Most Frightening Line In The CBO Report
The CMS and CBO have already concluded that the risk adjustment mechanisms in the House bill are insufficient. The risk adjustment mechanisms are slightly better in the Senate bill. The Senate also has an addition, a temporary three year reinsurance program for when the exchanges first get started. Unfortunately, the CBO has concluded that the risk adjustment mechanisms in the Senate bill are still dangerously weak:
The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization for its enrollees and attract a less healthy pool of enrollees. (The effects of that “adverse selection” on the public plan’s premiums would be only partially offset by the risk adjustment procedures applicable to all plans operating in the exchanges.)
I know that might not sound scary, but that line should strike fear in the hearts of any health care policy expert. As the Dutch have found out, strong risk adjustment mechanisms are essential for a properly run managed competition health care system.
Without a properly working risk adjustment mechanism, plans make money by primarily getting rid of their expensive, sick customers, and then trying to sign up young, healthy people. A strong risk adjustment mechanism takes money from all the plans and redistributes it based on the risk characteristics of each plan. When done right, insurance plans are rewarded not for trying to get healthy customers, but for how cost effectively they manage each individual’s care, regardless of health status. In fact, in the Netherlands, some insurance plans actively try to sign up older, unhealthy people. If they can deliver their care very cost-effectively, it is a huge potential money-maker due to the risk adjuster.
The Senate bill lacks a strong risk adjuster and that means it will be impossible to get high quality, low cost insurance on the new exchange. The public option is just a useful example of a plan that tries to act socially responsible. If any plan tried to treat its customers well by offering them quality, low-hassle coverage, they will quickly be flooded with very costly, unhealthy customers. This will drive up their premiums or drive them out of business.
Because of the weak risk adjuster plans on the new exchange, health insurance companies will not try to compete on quality. They will continue to do what they have been doing. They will compete by trying to drop their less healthy customers, and by designing plans to attract only young people. While new regulations will not allow them to technically drop a person when they get sick, the insurance companies will come up with new ways to “encourage” them to drop their coverage. It will be the same terrible practices we have now, just re-designed to get around the new rules. Unless the risk adjustment mechanism is strengthened, I fear for anyone shopping on the new exchange. All the regulation in the world is worthless unless we create a system that rewards companies for complying.