“Young Invincibles’ and Risk Pools

There is tension in our healthcare system over risk pools. Private health insurers would have us believe that they are carrying an unfair burden of paying for health care in our current system because too few young people (known as “the young invincibles”) have purchased private health insurance. The reality is that it isn’t the youth who are to blame, but the fact that private health insurers have gamed the healthcare system for decades to attract the healthiest enrollees in order to protect their profits.

Most populations, including ours in the United States, follow what is known as “the 80-20 rule.” The top 20% with the greatest health needs uses 80% of our health spending and the bottom 80% (the healthiest) uses 20% of our health spending. Note that the bottom 50% only uses 3% of health spending.

It is the bottom 50% that private insurers work to attract so they can reduce what they call “medical loss ratios” – the percentage of premiums collected that is spent on health care. These are generally people who are working and have coverage through their employers or who can afford to purchase insurance through the individual market and health exchanges.

Public insurances have been left to cover the populations that private insurers avoid, those that have the greatest health needs. Medicaid covers those with low incomes or who need long term care. Medicare covers the elderly and disabled. The Veterans Administration covers veterans. And high risk pools have been tried in order to provide coverage for people with pre-existing conditions. But this has placed a strain on public insurances as they struggle to cover significant health needs and stay within their budgets or keep premiums and out-of-pocket costs affordable.

A good example of this dynamic between private and public plans is seen within Medicare. If we compare traditional Medicare (fee for service) versus Medicare Advantage plans (private HMOs), we find that Medicare Advantage plans cover the healthiest seniors, yet they cost more.

In “The Medicare-HMO Revolving Door: The Healthy Go In and the Sick Go Out,” the authors found that “The rate of use of inpatient services in the HMO-enrollment group during the year before enrollment was 66 percent of the rate in the fee-for-service group, whereas the rate in the HMO-disenrollment group after disenrollment was 180 percent of that in the fee-for-service group.” In other words, those who enrolled in Medicare Advantage plans tended to be healthier than enrollees in traditional Medicare, but when they became sicker, they left the Advantage plans for traditional plans where there are fewer restrictions on care.

Medicare Advantage plans cost more, which is due in part to higher administrative costs, but is also due to the fact that they are for-profit, unlike traditional Medicare. Compare the overhead costs of the two:

Additionally, Medicare tends to overpay the private plans. This 2013 study found that Medicare had overpaid Medicare Advantage almost $300 billion between 1985 and 2012. The authors concluded, “Risk adjustment does not work in for-profit MA plans, which have a financial incentive, the data, and the ingenuity to game whatever system Medicare devises.”

The most efficient healthcare systems are universal publicly-financed systems because they have one risk pool that includes everyone and no profit motive. Each person pays in through their lifetime and the system is there for them when they need it. While most of the population is healthy, nobody can predict when they might give birth to a child with serious problems, or have a serious accident, or catch a serious infection or develop cancer or other expensive illnesses. Each of us is at risk for falling into that 20% who need the most care at any time in our lives.

If each of us is pooling our money by paying into a universal system, then the system is there for us when and if we need it. That’s the way that insurance was originally designed to work – sharing the risk so that we all have security.

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