I recently began questioning the health insurance companies as to what they suggest to turn the individual & family health insurance market around. My premise is that either the market, itself, is unsustainable or that the insurance companies are not giving us relevant guidance on how to repair a crippled market.
So far the answer has been 'we need to be able to raise rates'. I find this economically inappropriate. As you will see below, raising rates does nothing to stabilize the market.
This graph is an example of a linear curve between the premium for health insurance and the gross revenue generated by the premium increases. Revenue is represented by the blue line and premium by the red line. Each step in the premium increase is $50 per month over 20 periods. This is, of course, a completely untrue presentation of what really happens when insurance carriers increase health insurance premiums. Premium increases do not encourage more subscribers to buy or remain on the plan. In a fantasy world, the premiums would increase, gross revenues would increase and the number of subscribers on the plan would increase at the same time.
Now, here's a more realistic picture of what happens over time as health insurance carriers continue to increase premiums to make up for increasing costs on individual and family coverage (you can click on either graph to view and enlarged version).
On this graph, the gross revenue is reflected by the blue line, premium by the red line and I have added subscriber/member population as the green line. Economics refers to the 'law of diminishing returns' and this graph is very similar to the tax theories of economist Arthur Laffer (the 'Laffer curve'). Many will remember Laffer's theory referred to by then-candidate George HW Bush as 'voodoo economics'.
This second chart is my representation of what happens to a health insurance plan over time. Initially the revenue is zero because the plan has zero premium and is not being sold for free. Initial premium in step 2 is $100 per month for a subscriber as the health plan begins to attract new buyers. Each rate increase increment 3-20 is $50 per month until, at step 20, the monthly premium has escalated to $1000 per month from the original $100.
Things flow fairly smoothly initially and gross revenue and subscriber population continue to increase for a period of time (about step 13). However, at step 13 the monthly premium has risen to over $600 per month and subscribers are beginning to feel the pinch (and frustration). This range now creates a plateau where the number of people leaving the plan and the number of people buying the plan are about equal.
As premiums continue to go up to cover costs for the increasing claims of the long time subscribers (who may not be able to move plans because of medical/underwriting issues). Gradually after the plateau the only thing continuing to increase is the premium for the health plan. Revenue and subscriber population is beginning to decrease and the health plan is now experiencing 'diminishing returns' and is beginning to bleed money.
The three rate increases between steps 16-19 (rates increasing from $800 to $950 per month) show a rapid decline in revenue and subscribers. Anyone who can do it will dump this overpriced plan in favor of new coverage at lower cost (and start the cycle all over again). At step 19 ($950 per month) the subscriber population exceeds the revenue curve and the plan is now a financial disaster for the insurance company. Note that at no time after step 1 does the subscriber population go back to zero. This is because there will be some number of people who will remain on the plan no matter premium or because they can't switch to a new plan for medical reasons.
One thing not on the chart is an industry practice knows as 'blocking' This is when a health insurance carrier decides that the losses mounting from the health plan (usually they will pull the trigger around step 17 or 18) and the inability to attract new members requires them to close the plan off to any new enrollments and start shifting the current members onto 'new' plans. Once a plan is blocked, any members remaining on the plan may represent a high claims pool and could be subject to wild fluctuations in rates over time. Most choose to move to a new offering and get into an open pool attracting new members.
What we learn from this as that all health insurance plans will eventually implode at some point in the future when they become too expensive to manage. We also see that arbitrarily raising premium rates to make up for overall losses may work for a while, but will eventually create problems.
We have seen so much of this in the last decade. Does anyone remember the following health insurance plans?
-RightPlan 40 PPO
-PPO Share 500/1000/1500/2500
-PPO $10/$20/$30/$40
-Spectrum PPO 500/750/1000/1500/2000
-ActiveChoice PPO
And the list goes on..................
Dave (davefluker.com)
