HEXIT – 6 Reasons Health Insurers Are Withdrawing From Obamacare

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

HEXIT – 6 Reasons Health Insurers Are Withdrawing From Obamacare

July 5, 2016 – Last week Blue Cross Blue Shield of Arizona (BCBSAZ) and Health Net of Arizona announced they were exiting the individual marketplace. Nearly 44,000 Blue Cross Blue Shield customers and 14,000 Health Net customers will need to find new sources of individual health coverage for 2017. Similarly, United Healthcare and Humana have exited the state’s marketplace altogether in 2017.

This pattern of health insurers abandoning Obamacare is playing out in rapid succession across the country. Whether we ditch it, pitch it, or re-stitch it, here are 6 fundamental principles for success policy makers need to understand if private health insurance in America is to be saved.

The Risk Management Game

Insurance is not a game of luck. It’s a sophisticated form of risk management that has been around for centuries, primarily used to hedge against the risk of a contingent loss. In assessing risk there are 6 fundamental principles that insurers all over the world have followed since the beginning of time to protect their business model from imploding:

6 Fundamental Principles

    1. The Loss Must Be Due To Chance
    2. The Loss Must Be Definite and Measurable
    3. The Loss Must Be Predictable
    4. The Loss Cannot Be Catastrophic
    5. The Law of Large Numbers Must Apply
    6. The Loss Exposures Must Be Randomly Selected

Over the next few weeks I will explain in simple terms, various aspects of the ACA that fail each of these principles and what it means in terms of opportunities for a better plan. Let’s start with:

The Law of Large Numbers

The Law Of Large Numbers is a principle of probability and statistics which states that as a sample size grows, its mean will get closer and closer to the average of the whole population. It’s a statistical concept that relates to probability and is one of the factors insurance companies use to determine their rates.

eggs-1-1323530-639x424Let’s use a carton of eggs as an example. Say that for every three-dozen eggs sold by Basha’s an average of one of those eggs is cracked. Therefore every time we buy three-dozen eggs, it is probable that one of those eggs will be cracked. The more eggs we buy, the more probable this phenomenon becomes. If we buy 6-dozen eggs, the probability for one of every 3 dozen being cracked increases. If we buy 12-dozen eggs, the likelihood that one for every three-dozen will be cracked increases even more. The more eggs we buy, the more accurately we can predict that one per every 3 dozen will be cracked.

Simply speaking, as it applies to the insurance industry, the Law of Large Numbers is used to reduce an  insurer’s risk of loss by pooling a large enough number of people together in an insured group. The size of the group corresponds to the predictability of the losses. The bigger the group the more able the insurer is to predict risk and price it accordingly.

The ACA aimed for 48,000,000 uninsured individuals to purchase health insurance. That’s a lot of eggs. At the same time, it prohibited the use of medical information by insurers to assess risk. For that formula to work, nearly all of those 48,000,000 individuals would have had to purchase health insurance to protect the Law of Large Numbers. Confident in their plan, the Feds were convinced that everyone would run out and buy insurance once the ACA introduced the following requirements:

Prohibited Pre-Existing Condition Exclusions– previously written into insurance contracts to allow insurers to refuse coverage to individuals who presented a significant health risk, the ACA prohibited the use of such clauses beginning in January, 2014.

Outcome: Nearly everyone who had previously been deemed uninsurable purchased health insurance policies beginning in 2014, resulting in a significant spike in claim costs and uncertainty for insurers.

The Individual Mandate – intended to make the purchase of health insurance mandatory for individuals and enforced by way of a tax penalty for non-compliance.

Outcome: The tax penalty was minimal and could only be collected from individuals who filed taxes and were entitled to a return. Needless to say the Individual Mandate failed to draw the crowds needed for the formula to work.

The Employer Mandate – threatened steep, non-taxable penalties to large employers who chose not to offer affordable health insurance to all full-time employees.

Outcome: Employers did all they were told to do, incurred the expense and administrative burden that goes with it, and when all was said and done only 15-20% of previously ineligible employees elected coverage once it was offered.

Automatic Plan Enrollment – employers that employed more than 200 full-time employees were required to automatically enroll new full-time employees in one of the employer’s health plans.

Outcome: This stuck in the throats of the private sector for obvious reasons, particularly in view of the fact that mandatory enrollment at the individual level did not exist. This requirement was successfully repealed last November under the Bipartisan Budget Act of 2015.

Government Subsidies – the government offered financial aid to low income earners, primarily families, to assist with the purchase of health insurance.

Outcome: A large majority of the uninsured were of the impression ACA plans were going to be free. When they discovered they had to pay for them many discovered they still could not afford health insurance and chose to remain uninsured.

Health Insurance Market Place – a Federally sponsored, virtual shopping experience where individuals could shop for health insurance and apply for subsidies at the same time.

Outcome: The website proved confusing and cumbersome. Nothing in the ACA stipulated that private insurers were required to sell products in the government-sponsored marketplace and as a result many have chosen to exit the market all together.

All of us want affordable health care and I believe most of us agree that everyone should be able to purchase it, even if they have pre-existing health conditions. But any plan for financing that abandons the 6 tried and tested principles for identifying an insurable risk is flawed and destined for failure.

When your business model requires you pay for each cracked egg the model is not sustainable if the majority of them are cracked. The easiest and perhaps most logical way to grow the numbers is to start by addressing the cost of healthcare, not the cost of health insurance, as one drives the other. Perhaps policy makers can start there.

Next week’s failed principle in review: The Loss Must Be Predictable