qotd: Special enrollments cause adverse selection

The New York Times
January 9, 2016
Insurers Say Costs Are Climbing as More Enroll Past Health Act Deadline
By Robert Pear

Eager to maximize coverage under the Affordable Care Act, the Obama
administration has allowed large numbers of people to sign up for
insurance after the deadlines in the last two years, destabilizing
insurance markets and driving up premiums, health insurance companies say.

The administration has created more than 30 "special enrollment"
categories and sent emails to millions of Americans last year urging
them to see if they might be able to sign up after the annual open
enrollment deadline. But, insurers and state officials said, the federal
government did little to verify whether late arrivals were eligible.

That has allowed people to wait until they become ill or need medical
services to sign up, driving up costs broadly, insurers have told
federal health officials.

"Individuals enrolled through special enrollment periods are utilizing
up to 55 percent more services than their open enrollment counterparts"
who sign up in the regular period, the Blue Cross and Blue Shield
Association, whose local member companies operate in every state, told
the administration.

"Many individuals have no incentive to enroll in coverage during open
enrollment, but can wait until they are sick or need services before
enrolling and drop coverage immediately after receiving services, making
the annual open enrollment period meaningless," Steven B. Kelmar, an
executive vice president of Aetna, said in a letter to Sylvia Mathews
Burwell, the secretary of health and human services.

A quarter of the applications that Aetna received in the health law's
public insurance marketplace last year came through special enrollment
periods, he said.

Kevin J. Counihan, the chief executive of the federal insurance
marketplace, said nearly 950,000 people used special enrollment periods
to get coverage through HealthCare.gov from late February to the end of
June 2015.

"On average," Aetna said, "special enrollment period enrollees stay with
us for less than four months, while enrollees who come to us during the
annual open enrollment period maintain their coverage on average for
eight to nine months."

Daniel J. Schumacher, the chief financial officer of UnitedHealthcare,
the insurance unit of UnitedHealth Group, said more than 20 percent of
its marketplace customers signed up after open enrollment ended last
year. And they used 20 percent more health care than people who signed
up before the deadline, he said.

Such concerns could portend higher insurance rates broadly. In setting
current premiums, insurers say, they did not realize how many people
would sign up after the deadline and how much care they would use. That
information may affect future rates and benefits.

The federal government allows people to sign up or switch health plans
outside open enrollment for various reasons. Lawyers said it was not
easy to find a complete list of the eligibility criteria, which have
been set forth in regulations, bulletins, official policy statements,
manuals and informal "guidance documents." Some of the reasons are
straightforward, like getting married or having a baby.

Others are more complicated and less clear-cut. Consumers may, for
example, be eligible for a special enrollment period in "exceptional
circumstances" and in "other situations determined appropriate" by the
Centers for Medicare and Medicaid Services. The circumstances may
include "a serious medical condition" that kept a person from enrolling.

"Most consumers are confused by the rules on special enrollment periods
and do not understand the system well enough to try to game it," said
Christine Speidel, a lawyer at Vermont Legal Aid. On the other hand, she
said, "many people feel that insurance is not affordable, even with
subsidies, and they will call the marketplace to see if they qualify for
insurance when they get sick."

http://www.nytimes.com/2016/01/10/us/politics/insurers-say-costs-are-climbing-as-more-enroll-past-health-act-deadline.html?ref=business&_r=0

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Comment by Don McCanne

Open enrollment periods for the ACA exchange health plans are limited in
duration to prevent people from buying insurance only when a need
arises, and then canceling the insurance after the need is met. This
"adverse selection" would reduce premium revenues for the insurers while
increasing expenditures for medical benefits. This drives up the cost of
premiums for everyone else which can cause the healthy to bail out,
driving premiums up even more and resulting in the "death spiral," which
is very disruptive to insurance markets.

Circumstances for individuals do change when enrollment is closed, thus
the law allows special enrollment so that individuals don't have to wait
up to a year to gain coverage. The problem with special enrollment
during closed enrollment periods is that it is the individuals with
changing circumstances who also have pressing medical needs that will be
compelled to enroll. Thus the payouts by the insurers will increase
during these closed enrollment periods. Also, many healthy individuals
who feel that they cannot afford their premiums will drop their
coverage, decreasing revenue for the insurers. Increased expenditures
and reduced revenues is not exactly the business model that insurers seek.

This creates a dilemma for the actuaries. To ensure solvency, premiums
will have to be set higher than would be warranted based strictly on the
better health of those enrolling during the open enrollment period.
Higher premiums then threaten the insurers' ability to gain market
share. This is a problem for even the nation's largest insurers, as we
now see UnitedHealth is withdrawing from the exchanges for this very reason.

The Affordable Care Act perpetuates a market of private plans
theoretically designed to use competition to improve quality while
reducing costs. But because insurers are not allowed to exercise pure
market forces since they must sell their products to people who will
actually need to use them, the regulated market of private plans fails
under these countervailing forces. Waste escalates because of the
greater administrative burden of this defective market, and because of
the need of the insurers to distort the functioning of their plans
(e.g., higher deductibles and narrower networks) in an attempt to
protect their bottom lines.

We can't keep pretending that we will figure out a way to make private
insurance markets work for everyone. We already have over half a century
of failure. That's enough. It's time to enact a publicly-administered
and publicly-financed single payer national health program - an improved
Medicare for all.