Health Care and Insurance

VOICES FROM THE INDUSTRY: Association health plans are destined for failure

May 29, 2006

As the cost of health care rises, legislators in Washington, D.C., look for ways to make health care insurance more affordable for everyone.

The Indiana State Association of Health Underwriters applauds the efforts of legislators to accomplish this. But the attempt to accomplish this through Association Health Plans, while commendable, ignores history and fails to address the underlying issue-the rising cost of health care.

The idea of AHPs has gained in popularity in Washington on the belief that large groups have better purchasing power, can sidestep many state-mandated benefits and reduce administrative costs, therefore keeping premiums for everyone in the plan lower. History has proven otherwise.

Recent history in Indiana through the failed Indiana Construction Industry Trust's Multiple Employer Welfare Arrangement, which is similar to an AHP, punctuates this fact. To learn from history Congress needs to understand the life cycle of an AHP and the four distinct phases they have gone through before failing: Introduction, Pricing, Migration, and Cost Burdens.

Introduction

Multiple Employer Welfare Arrangements, such as the ICIT's, were introduced to combat rising health insurance costs under the premise that small employer groups could band together into larger purchasing pools to increase the purchasing power they could not achieve individually. This was done to reduce the rate of which their health insurance premiums have increased over the years.

If an employer had particularly healthy employees, they could switch to the MEWA and realize a savings on their premiums.

However, the MEWA also becomes very attractive to employers with unhealthy employees who have been hit even harder by rising premiums. In fact, MEWAs tend to attract very sick small employer groups for this reason. As more and more unhealthy small employer groups join the MEWA, the average health of the plan member gets worse, therefore the health care costs to the plan rise. This leads to the inevitable second phase.

Pricing

When the average health of the plan member is good, the plan realizes lower health care costs and therefore can offer lower premiums to members. However, as the number of unhealthy members increases in the MEWA, the costs to the plan rise. This forces the MEWA to raise premiums to everyone in the plan to offset the additional health care costs for those plan members that are less healthy.

Suddenly, the very thing that attracted the healthy groups to the MEWA has begun to go away because the premium savings they were getting over traditional insurance plans no longer exist. These healthy groups are able to switch insurance just like they did when joining the MEWA, leading to migration.

Migration

As the average health of the plan member gets worse, the average premium to the plan members increase. This causes the healthier employer groups to migrate out of the plan to an insurance carrier that will rate their premiums according to the relatively good health of the group.

If this leads to a lower insurance premium than the MEWA offers, the healthy groups leave the MEWA, resulting in an even worse average health rate of plan members, forcing the plan to raise premiums even more.

In the insurance industry the phrase "adverse selection," essentially means the more costly groups need to stay where they are and the healthy groups are able to leave the plan leading to the adverse reaction that was originally intended. This leads to the last phase that has always occurred: cost burden.

Cost burden

Human nature and Business 101 dictate that people are not going to pay more than they need to for insurance or any other business expenditure.

So, the healthy employer groups leave the MEWA and the unhealthy are left in the plan, forcing the MEWA to continually raise premiums to offset rising health care expenditures.

This inevitably leaves the MEWA, as was the case with the ICIT, with only very sick employer groups and unmanageable costs to the plan, forcing the plan to fail under its own cost burdens.

In the ICIT's case, there was not enough money to pay the medical claims that continued to pour in from the unhealthy groups that remained in the plan.

Health care providers are then left to shift the bad debt-from unpaid claims as the MEWA fails-to everyone else to offset losses. This means health care costs go up for everyone as does health insurance premiums.

History has proven that MEWAs do not work, so for Congress to roll out Association Health Plans on a national grand scale will again lead to higher health care costs and higher health insurance premiums for those very people that it is originally intended to help.

The underlying issue ISAHU believes must be addressed before any free market health insurance policy decisions to truly benefit everyone, is the rising cost of health care and lifestyle effects on cost. When this premise is laid as the foundation for policy decisions, maybe true reform can take place.



Gibbons is president-elect of the Indiana State Association of Health Underwriters, a board member with the Indianapolis Association of Health Underwriters, and director of marketing with Indiana Health Network. Views expressed here are the writer's.
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