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Frequently Asked Questions Q. How
would the proposed Association Health Plans (AHPs) differ from
associations that offer health plans right now?
A. The proposed legislation would exempt qualified AHPs from almost
all state regulation, allowing them to design their own benefits and have
broad discretion in the setting of premiums and premium variation. Most
association plans that exist now are subject to these state rules.
Q. Under the AHP proposal, associations would be required to accept all
members and abide by the Health Insurance Portability and Accountability
Act of 1996 (HIPAA). Further, fully insured plans would be required to
abide by the rating rules in their state of domicile, and self-insured
plans would be precluded from setting rates based on health-related
factors. Given these and other protections, why is there a concern about
risk selection?
A. Currently, the rates that can be charged in the small group
market are regulated by the states. Most states have “rate bands” of
varying degrees that define the window in which rates can fluctuate and on
what basis they can fluctuate. Other states have a form of community
rating in which rates are essentially the same for all participants.
Fully insured AHPs would only be subject to the rate bands in their state
of domicile and would use those rules in all other states in which they
operate (some states have very liberal rating rules; Michigan, for
instance, essentially has no rating rules). If an AHP were to sell into a
community-rated state while utilizing broad rate bands from another state,
the consumer choices would be stark. The AHP rates for younger, healthier
groups are likely to be significantly less than for other groups, while
AHP rates for older, less healthy groups are likely to be higher than the
average rate in a community-rated state. It is easy to see what will
happen: younger, healthier groups will join AHPs, and the rest will not.
The departure of these younger groups from the state-regulated pools will
drive rates up dramatically.
Furthermore, this problem is not limited to states that community-rate.
Any state that has imposed a rate band that is more narrow than that being
used in the AHP domicile state will have the same effects. It is likely
that a small number of states (or even a single state) with attractive
rules will become the bases for almost all successful AHPs. Also, rating
is not the only part of the AHP proposal that could lead to risk
selection. Plan design (AHPs would not be subject to state benefit
requirements) can also be a powerful tool to attract “the right risks.”
It is important to note that the most outrageous cases we now hear
about—small businesses with annual premium increases of 50-70 percent or
more—usually see such huge increases because the group has moved into a
higher age bracket. These businesses will see their plights made yet worse
by AHPs, as further upward pressure is put on premiums for older groups.
Q. Don’t the associations that will run these AHPs have incentives to
attract as many members as possible? Why would they want to design plans
that would be unattractive to some of their members?
A. To serve their members and to attract new members, AHPs will
want to keep premiums as low as possible. The most effective way for such
a pool to achieve lower premiums is to attract better risks. To deny that
such will occur is to deny the effect of market forces.
Two types of associations seem most likely to offer AHPs: national
vertical trade associations (representing a specific industry, e.g.
banking, restaurants) and national general small business groups (such as
NSBU or NFIB). A vertical trade group that believes that its trade
population is relatively young and healthy is likely to start an AHP, and
expect it to be successful. Similarly, a vertical trade group that
believes its trade population is relatively old and unhealthy is unlikely
to be able to sustain an AHP. In other words, affected trade associations
and their health insurer partners would behave predictably and according
to their organizations’ financial interests. Risk selection would be part
of AHPs from the very beginning, as individual groups decide whether their
individual risk profiles can sustain an AHP. To believe otherwise is to
refuse to acknowledge the way small group insurance markets function now,
in spite of heavy state regulation.
It is also likely that there would be a number of national general small
business AHPs. These associations would market nationally to potential
members, largely on the basis of premium. Given that these groups would
all have the same regulatory advantages, they would succeed or fail almost
entirely on their ability to attract and maintain a healthier population.
Since apportionment of health risk is ultimately a zero sum game, lower
premiums for those participating in AHPs will mean higher premiums
elsewhere. These increases will drive more healthy people away from the
traditional pools and into AHPs. Those AHPs that attract significantly
better risks can be highly profitable. But AHPs that refuse to engage in
this sort of risk selection, as well as traditional plans that are
forbidden by state law from doing so, will fall into what is known as a
“death spiral,” where higher premiums chase away better risks, which leads
to still higher premiums. The end result will be the destruction of the
traditional insurance market for small firms and the displacement of
millions of currently insured individuals.
