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Monday, December 1, 2008

The Individual Insurance Market: Selling Pintos among a fleet of Cadillacs

With apologies to kicking the auto industry while they’re down, there have to be ways to sell a better individual insurance plan to those below the age of 64 since we provide such grand individual insurance plan to those above 65 and get Medicare.

Medicare market: Those who are on Medicare can either just get original Medicare that cover 80% of their expenses or pay anywhere from a few dollars more per month to hundreds of dollars more per month to get everything covered with any doctor. There are possibly more choices of Medicare plans than there are choices of breakfast cereal with everything from pure gut cleaning fiber to sugar infusions that will give you instant diabetes. All this is brought to you by the federal government which generally pays for 90% of the cost of the plans and offers a risk adjusted payment scheme to well, limit risk. With risk adjusted payments, insurance plans get paid more for sicker members so there is no incentive to try and put in conditions to try and attract only healthy members.

Individual market: All these options in the Medicare market, contrast with a real lack of choice or good options in the individual commercial insured market. Various health care reform proposals have proposed making insurance an individual purchase. However, it doesn’t address the issue that purchasing an individual insurance plan is kind of like buying a car in the 70’s. Not a lot of reliable options, not a lot of emphasis on the features that you really want, and it can tend to burst into flames just when you need it.

Supply vs Demand: In general, people want to buy health insurance because they are high utilizers (the 20-30% who use 70-80% of all health care dollars in a given year) or only want it if they get run over by a herd of wildebeests. However, most health insurance plans are priced and planned for the median consumer and don’t need the coverage that the high users want and are more expensive than what the avoider of wildebeests want. The health insurance consumer curves demand looks like a 2 humped Bactrian camel while the supply is a 1 humped camel.

Am I listening? Health insurance companies need to come out with individual plans that better match what consumers want to buy if it is going to be a viable market. The only really interesting part of that statement is that I’m yelling at myself to do something since this is the field where I work. Other blog posts tend to yell at some else to fix something. I’m yelling at myself because I can tell the individual health insurance market is not working and if I am not motivated to do something about it than someone will change it for me and I will probably become a government employee in the process. Not that being a government employee is a bad thing as I thoroughly enjoyed my previous stint in the county health department.

Solution- Products to match 2 main segments: There’s lots of ways that the individual market needs fixing but my lens for viewing it right now is to come up with plans or products that fit people’s needs. Right now, the average carrier’s strategy is to come up with a middle of the road insurance plan that isn’t so comprehensive that it appeals to people who really want to use it but isn’t so expensive that healthy people won’t buy it because it isn’t worth it. That’s how you balance risk and try to lean it towards the healthier folks. The result is mildly satisfying some but leaving a group of unhealthier folks who can’t get as good of a plan as they could get if they got employer insurance and healthier folks who see a plan that’s more expensive than they want.

Free Market Approach: The vaunted free market has not come up with a solution but encouraged a race to the bottom approach of pre existing conditions, limitations, and rigorous screening. The game has been about getting healthier members since that’s the best way to make money. I don’t fault carriers for using this approach since that’s how the system is set up.

Regulatory Solution: The alternative approach that I see involves some regulation of requiring the creation of 2 types of health insurance plan categories; one for low utilizers and one for high utilizers. In order to participate in the individual insurance market, you must offer plans for both of these segments. To ensure that viable plans are offered to both low and high utilizing segments, both the price and membership are linked together by multiples. Your ability to compete for the the low utilizers will be tied to your competitiveness with the high utilizer segment.

The Details:Insurance companies can offer a category of plans for low utilizers that have less benefits at a price that makes it worth it for the low utilizer. Since they are not likely to use the plan, are getting it as a well, insurance policy in case something goes wrong, they are looking more at price and less at coverage. However, to offer plans to this segment, companies must also offer more comprehensive plans at a price that’s a multiple of the low utilizer segment. If you make your high utilizer plans more expensive than your low utilizer plans will have to be more expensive (and less appealing). The final kicker is the membership in your low utilizer plan will also be a multiple of the membership in your high utilizer plan. The plans for high utilizers can have lots of case management, disease management, and be heavy on the design to reduce costs for those with chronic conditions. They can also contain their own network of physicians who have more success or skills with this type of disease management. The insurance companies that can better manage medical costs will do better financially.

To continue the car example, it’s a low end model for those who just need a car to get around and a high end model for those who really like to drive, show off their car, or for whatever reason people get high end cars. These 2 segments are looking for very different things in an insurance plan and have different value to insurance companies. In order to get the higher valued customer (lower utilizers of health care), carriers need to figure out how to serve the higher utilizers of a health care in a sustainable manner.

There are lots of issues with the individual market but this is one solution that addresses the fact that the individual plans that consumers truly want aren’t available because insurance companies have congregated left of center. It should create more appealing insurance options for low utilizers (typically young adults who have a 30% uninsured rate) and more affordable options for high utilizers who have been pushed out of the market.

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