. there is a major sea change in legislative power in Washington.

f. other

 

 

 

 

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Colorado enrollment numbers look bad

According to a news report today from the Associated Press, the enrollment numbers in Colorado are about half of what the state had projected as its “worst case scenario” for enrollment in its Exchange.  The  6,001 Colorodoans who have enrolled thus far (and that is enrolled, not yet paid) is also way less than the 20,186 that had served as the midpoint projection for this time in the open enrollment season. Colorado officials apparently believed that 136,000 people would enroll by the end of 2014. Enrollment  thus far has apparently been complicated, however, by a requirement that  consumers seeking a subsidy on the exchange first find out if they qualify for Medicaid, which may require a 12-page application.

Three facts make the low Colorado numbers yet more troubling for those concerned either about a reduction in the number of uninsured individuals or about the prospects that those getting enrollment in the Exchanges for 2014 will shortly find themselves sucked into an adverse selection death spiral.

First, these low figures are coming in a state where the web site has, for the most part, been operating respectably (further details here) and not in a state dependent on healthcare.gov.

Second, it comes in a state where between 106,000 and 250,000 individual health insurance policies have been cancelled. I have an inquiry in but have not yet been able to find from published sources whether Colorado will permit insurers to reinstate those policies and under what conditions. [LATE BREAKING NEWS at 13:52 Houston time: Colorado insurance official says Colorado expects to announce a decision on this point later today or tomorrow (per email from Vincent Plymell, Communications Director at the Colorado Department of Regulatory Agencies, who courteously responded to my inquiry)]

Third, Colorado already had 1,227 people enrolled in the Federal Pre-Existing Condition Insurance Plan (PCIP). One would think those people, who tend to have high medical expenses and are willing to pay full freight for insurance, would have been among the earliest to sign up under the Colorado exchange with the potential for subsidized rates.  Thus, some of the 6,001 already enrolled may not represent a reduction in people without insurance to people with health insurance but merely a substitution from one federally created plan to another.

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Should California be happy or concerned by its early enrollment data?

The short answer: concerned but not panicked

As discussed yesterday on this blog and elsewhere in the media, Cover California, the state entity organizing enrollment there, has released data showing the age distribution of the group thus far enrolling in plans on its Exchanges.  Although I took a rather cautionary tone about the age distribution — fearing it could stimulate adverse selection — the head of Cover California and some influential media outlets generally favorable to the Affordable Care Act have been considerably more cheerful.  So, who’s right?  For reasons I will now show — and probably to no one’s surprise — me. (More or less).

To do this, we need to do some math.  It’s a more sophisticated variant of the back of the envelope computation I undertook earlier on this blog. The idea is to compute the mean profit of insurers in the Exchange as a function of the predicted versus the actual age distribution of the pool they insure.  Conceptually, that’s not too difficult. Here are the steps.

1. Compute the premium that equilibrates the “expectation” of premiums and costs for the predicted age distribution of the pool they insure. Call that the “predicted equilibrating premium.”

2. Compute the expected profit of the insurer given the predicted equilibrating premium and the actual age distribution of the pool they insure.

3. Do Step 1 and Step 2 for a whole bunch (that’s the technical term) of combinations of predicted age distributions and actual age distributions.

Moving from concept to real numbers is not so easy. The challenge comes in getting reasonable data and, since there are an infinite number of age distributions and in developing a sensible parameterization of some subset of plausible distributions.

The Data

The data is interesting in and of itself.  To get the relationship between premiums and age, I used the robust  Kaiser Calculator.  Since healthcare.gov itself recommends the web site (their own site seems to have a few problems) and I have personally validated its projected premiums for various groups against what I actually see from various vendors, I believe it is about as reliable a source of data as one is likely to find anywhere right now.  So, by hitting the Kaiser Calculator with a few test cases and doing a linear model fit using Mathematica (or any other decent statistics package), we are able to find a mathematical function that well captures a (quadratic) relationship between age and premium.  (The relationship isn’t “really” quadratic, but quadratics are easy to work with and fit the data very well.) The graphic below shows the result.

Nationwide average health insurance premium  for a silver plan as a function of age
Nationwide average health insurance premium for a silver plan as a function of age

We can normalize the graphic and the relationship such that the premium at age 18 (the lowest age I consider) is 1 and everything else is expressed as a ratio of the premium at age 18. Here’s the new graphic.  The vertical axis is now just expressed in ratios.

