Wednesday, October 30, 2013

The ACA, Utilization, and Premiums

An overlooked aspect of the ACA (at least, I've not seen anyone talk about this specifically), is what will happen to utilization. In a letter to employees about our 2014 benefits, the following comment was made: "However, premiums are directly affected by utilization and, as determined by our actuaries, utilization increased requiring the increases that we have implemented." That is specifically talking about why our insurance premiums are increasing.

But, that statement encompasses a more general central truth in insurance. Premium levels are set to cover the costs of utilization, or the amount that the insurer will have to pay out in claims. Think about auto and home owners insurance policies. Everyone knows that if you have a bunch of claims, your rates go up. This is because you are more expensive to insure. This also explains the popularity of "good driver" or "accident forgiveness" discounts. If you have a track record of low or no claims, they're "making money" on your policy, so they can afford to overlook one bad act.

Now, extend this thought model to health insurance and the ACA. A significant number of people who either had catastrophic plans or had no insurance at all will now carry insurance per the individual mandate. One of the core basket of services are annual check-ups/physicals, at no cost to the policy holder. Please notice I didn't say "free", as the physician will still be reimbursed for their time. I don't know about you, but if my policy says I'm entitled to something, I'm most likely going to get it or use, especially if it's "free".

So you will now have this spike in utilization. Imagine what this will do from a supply and demand perspective. Demand (for physician services) will increase, and supply is fairly static, and may actually be decreasing as doctors change how they run their practices. This means that you will wait longer for appointments, and delays will inevitably increase. So there will be a negative impact just on being able to see your doctor.

And now back to my primary point. "[P]remiums are directly affected by utilization." Utilization is going to increase. After a year or two of solid actuarial data, what do you think will necessarily happen to policy premiums?

In other words, if you think the ACA plans are expensive now, you ain't seen nothing yet.

The LORD bless you and keep you; the LORD make his face to shine upon you and be gracious to you; the LORD lift up his countenance upon you and give you peace.
Numbers 6:24-26 (ESV)


  1. What a shame that people with pre-existing conditions get preventative health care. They should go back to dying in poverty like they used to, like they're supposed to, the way Jesus meant for them to die.

  2. Luke, chapter 6, verse 9: if a cancer survivor becomes eligible to join your health care plan, write a blog post groaning about "utilization".

  3. I think preventative care is quite important, actually. My complaint, and the focus of this post, was the mechanism by which the ACA is forcing people into health care plans that they might not otherwise want. Young, healthy people would previously make a rational personal decision to forgo insurance, or to carry only a catastrophic plan. The ACA removed that option for them.

    Now, again making a rational decision, I fully expect them to start utilizing services they are paying for. After all, if you're paying for it, why not use it.

    So, utilizations of the system are going to increase. An increase in utilizations will necessitate an increase in payouts from the policies. If those payouts outpace the contributions from the premiums, then there is no choice but for premiums to increase.

    My point, then, is merely that the system as implemented is going to have unforeseen consequences. And I would ask you, what good is a health care insurance plan that is unaffordable?

  4. What good is salvation to a sinner? It's unaffordable! Who designed the system? Someone who thinks he's God! I think he's a muslim.

  5. Putting smart words together doesn't make your argument smart. You've missed entirely the definition of "preventative". Utilization of preventative care drives down the utilization of more expensive, later-stage care. You should have been able to figure that one out on your own, but it doesn't support your argument that caring for the sick and poor is too expensive. Republican beliefs are later-stage symptoms of a diseased mind. Restoring rational thought to someone in your condition usually takes a miracle.

    1. I'm not talking about later-stage care though. I'm talking about current utilization of limited resources. Again, when a lot more people start utilizing a limited resource, what happens? In a market-driven economy, that resource becomes more expensive. Well, healthcare, for various reasons, is not a true market-driven economy. So, there is no disincentive to cause people to stop utilizing, or to modify their utilization. This will lead to longer "lines", fewer open appointments, shortened appointment slots, etc. But I'm sure you recognize all of this.

      And here's the other problem. We're not actually talking about healthcare. We're talking about the insurance market. And the insurance market is a hedge against risk. You as a consumer are betting that you will pay less in premiums than you will consume in services. Either that, or you're buying peace of mind for that moment when you REALLY need the coverage. That's true whether we're talking about auto insurance, home owner's insurance or healthcare insurance.

      Conversely, insurance companies are betting that they will take in more total premiums than they pay out across the entire risk pool. If they're losing money, then they go out of business. They manage that by using various actuarial and underwriting tools to appropriately price the risk.

      And that's the rub with the ACA. It does absolutely nothing to address or fix the healthcare marketplace. It focuses almost solely on the insurance marketplace. It artificially restricts that market and prevents the insurance companies from appropriately weighting the risk factors (and that's why the individual mandate exists).

      I actually agree that the current system is broken. Healthcare insurance shouldn't have to be tied employer group plans (and there's an interesting history behind that with salary cap laws). The private insurance market should be cheaper, and more flexible and more robust. People should be able to buy plans that cover those maladies they have or are concerned about.

      But, the ACA doesn't seem to be the way to fix it. It doesn't address issues with limitations on cross-state policies. Some of the regulations appear to work counter to the stated objectives. Promises made early on appear to no longer be valid, and no explanations for that are forthcoming.

  6. Or you could just have universal healthcare like every other western democracy on the planet...