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Subject: qotd: Insurers game risk against each other
Date: Mon, 8 Jul 2013 08:49:36 -0700
From: Don McCanne <firstname.lastname@example.org>
To: Quote-of-the-Day <email@example.com>
National Bureau of Economic Research
Working Paper 19198
Do Insurers Risk-Select Against Each Other? Evidence from Medicaid and
Implications for Health Reform
By Ilyana Kuziemko, Katherine Meckel and Maya Rossin-Slater
Increasingly in U.S. public insurance programs, the state finances and
regulates competing, capitated private health plans but does not itself
directly insure beneficiaries through a public fee-for-service (FFS)
plan. We develop a simple model of risk-selection in such settings.
Capitation incentivizes insurers to retain low-cost clients and thus
improve their care relative to high-cost clients, who they prefer would
switch to a competitor. We test this prediction using county transitions
from FFS Medicaid to capitated Medicaid managed care (MMC) for pregnant
women and infants. We first document the large health disparities and
corresponding cost differences between blacks and Hispanics (who make up
the large majority of Medicaid enrollees in our data), with black births
costing nearly double that of Hispanics. Consistent with the model,
black-Hispanic infant health disparities widen under MMC (e.g., the
black-Hispanic mortality gap grows by 42 percent) and black mothers'
pre-natal care worsens relative to that of Hispanics. Remarkably, black
birth rates fall (and abortions rise) significantly after MMC—consistent
with mothers reacting to poor care by reducing fertility or plans
discouraging births from high-cost groups. Implications for the ACA
exchanges are discussed.
From the Introduction
In summary, under MMC, infants whose costs are likely to exceed the
capitation payment die more frequently, experience worse health
outcomes, receive diminished care, or are not born at all.
From the Conclusion
Introducing risk-adjustment could potentially address the risk-selection
results we have presented, though, historically, governments have been
reluctant to risk-adjust based on race. Adjusting based on past health
conditions is very challenging in the MMC setting and, as previously
noted, is rarely attempted. First, plans would have to submit some
accounting of their clients' health conditions to the government, so
"intensive" coding becomes a problem, as it is in Medicare Advantage and
the Medicare Prospective Payment System. Second, while Medicare can
calibrate a risk-adjustment formula by regressing enrollee costs on
dummies for past health conditions using cost and claims data from its
FFS pool, state governments under MMC typically do not have a public FFS
option and thus will not have the cost and claims data that Medicare
uses. Third, risk-adjustment formulae typically document existing health
conditions using twelve months of pre-data, and use this information to
forecast costs for the following twelve months. A stable client
population - as in Medicare - is thus required, a challenge in Medicaid
given the "churning" of the client base.
Each of these three challenges would seem to apply equally to the ACA
state exchanges. Regulators will rely on insurers' accounting of client
health conditions, and as there is no public FFS option they will not
have their own cost and claims data. And as the exchanges serve those
too rich for Medicaid but not so well off as to have employer
insurance, their clients will likely come and go based on outside
options - if their situation improves, then they will move into employer
insurance; if their situation deteriorates, then they may need to switch
With Medicaid Managed Care, the ACA exchanges, Medicare Part D and the
prominence of Medicare premium-support proposals, the U.S. is moving
rapidly toward providing public health insurance through a model of
competing, capitated private insurance plans. Past work has identified
challenges associated with this model, including the increase in costs
that come with insurers losing monopsony bargaining power over providers
and consumers' cognitive overload from choosing among a large set of
options. Our work points to an additional concern arising from consumer
choice - it tempts insurers to under-serve high-cost clients in the hope
they will switch to a competitor.
Comment: The conclusions of this study are shocking, even if predictable.
It has already been established that private Medicare Advantage plans
engage in surreptitious activities that result in enrollment of
lower-cost, healthier patients, while both avoiding higher-cost
patients, and engaging in behaviors that cause higher-cost patients to
disenroll (cherry picking and lemon dropping). This shifts higher-cost
patients to the traditional public Medicare program, while the private
insurers increase profits by continuing to game risk selection.
This study is different because all of the Medicaid patients who were
formerly insured through a public program were transferred to private
Medicaid managed care programs. Thus there was no public program where
the private plans could dump their high-cost patients. So what did they
do? They dumped them on their private Medicaid managed care competitors!
What is particularly shocking is the way they did it. They spent more
money on the healthier patients to keep them contented so they would
stay in their plans, while reducing spending and giving worse service to
their higher-cost patients, ensuring dissatisfaction because of the
worse outcomes that the patients suffered. Particularly distressing to
advocates of social justice is that the high-cost patients discriminated
against in this Texas study were predominantly black.
This study provides an important lesson for the insurance exchanges
being established under the Affordable Care Act. Since a "public option"
was rejected, the exchanges will include only private plans competing
with each other. What kind of behavior can we expect? The most effective
way for the private insurers to dump high-cost patients onto their
competitors will be to give them worse care with terrible outcomes,
causing their patients to flee. Of course, there is nowhere else to turn
except to other private insurers, though some patients might even
consider that paying a penalty for remaining uninsured might be a better
option. Then again, remaining uninsured is not a realistic option for
those who need higher-cost care.
It's the same old bottom line. We can either have a publicly
administered system dedicated to a patient service ethic, or we can have
a privately administered insurance system dedicated to a common business
ethic, no matter how cutthroat. Aren't we making the wrong choice?