Nationwide average health insurance premium ratio for a silver plan as a function of age
Nationwide average health insurance premium ratio for a silver plan as a function of age

To get the relationship between cost and age, I used a peer reviewed report from Health Services Research titled “The Lifetime Distribution of Health Care Costs.”  It’s from 2004 but that should not matter much: although the absolute numbers have clearly escalated since that time, there is no reason to think that the age distribution has moved much. I can likewise do a linear model fit and find a quadratic function that fits well (R^2 = 0.982).  Again, I can normalize the function so that its value at age 18 is 1 and everything else is expressed as a ratio of the average costs incurred by someone at age 18.  Here’s a graphic showing the both the relationship between age and normalized premiums in the Exchanges under the Affordable Care Act and normalized costs.

labeledNormalizedCombinationPlot

The key thing to see is that health care claims escalate at a faster rate than health care premiums. Others have noted this point as well. They do so because the Affordable Care Act (42 U.S.C. § 300gg(a)(1)(A)(iii)) prohibits insurers from charging the oldest people in the Exchanges more than 3 times what they charge the youngest people. Reality, however, is under no such constraint.

Parameterizing the Age Distribution

There are an infinite number of potential age distributions for people purchasing health insurance.  I can’t test all of them and I certainly can make a graph that shows profit as a function of every possible combination of two infinite possibilities. But, what I can do — and rather cleverly, if I say so myself — is to “triangulate” a distribution by saying how close it is to the age distribution of California as a whole and how close it is to the age distribution of those currently in the California Exchange pool.  I’ll say a distribution has a “Pool Parameter Value” of 0 if it comes purely from California as a whole and has value of 1 if it comes purely from the California Exchange pool.  A value of 0.4 means the distribution comes 40% from California as a whole and 60% from the current California Exchange pool. The animation below shows how the cumulative age distribution varies as the Pool Parameter Value changes.

 

How the age distribution varies as the pool goes from looking more like California as a whole to looking more like the current pool as a whole.
How the age distribution varies as the pool goes from looking more like California as a whole to looking more like the current pool as a whole.

Equilibration and Results

The last step is to compute a function showing the equilibrium premium as a function of the predicted pool parameter value. We can then use this equilibrating premium to compute and graph profit as a function of both predicted pool parameter value and actual pool parameter value.

The figure below shows some  of the Mathematica code used to accomplish this task.

Mathematica code used to produce graphic showing relationship between insurer profit in the California exchanges and the nature of the predicted pool and the actual pool
Mathematica code used to produce graphic showing relationship between insurer profit in the California exchanges and the nature of the predicted pool and the actual pool

Stare at the graphic at the bottom.  What it shows is that if, for example, California insurers based their premiums on the pool having a “parameter value” of  0 (looks like California) and the actual pool ends up having a “parameter value of 1 (looks like the current pool), they will, everything else being equal, lose something like 10% on their policies and probably need to raise rates by about 10% the following year. If, on the other hand, they thought the pool would have a parameter value of 0.5 and it ended up having a parameter value of 0.75 the insurers might lose only about 3.5%.

Bottom Line

If I were an insurer in California I’d be concerned about the age numbers coming in, but not panicked.  First, I hope I did not assume that my pool of insureds would look like California as a whole.  I had to assume some degree of adverse selection. But it does not look as though, even if I made a fairly substantial error,  the losses will be that huge.  That’s true without the Risk Corridors subsidies and it is all the more true with Risk Corridor subsidies.

What I would be losing sleep about, however, is that the pool I am getting is composed disproportionately of the sick of all ages. If I underestimated that adverse selection problem, I could be in deep problem. My profound discomfort would arise because,  while I get to charge the aged somewhat more, I don’t get to charge the sick anymore. And there’s one fact that would be troubling me. Section 1101 of the Affordable Care Act established this thing calledthe Pre-Existing Condition Insurance Pool. It’s been in existence (losing boatloads of money) for the past three years.  It held people who couldn’t get insurance because they had pre-existing conditions.  They proved very expensive to insure.  There are 16,000 Californians enrolled in that pool.  But that pool ends on January 1, 2014.  And the people in it have to be pretty motivated to get healthy insurance.  Where are they going to go? If the answer is that a good chunk of the 79,000 people now enrolled in the California pool are former members of the PCIP, the insurers are in trouble unless they get a lot more healthy insureds to offset these individuals.

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