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Health risk, costs, insurance and consumer accountability

Health insurance actuarial analysis and group underwriting have always been a study in social engineering, ethics, morality and regulation unique in the practice of general insurance services.  To illustrate: when I was a sixteen-year-old male, my auto insurance premiums were a substantial multiple of that of my father.  Actuarial analysis of losses for males between 16 and, say, 21 were much higher and my personal rate reflected this. The only relief that I could earn was to begin a period of continuous demonstration of sound driving habits (no tickets, no accidents) for multiple periods and maintenance of a superior grade point average to get the “good student discount”.  The combination of these two behaviors earned an eventual reduction in premium of, maybe, ten percent – which was meaningful.  I could look forward to an increase in premium at twenty-one (legal drinking age) but a reduction if I married, then again when I hit twenty-five.  If my personal driving record remained spotless, or very nearly so, then I could expect to pay auto insurance premiums assigned to the loss experience of my peer group.  Drivers with poor records, those who elect to drive higher risk vehicles, or drive professionally were assigned to peer groups with higher loss experience and higher premiums.

Life insurance premiums are also, often, individually underwritten.  A health questionnaire and/or medical exam are often used to determine an applicant’s risk group and premium.  Weight, exercise, smoking, alcohol consumption, hobbies, age, sex, ethnicity, location, current medical conditions, medications and many other factors may be collected to determine probability of death, life expectancy and premium payments.

Health insurance underwriting has been very different.  A group policy is underwritten by forecasting (from actuarial analysis) costs in the coming coverage year for the assumed membership of the group.  Data about the group (age distributions, families vs singles, ethnicity distribution, geographic location (s) distribution and other, essentially demographic data) are used to estimate the level of healthcare spending expected in the coming year.  Oversimplified, these numbers are added up, then divided by coverage class to determine the “slice” of group cost assignable to an individual member.  Everyone contributes equally to the coverage pool, irrespective of personal behavior, characteristics or choices.

A car buyer understands that a fancier car will require a higher insurance premium.  That is a factor in making a choice.  Group health insurance members are usually offered some choice of benefit plans.  Plans offering more coverage, richer benefits or more freedom of choice of physician costed more, others less.

“Adverse selection” is the term used to describe the condition of an underwritten, insured group being composed of heavy utilizers in numbers larger than those assumed in the forecast which supported the premium.

The programs that have resulted from the Affordable Care Act are the predictable outcomes of the elements of the law.  Mandated coverage for “children” as family members raised family premiums.  Elimination of pre-existing condition exclusions which helped manage adverse selection assured that all heavy utilizers could and would enroll.  Mandated benefit coverages prevent custom plan design, helping to drive up prices further.  High costs, mandated benefits misaligned with personal needs and a comparably modest penalty for failure to participate translate into healthy citizens opting out while people with high health risks and costs all opt in – adverse selection to the max!  Resulting in even higher prices the next renewal year, more low utilizers opting out and another round of increases.  A financial death spiral.  Low utilizer or healthy does not mean “no cost”.  Healthy people have accidents, experience slow to emerge health conditions, take health for granted and let life choices build up, triggering health conditions.  Utilization by “opting out”, uninsured citizens results in bad debt and charity care exposure for providers of care, financial ruin or severe burden for the uninsured patient.  Some of the stresses the Affordable Care Act was intended to address. Payers structure plans with increasing levels of cost sharing with the insured through higher copays and deductibles.  This results in coverage which provides little “first dollar” financial benefit, becoming more of a catastrophic medical event plan.  An insured person still faces significant financial barriers to primary care, wellness and condition management access to healthcare providers.

Generic health insurance underwriting policy seeks to avoid inequitable financial burden on those who; by virtue of genetics, misfortune or habits; face the necessity of expensive healthcare.  There was no or little sound, objective basis to parse conditions resulting from heredity or misfortune from those predictably resulting from health neglect and personal choice.  In healthcare, there has not been a sound basis for segmenting group members into tiered risk/cost structures that could recognize the role personal choice plays in healthcare service utilization.

Times are changing, science continues to make strides.  Personal genetic analysis is now available that can provide individualized reports on health risks and factors that are, literally, who we are.  Imagine a mandatory practice of DNA screening at birth or early in pediatric care which provides parents and care givers insight into health conditions that are expected, that are likely or unlikely.  It would then be possible to develop a personal health management road map designed to assure the highest possible quality of physical life, proactive avoidance of personal health risks and “wellness” support.  Assessed individuals would be assigned membership in a “primary risk pool”.  Healthcare costs would be projected based on forecasted utilization expected based on genetic screening.  These costs would include proactive support for genetic risk conditions, “wellness” care and actuarial assessment of risk medical care costs.  Personal accountability can be addressed by monitoring individual compliance with a healthy living map, and, as with auto or life insurance, creating risk pools for individuals who choose to ignore sound guidance and healthy habits.  Higher premiums would be applied to those who engage in health risk heightening behaviors when the behavior begins, not when the resulting health condition emerges.  There is alignment of personal choice, financial burden and incentives.  As with the “good student discount” and teen auto insurance premiums, each of us can connect our current decisions with predictable, future cost of health care.

Hopefully, sound habits and decisions early in life prevent emergence of health conditions in our later years.  With personal freedom to live as we see fit should come some measure of personal responsibility for the costs of those choices.  A new system of health care cost administration that starts with everyone on an objectively and personally established health plan then recognizes incremental costs incurred by individuals who do not care for themselves, assigning these excess costs to well-structured underwriting risk pools can reward responsible personal choice and discourage poor choices early.

Are you an Accountable Care Organization? Engaged in healthcare payment or risk management?  Contact BrightWork Advisory, LLC to schedule a strategic review of products, services and programs today.

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