Q. Won’t large national AHPs be in a better position to negotiate lower
rates for their members who have few choices now? Everyone knows volume
purchasing equals discounts.
A. One of the fundamental precepts that underpins the arguments of
those advocating for AHPs is the idea that big pools will equal bargaining
clout. In almost every market in the world, the larger the quantity you
buy of something, the lower its per unit price will be. In the health
insurance market, however, the make-up and location of that pool are both
far more important factors in establishing a price than size alone.
A pool of 1,000 people with an average age of 40 could demand (and
receive) a much better rate than a pool of 50,000 people with an average
age of 55. Those are simply the actuarial facts of the matter. Moreover,
when a plan is negotiating reimbursement with providers, a local hospital
or physician will be driven by how many patients the plan will bring them.
A local plan with a total of 100,000 lives will be able to drive a much
better deal than a big national plan with 5 million lives, only 15,000 of
which are local.
The risk profile of the group and its geographic concentration are the two
most important factors in negotiating rates for small business health
insurance. Unfortunately, the proliferation of AHPs would likely draw
small companies into many national pools. While each of these may have
significant national size, their local clout would be limited. At the same
time, they will have drawn groups away from local pools that could be more
effective in negotiating lower prices.
Q. Large self-insured companies have been able to design their own
plans and set their own rates for almost 30 years. Why haven’t we seen
similar problems in those groups?
A. Large and small companies have the same motivations: to provide
the best benefit package they can, one that serves the real needs of their
employees at an affordable cost. But large companies and AHPs don’t
necessarily have the same motivations. Large employers know that they have
a large pool of employees, some good risks, some bad risks, but it is
actuarially stable. With the employer paying all or most of the premium,
even the youngest and healthiest have little incentive to looks elsewhere
for coverage, or to decline coverage.
In an AHP setting, however, the pool is made up of a large number of
groups, each of which has complete autonomy; they can come, stay, or go at
any time, based upon whether they can get a better deal in the AHP, out of
the AHP, or with another AHP. If the AHP finds that it is attracting,
vis-à-vis its competitors, a large “unhealthy” population, it will need to
alter its premium and/or benefits structure. Otherwise, it will collapse.
Large company plans would have the same problems if they were being
marketed outside of a controlled group. If, say, IBM were to allow other
companies or individuals to “buy-into” its plan, it would have to manage
its risk exposure, just like an AHP would. If the plan were too attractive
to older and sicker individuals, prices would go up, and younger and
healthier individuals would leave.
Clearly, the playing field between large and small business is not even.
But the primary benefit enjoyed by larger companies is their large
actuarially stable pools. Rather than creating such stable pools for small
businesses, AHPs will cause additional fracture in the small business
market, and dig that market even dipper into the pit of adverse that it is
already in.
Q. CBO and others have estimated that AHPs will save their members a
lot of money. Aren’t these savings worth the potential risks?
A. Proponents claim that AHPs will save their members significant
amounts of money. In fact, a Congressional Budget Office (CBO) paper
estimated that businesses switching from an existing state-regulated pool
to an AHP would see their premiums decline by 13 percent, a fairly
substantial savings. However, most (almost two-thirds) of those savings
come from risk selection. According to the CBO paper, AHPs would achieve
cost savings by draining away healthier individuals from the
state-regulated pools, thereby forcing premiums to go yet higher for the
majority of the market. The CBO estimates costs will decline for the 20
percent of businesses that join AHPs, but will, therefore, go up for the
remaining 80 percent.
We do not believe that savings for a small part of the market is worth the
increase for everyone else, especially since AHPs will cause the highest
premium increases for small businesses with older groups—precisely those
that have the biggest problem affording coverage right now. |
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