Assembly Hearing Addresses Issues of Risk

It was not your usual subject for an Assembly hearing in the Capitol Building.

Yesterday’s hearing convened by the Assembly Committee on Health took on the arcane and important subject of adverse selection and risk pools. The nerdy-tech tone of the hearing was not lost on its participants.

“I have to applaud the committee — for taking on such a dry topic,” said David Panush, director of government relations for Covered California, the state’s health exchange. “But it is so important. I’m really glad to see it.”

Allen Tong, a primary care research fellow at UC Davis Medical Center, presented a succinct description of adverse selection:

“If you ask most people, they pretty much know their medical complaints and conditions,” Tong said. “So when you give them a choice of plans, healthy people either will not purchase a plan, or they’ll buy a cheaper, basic plan. Less healthy people will tend to buy more comprehensive care. That makes sense. Everyone here is acting relatively rationally and logically.”

But what that does, Tong said, is create two pools of people — a small, expensive pool of sick people and a large pool of low-cost, healthy people.

“So it leads to an uneven distribution of healthy and unhealthy people,” Tong said. That means an uneven distribution of expenditures on health care, and an uneven amount of risk. Those pools are formed naturally, but they tend to result in health care coverage only for the healthy, because they’re more desirable enrollees because they don’t need it as much. In a way, it’s the opposite of one of the tenets of health care, Tong said, to care for people who are ill, for people who need care.

“What exaggerates this even more,” Tong said, “is that the top 10% of health care users take up about 65% of the total expenditures. Going higher than that, the top 1% take up nearly a quarter of the spending. While the 50% with lower expenditures only use 3.5% of health care services.”

Tong described a “death spiral” of health care coverage and expenditures, in which the people who are higher-risk, heavier users of care cost more, so insurers need to ask those consumers to pay more. But by raising the cost of insurance to that small group, the only ones who can afford to remain in coverage are those who need more of the services, which drives cost higher, then prompts another wave of price hikes, and so on.

“It becomes too costly to take care of a disproportionate share of unhealthy people,” Tong said.

The idea is to spread out risk and cost across a bigger pool of enrollees — a mix of healthy and unhealthy people. But insurers would prefer to enroll mostly the healthier enrollees, and avoid ones with risk, Tong said. “And those insurance companies are acting completely rationally,” he said. “But it doesn’t result in good care.”

Marian Mulkey is director of the Health Reform and Public Programs Initiative at the California HealthCare Foundation, which helped put together yesterday’s hearing and publishes California Healthline.

“Risk issues are a big reason why small employers don’t offer insurance,” Mulkey said. She said one way insurance companies manage risk is to turn down individual insurers who might bear risk. “They can also offer coverage but rate someone up based on their conditions and potential risk factors,” Mulkey said. Or they can raise the cost of copays and limit coverage, she added.

“Only half of actual costs of care now are paid by premiums in the individual market,” she said.

That will change under the Affordable Care Act, Mulkey said, to at least 60% of actuarial value, with more comprehensive coverage. “But that will come with slightly higher premiums,” Mulkey said.

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