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AHIP Explains Why It Will Cherry Pick the Exchanges — And How an Opt Out Will Help Them Do It

The WaPo’s Ceci Connolly, the health care reporter the WaPo implicitly offered access to for a mere $25,000 a session, gives America’s Health Insurance Plans (AHIP), the private insurers’ lobbying arm, an opportunity to complain that Baucus’ reform bill is reneging on the deal they got from Baucus and the White House.

But in the article, AHIP inadvertently concedes that insurers will have strong incentives to cherry pick low-cost (i.e., younger) consumers in the new exchange(s), while pushing higher-cost (i.e., older) consumers towards the uninsured category.

This unforced concession has implications for how the so-called opt-out “compromise” would work to screw older and sicker Americans, the very groups that need more affordable health care coverage. But to see that, let’s go back a week to this excellent WaPo article, in which David Hilzenrath explained how insurers would still discriminate against some patients and cherry pick others in the exchanges.

If insurers are prohibited from openly rejecting people with preexisting conditions, they could try to cherry-pick through more subtle means. For example, offering free health club memberships tends to attract people who can use the equipment, says Paul Precht, director of policy at the Medicare Rights Center.

Being uncooperative on insurance claims can chase away the chronically ill. For people who have few medical bills, it is less of a factor, said Karen Pollitz, research professor at the Georgetown University Health Policy Institute.

And to avoid patients with costly, complicated medical conditions, health plans could include in their networks relatively few doctors who specialize in treating those conditions, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania’s Wharton School.

By itself, a ban on discrimination would not eliminate the economic pressure to discriminate.

“It would probably increase the incentive for cherry-picking,” Pauly said. “I’m strongly motivated to try to avoid you if I’m not allowed to charge you extra.”

Got it? Despite reforms prohibiting discriminatory practices, insurers would still have powerful incentives to cherry pick low-cost people and mistreat/shoo away high-cost people. While the reform bills include a risk-adjustment mechanism to reallocate dollars within the exchange(s) from insurers with lower-cost enrollees to insurers with higher-cost enrollees, that mechanism would likely fail to capture all the adverse selection effect, and insurers would have strong incentives to undermine the rules and deceive federal/state regulators trying to counteract the perverse incentives.

In Ceci Connolly’s article, AHIP confirms the insurers’ susceptibility to these perverse incentives. Connolly reports the insurers concern that, given the Baucus bill’s failure to cover 25 million uninsured people and not penalize the uninsured enough to induce enough people to buy their products, then they shouldn’t be forced to comply with bans against discrimination, denying coverage for those with prior conditions, and so on. But think about what AHIP’s Karen Ignagni’s argument is revealing:

Industry leaders, who have held their tongues for months, spoke in increasingly dire tones Thursday about the impact of the Democratic proposals, raising the specter of an eleventh-hour lobbying campaign to defeat Obama’s centerpiece domestic policy goal.

Many lobbyists and independent analysts underlined what they called major flaws in the Finance Committee’s bill, saying it probably would draw the sickest, most expensive patients into the health coverage system without balancing the insurance risk with more young, healthy people. The result, they predicted, would be ever-rising premiums for the people, businesses and governments that pay for medical care.

“The consequences of this would be an upward spiral; rate shock to everyone who stays in,” said Karen Ignagni, president of the industry group America’s Health Insurance Plans. “This legislation will fail the test of affordability for individuals.”

Ignagni’s logic is correct and predictable, but what it tells us is that the insurers are counting on lots of younger, healthy people being forced to pay premiums, so they won’t be stuck with just older/sicker people with higher costs. She’s implicitly confirming that the scheme focuses insurers’ incentives on attracting the young and discouraging the old. These same incentives will be driving the industry whether the number of uninsured is 25 million or 17 million (as projected for the House bills).

How Does This Affect the Public Option and the “Opt-out Cop Out?”
The private insurers will follow the money — they’ll follow the incentives to attract the young and healthy and discourage the older and sicker patients. If there is a viable Public Option (PO), those folks will gravitate towards the PO. If the PO’s rates are linked to Medicare and Medicare payments, as they should be, these patients should be fine, because Medicare payments are already designed to deal with an older, generally sicker population; Medicare is the logical payment structure for many of the people likely to wind up in the PO.

As long as there is a viable PO, these people will have an alternative to choose that is not a private insurer whose incentives are lined up to discourage and screw them. The PO will faithfully cover them at rates linked to costs of serving older/sicker people.

Moreover, the PO will want to survive, so it will have it’s own powerful incentives to press federal regulators to design and implement a fair cost/risk allocation scheme that will transfer dollars from cherry-picking private insurers with lower risk patients to the insurers (especially the PO) that cover higher-risk patients.

Now consider an opt-out scenario in which there is no PO in, say, Texas and several other states. In that case, the usual perverse incentives will still drive private insurers. They will cherry pick the young/healthy and discourage and drive away the older/sicker folks — but where would these people go?

There is a good chance that without a PO as a dependable alternative, these people would simply find insurance unaffordable or so unresponsive they would simply drop out of the system. The insurers will use Baucus’ 4:1 age ratio to charge older folks more and drive them out. And that’s fine with the private insurers, because as Karen Ignagni tells up, they really don’t want those customers anyway, because these older/sicker patients cost more.

The bottom line: the private insurers will have powerful incentives to cherry pick the young and discourage older, sicker patients. A strong, viable PO would have incentives to offset these effects and to make sure the older/sicker are still faithfully covered even if cherry picking occurs.

However, an opt out would strengthen the ability of private insurers to discriminate and leave the older/sicker patients with fewer choices, and perhaps drive them way from all coverage.

No liberal health reform advocate should endorse a system that encourages such discrimination and leads to this entirely predictable and unconscionable scenario.

RJ Eskow/HuffPo, Brilliant Maneuver or Crippling Compromise?
Bill Moyers/Michael Winship/HuffPo, In Washington, the Revolving Door is Hazardous to Your Health

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John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

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