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Picking Cherries in the Age of PPACA

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Health insurers can use many subtle strategies to avoid enrolling consumers they would rather not serve, even if new federal laws ban medical underwriting and keep insurers from basing rates on enrollees’ health status.

Kirk Roy, a vice president at Blue Cross Blue Shield of Michigan, Detroit, has written about strategies for “cherry picking,” or intentionally encouraging good risks to enroll and bad risks to go to other health insurers, in a comment letter submitted to the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.

The Exchanges Subgroup at the NAIC has been developing white papers that would give state insurance regulators’ regulators views on implementation of the section of the federal Patient Protection and Affordable Care Act of 2010 (PPACA) that call for the creation of a new system of health insurance exchanges.


Starting in 2014, the exchanges are supposed to distribute subsidized health coverage to individuals and small groups.

That same year, PPACA is supposed to require all major medical insurers to sell coverage on a guaranteed-issue, mostly community-rated basis.

Insurers could adjust rates to reflect an applicant’s age, and the rates for the oldest enrollees could be as much as 4 times as high as the rates for the youngest enrollees.

One of the NAIC Exchanges Subgroup white papers deals with “adverse selection,” or the risk that some insurers will end up assuming more than their fair share of risk, in a way that will end up destabilizing local markets, state markets or the national market.

Michigan law now treats Michigan Blue as that state’s health insurer of last resort. Other insurers in Michigan can consider applicants’ health status when reviewing applications and pricing coverage; Michigan Blue cannot.

Michigan Blue also faces a strict rate review process.


Because of the nature of the laws governing the Michigan health insurance market, Michigan Blue has experienced significant adverse selection, Roy writes in his comment letter.

Michigan Blue wants to draw the NAIC’s attention to three ways health insurers could avoid enrolling consumers with health problems:

  • Offering an inadequate network.
  • Wrapping products.
  • Letting providers or other insurers pay individuals’ premiums.

For a health insurer, one simple way to deter patients with conditions such as heart disease or cancer is to reduce the number of cardiologists and oncologists in the network, Roy says.

An insurer also could impose unaffordable levels of cost sharing on the routine treatments needed for high-cost conditions, Roy says.

If, for example, a carrier wanted to avoid enrolling patients with end-stage renal disease, it could impose a 90% cost-sharing requirement for dialysis, Roy says.

To avoid those problems, the NAIC should encourage policymakers to “ensure that plans do not develop prohibitive cost sharing arrangements to steer certain patients to other plans, and ensure network adequacy requirements also encompass specialists,” Roy says.

Another practice “wrapping,” is a strategy that involves an employer buying a high-deductible base group health insurance plan for employees, then reimbursing employees for claims that are too small to reach

the deductible, Roy says.

When employers wrap, Roy says, employees are much more likely to file claims.

Some states let insurers increase the rates of employers that use wrapping, or refuse to sell coverage to those employers, Roy says.

“Without rules in place to either prevent wrapping or allow for application of the appropriate underwriting surcharges, restrictions on rating rules will force carriers to spread the additional costs associated with the small portion of groups wrapping to the entire small group risk pool,” Roy says.

If about 5% to 15% of small groups use wraps, Roy says, carriers would need to impose underwriting surcharges of about 10% on the groups employing wrapping.

Otherwise, he says, wrapping will increase costs for the entire market about 0.5% to 1.5%.

In an exchange environment, wrapping could become more common, even in the individual market, and that could lead to selection issues for some people with high utilization patterns, Roy says.

The NAIC should encourage policymakers to ban group plan wrapping or let carriers impose a surcharge on group plans that may be wrapping coverage, Roy says.

Letting third parties pay premiums is another way to throw off underwriting forecasts, because hospitals, pharmacies, automobile insurers and other third parties will probably focus on paying the premiums for consumers with health problems.

In addition, a health care provider may pay the premiums only if the consumer sticks with the provider, and, if a provider is paying the premiums, “the member is often steered to the insurer with whom the provider has contracted the highest reimbursement rate,” Roy says.

Michigan Blue “recommends that NAIC discuss the selection issues that can occur if a third party, especially a provider or other insurer, pays a member’s premium (except in the instance that the member is employed by the health care provider/alternate insurer) and recommends prohibition or limitation of this practice,” Roy says.

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