U.S. Health Insurance: Who can get it, who can't. Basics

The very basics of health insurance – what you need to know about insurance itself in order to understand why it’s such a problem 

Especially basic basics:

Risk pool: “A distinct population group, such as employees of a company, insured against costs of their potential use of health care resources. Premium projections are based on variables such as the age of the covered population, health status, sex, occupation, group size, and location.”  

In a large and diverse risk pool such as you might find in a giant corporation, you’d have a big bunch of covered people with all levels of risk for health problems. Those that will require serious coverage will far outweigh in spending what the half of the population unlikely to need much coverage will use.  But the idea is that we pay our premiums to cover the whole pool so that we can cover ourselves should we fall into the high risk category.

Health care expenditures overall are highly skewed. One set of figures which is pretty typical shows that:: 

· 1% of the population uses  30% of health care expenditures

· 10% uses 72%

· 50% uses 97%

· 50% uses only 3%. 

Risk segmentation means breaking groups into smaller segments which usually exclude some or all high expense users or limit their coverage. Risk segmentation is the biggest single problem with our current health insurance system in combination with…. 

Voluntary participation in insurance markets: We are not compelled to have health insurance as we are to have auto insurance. This means we often shop for the best deal at the moment. This leads to long-term problems for individuals and for all of us as a group. 

General consequences of efforts to keep prices low: 

· Health insurers have extremely strong incentives to identify and insure below-average risk populations – competition for good risks. “The lower the health risk of an insured group, the lower the expenses to the insurer and the lower the premiums the insurer must charge in order to be profitable.”

· It is in the insurers interest, therefore, to keep out high risk people in order to make profits, keep premiums affordable.

· This means high risk people may not be able to buy affordable insurance.

· Even moderate and low risk people may find premiums for good care out of reach.

Current make-up of the health insurance system

• Public Sector
  • Medicare: 65 and over, some none-elderly disabled
  • Medicare and Medicaid combination
  • Medicaid: Some limited categories of  low-income. Combined state and federal.
  • SCHIPS: Some low income children. Combined state and federal.
  • CHAMPUS: covers authorized medical  necessities only from civilian sources on a cost-sharing basis for retired military, and dependents of active duty and retired and deceased military.
  • State sponsored high risk pools: for individuals who as a function of pre-existing illnesses or conditions have been denied private coverage or have difficulty finding      comprehensive coverage at a rate lower than the high-risk pool.

• Public/Private mix:
  • Medicare and Medigap: Medigap is private insurance that pays to one degree or another for deductibles and copays of Medicare.
  • Past year part public, past year part private: Medicaid and none.
• Private Sector
  • ERISA (see below) protected coverage: exempt from state regulations. Mainly provided by large firms.
  • Experience rated commercial insurance coverage. Large firms of at least 500 workers, actuarially sound risk pool, subject to state regulations
  • Experience rated commercial, small firms or individuals, persistence in risk rating
  • No insurance coverage

The four categories of private insurance are considered four tiers. Below are some of their characteristics:

• Groups that purchase through an Employee Retirement Security Act (ERISA) protected plan (see ERISA at end of article): can be held by firms, multi-employer welfare arrangements (MEWAs) or individuals choosing  to self ensure. ERISA coverage is      exempt from state insurance laws:
  • Don’t have to abide by state mandated benefit laws such as mandatory benefits (think mammograms)
  • Don’t have to pay premium taxes tosubsidize high-risk or uninsured population.
  • Large groups and groups with better-than-average risk profiles (i.e. the 50% of the population that uses 3% of the money) are attractive candidates for self-insurance.

· Important concept here: For self-insurance groups, the Stop Loss provision: Stop loss is critical to a risk contract and the mathematics of how it is computed can radically alter the expected result. Stop loss coverage may be a single threshold amount for all expenses (institutional, physician and pharmacy) or there may be a stop loss level for each risk pool. In some cases, there may be other forms of stop losses built into the overall limit, such as a separately computed stop loss for inpatient days or for NICU (neonatal intensive care) or Obstetrics, with the uncovered costs rolling up into the computation of the overall stop loss level. The level at which losses are stopped is important as well. Inpatient stop loss levels are typically in the vicinity of $50,000, with 90% of the costs over that level paid by the insurer.

• Groups that purchase commercial experience-rated insurance through “actuarially balanced risk pools”…that  is, I think, where actuarial study has determined the spread of the risk      and the group is large enough so the vast majority are not high cost and the random risk of a high-cost person is spread over the whole group.
• Third tier private coverage. Firms which purchase experience-rated insurance and individual policies have third tier coverage which is the most unstable sort. The groups making up this tier are called “persistence of risk rating” groups. They are not large enough to be      considered actuarially balanced risk pools. At any moment they are subject to a a      member developing a high-cost problem (otherwise known as a “high risk event”) leading to a jump in all the group members´ premiums. Once a high risk event occurs, the group      likely to continue to be considered high risk for years. They will be continually penalized      because “economic theory” suggests that the gains to an insurer of selecting groups with relatively healthy experience are much greater than the net gain resulting from analyzing a group with recent high cost experience in order to determine if the high-cost event is completed or unlikely to recur. Think what happens to your car insurance rates after an      accident.
• Fourth tier: complete absence of insuranceincluding those completely unable to buy insurance because of pre-existing conditions or because conditions have resulted in them being dumped from the market or those choosing not to purchase because of high premiums or whatever.

        ERISA:  A federal law that sets minimum standards for most voluntarily established pernsion and health plans in private industry to provide protection for people in them.  Requires that plans provide participants with info about features and funding, establish who is responsible for managing and controling assets, has a grievance and appeals process.  It was amended to provide COBRA coverage after they leave their jobs.  It exempts plans from state regulations. 
        In 1996, ERISA was amended by the Health Insurance Portability and Accountability Act, known as HIPAA.  This will be discussed in another article, probably the next one.
(Note: Plans often divide the risk budget into two or three components: Inpatient or institutional services, Physician services and pharmacy. The risk in each of these "funds" or pools may be shared differently between the physicians, the Plan, and perhaps hospitals.)

Some sources:

Blumberg, Linda J. and Nichols, Len M., Health Insurance Market Reforms: What They Can and Cannot Do (1995) http://www.urban.org/urlprint.cfm?ID=5870
Delaware Healthcare Association, www.deha.org/Glossary/GlossaryR.htm.
Dietrich, Mark O. Dietrich and Wilson 2000, www.cpa.net/articles/soyouwant.html