Inside the Black Box:

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• Inside the Black Box
• Special Considerations in
• Individual Small Group
• AcademyHealth - June 8, 2004
• Jerry Winkelstein, FSA, MAAA
• Blue Cross of CA

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Individual/Small Group/Large Group Comparison
Large Group
Small Group
Individual
May decline
Guarantee issue
May decline
1. Issuance
None
Depends on group size
Yes
2. Individual medical underwriting
Low
Medium
High
3. Level of anti-selection
None
Usually /- X
Varies by state
4. Rating restrictions
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Individual Medical Underwriting ? Claim Cost
Duration Curve
1.16
1.2
1.02
0.93
0.95
1
0.85
0.77
0.8
0.6
0.6
0.47
0.4
0.2
0
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Year 2
Year 3
Year 4
Year 5
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Claim Cost Duration Curve ? 3 Different Rating
Approaches

• 1) Aggregate Rating All insureds with same
  attained age pay same rate

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Claim Cost Duration Curve ? 3 Different Rating
Approaches

• Durational Rating (with Re-Entry Underwriting)
  More recently under-written business pays less

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Claim Cost Duration Curve ? 3 Different Rating
Approaches

• 3) Experience Rating More recently
  under-written business pays less, amplified by
  prospective evaluation.

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Aggregate Rating ? A Closer Look

• Primary rating scheme of Blues
• Pros
• Protects insureds against large premium increases
  if they become un-healthy
• Encourages lifetime partnership basically
  saying we will not discriminate against you
  rate-wise if you become chronically ill
• Con Higher initial premium rates

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Durational Rating ? A Closer Look

• Primary rating scheme of non-Blues
• Pros
• Lower initial premium rates, in a very
  competitive market
• More equitable
• Cons
• More administrative work involved with
  re-underwriting evaluations
• Raises sicker insureds rates at a time they can
  least afford it/leads to closed block
  problem/encourages regulatory intervention

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Experience Rating ? A Closer Look

• Rating scheme used by a small minority
• Every renewal year, every insured is placed in 1
  of 3 buckets

• Total premium rate limited to 300 of new
  business rate

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Experience Rating ? A Closer Look

• Pro Lowest initial premium rate
• Cons
• More administrative work
• Ethical/Morality issues/strongly encourages
  regulatory intervention

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Uninsured Issues Does Guaranteed
Issue/Community Rating Work?

• New Jersey implemented Guaranteed Issue several
  years ago, so that all residents have access to
  affordable Individual Health

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Uninsured Issues Does Guaranteed
Issue/Community Rating Work?

• Due to Assessment Spiral caused by several years
  of healthier insureds exiting the market, current
  monthly premium rate for a 5,000 deductible,
  50/50 MM coverage for age 42 single male 376
• In a medically underwritten environment, it would
  be approximately 77, or 80 LESS!

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Uninsured Issues Is Pooling the Answer?

• Many politicians tout Pooling as the answer to
  reducing the risk of covering the uninsured under
  Individual Medical
• Pooling reducing the variance of the claim loss
  expected. Pooling claims above 50,000/year will
  reduce the overall claim level by 18, if no
  Pooling charge
• Pooling does little to reduce the overall level
  of the claim

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Uninsured Issues Is Pooling the Answer?

• Claim variance is not even a minor concern to the
  major Individual Medical cariers in a State.
• It is the overall claim level that is of concern
  to Individual Medical carriers, especially if
  they asked to provide guaranteed issue in return

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Small Group Late 70s/Early 80s, The Time of
Abuse

• There were few State laws protecting the
  marketplace
• Small Group Carriers became increasingly
  cannibalistic
• JALIC Experience Slamming 5 of the Worst
  Groups was worth 8 to entire block
• Where did the bad groups go?
• Uninsured MEWAs were pyramid schemes who went
  bankrupt, leaving insured Small Groups
  uninsured!

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Abuse ? Small Group Reform

• Regulations vary by state
• Rationale
• Small employer market is not as sophisticated or
  powerful as the large group market and therefore
  needs regulatory intervention
• Purpose
• Promote availability of health insurance to small
  employers
• Prevent abusive rating practices
• Limit use of pre-existing condition exclusions
• Improve fairness of small group market

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Small Group Reform Mandates

• Guarantee Issue
• Definition of Small Group Employer
• States typically specify what rating variables
  must be part of the /- X restriction
• States typically allow /- 25 variance for
  health status or claims experience, with
  additional factors allowed for industry (e.g. /
  15) or group size
• Some States allow complete rating freedom
• Other states are community ratedno rate
  variation allowed
• California Allowed rate variance is /- 10,
  including health status, claims experience,
  industry and group size

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Why AHPs Would De-stabilize the Small Group
Marketplace

• Proposed Association Health Plan regulations
  would seem to set the stage for a return to the
  abuses rampant in the late 70s and early 80s, by
  eliminating State oversight.
• AHPs would self-report problems and rely on the
  US DOL for oversight. The US DOL has testified
  that it could review each health plan only once
  every 300 years.
• Multi-State AHPs could be exempt from State
  Reform rating rules leading to the following

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Why AHPs Would De-stabilize the Small Group
Marketplace
Assume that the Small Group marketplace consists
of the following 4 types of groups, in equal
numbers, and is in a /- 20 State
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Why AHPs Would De-stabilize the Small Group
Marketplace
Before AHPs enter the market, carrier having
equal numbers of A, B, C, D price as follows
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Why AHPs Would De-stabilize the Small Group
Marketplace
AHPs will enter market and will be able to under
price A and overprice D versus the market.
Eventually, the AHPs will get all A and no D
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Why AHPs Would De-stabilize the Small Group
Marketplace

• AHPs will be able to rate all Groups (A, B, C, D)
  properly!
• But, look what happens to the rest of the market
  that has to obey State Small Group rating
  regulations

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Why AHPs Would De-stabilize the Small Group
Marketplace
After AHPs enter the market, carriers will get no
A and B, only C and D
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Why AHPs Would De-stabilize the Small Group
Marketplace

• The bottom line
• As and Bs will get lower rates, at the expense
  of Cs and Ds
• Avoiding State benefit mandates adds small amount
  to increased AHP competitiveness Is this
  desirable?

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Individual / Small Group Rate Increase
Anti-Selection

• Assumptions
• 10 rate increase causes 1.5 additional lapses
• The additional lapses have morbidity 80 of the
  average for the plan
• Prior claims pmpm 200.00
• 1,000 Prior Members

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Individual/Small Group Rate Increase
Anti-Selection
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Individual/Small Group Rate Increase
Anti-Selection

• Prior Monthly Claims pmpm 200.00
• New Members Claims pmpm 200.61
• 200.61 is 0.3 higher than 200.00
• Therefore, for each 10 of rate increase, there
  will be a 0.3 additional claims pmpm increase
  (on top of normal trend)

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Thank You