Health Insurance Basics

Today, when looking at health insurance or getting pre-negotiated discount pricing at doctors, hospitals, pharmacies, etc., people can buy a medical service Discount Card for their entire family, for ~$20 per month, for most health care services.  With 50% of all people spending less than $1,000 per year on health care services, it is the lowest-cost way for most people to access health care services.  Therefore; since health insurance plans cost, on average, ~$500++ per month per person, people will generally only purchase a health insurance plan when they are sick; and know they have chronic medical conditions to manage.

To understand why health insurance has doubled and tripled in price since 2013; go to the Actuarial Values and Risk Pools page.   Reason: It is due to a combination of two (2) factors, 1) The elimination of the High-Risk Pools; and 2) The Actuarial Value Calculator (AVC) that requires that everyone pay the national average of services required by a person.  In the past, the High-Risk Pools divided expenses across millions of people in a State; but today, the small number of people in the Individual and Small Group marketplaces in each State have to cover those expenses, typically about 10% of the people that had previously helped pay for those extra expenses.   In addition, and poorly understood, the AVC, in combination with the elimination of the High-Risk Pools, forces people to pay more for their health insurance by making everyone pay the “average expected expenses” per person.

Explanation: One needs to understand that 5% of all people spend 50% of all health care dollars and 1% spend 30% of all health care dollars.  At the same time, 50% of all people spend less than $1,000 per year.  What the AVC does is average usage of medical services.  For example, a person with multiple chronic health conditions may go to the doctor 2-to-3 times per person per month, while a healthy person may go 2-to-3 times per person per year; therefore the AVC “averages” it and says, “on average” a person uses medical services 15 times per person per year; and therefore, each person must pay for 15 visits per year.  Why?  Well, because the AVC, in combination with the loss of the High-Risk Pools, forces the cost of the medical services of the really expensive people down to the lowest-cost people.  The fewer people in an insurance pool, like today’s individual healthcare markets, the more people pay, significantly more! This is all because the AVC doesn’t carve put the people with really expensive chronic medical conditions.  The AVC does not take into account that 50% of all people spend less than $1,000/year; as it forces each person to pay the national average of $10,000/year.

What should we do?  We should bring back Federal and State Reinsurance Funds/Pools, under the historical model that worked for over 20 years.  By using Reinsurance to cover even just 1% of the 5%, the cost of insurance for everyone else could decrease by 30% or more!  PPACA ruined this historical system by changing it to insurance companies that make money have to send money to insurance companies that lose money.  Really!  Therefore, why would an insurance company care about making money in the Individual health insurance marketplace, if they would have to give their profit to another company?

However, the only way to make Reinsurance work effectively is to also create a “shared risk” program that does not allow for Unlimited Billing of medical services; and Medicare provides a good solution, meaning that if the Risk Pools pay for people’s expenses, then Providers and Drug Companies will only be Reimbursed at Medicare Rates.  This way, everyone shares in the cost of helping cover the people with the most expensive medical costs.  {Note that Medicaid enrollees should not be part of this equation, as they are already being paid for at the lower Medicaid reimbursement rates.} 

Theory versus Reality

It is important to note that today’s system was designed using “theoretical” knowledge and not practical knowledge, or a “Common Sense” approach, all the way back to the establishment of Romneycare in Massachusetts in 2006 (the program used to design PPACA/Obamacare).  Confused?  People involved in establishing the program have publicly stated that they had never purchased their own health insurance plans and had no idea how hard it was to pick a health insurance plan, including former head of CCIIO,, and CEO of the CT Exchange, Kevin Counihan, click here for CT Mirror interview.  It is important to remember that People do not behave theoretically…

When it comes to picking and buying a health insurance plan, people tend to purchase more expensive plans than they need, out of fear of medical bills.  In addition, sick people will always try to buy the best health insurance plan they can afford, even if it is over-priced; especially if they have a lot of chronic health conditions.

The Good but Bad News – The System will (sort of) Fix Itself

This concept is further explained on the PPACA Enrollment page; however, it focuses on understanding that almost 80 million Baby Boomers are in the process of turning 65 and enrolling in Medicare, almost 30% of the Country!  At the same time, over 100 million Millennials (21-36) are still entering the workforce and replacing them.

Therefore, the Individual Health Insurance marketplace will shrink considerably.  In fact, a recent Report from the CMS Actuary predicted that these changes, along with the Repeal of the Individual Mandate would result in ~39 million uninsured, contrary to the CBO Analysis that estimated ~54 million people uninsured by 2026, from early 2017, if PPACA had been replaced by the then proposed health care Bill.

The response from CBO on the CBO Report estimates for uninsured from early 2017 was simply that they had made some “significant” assumptions; and that the CMS Actuary was the “realistic” estimate.  The CBO analysis from 2017 assumed that over 5 million people enrolled in Medicaid would “give up” their Medicaid plans if there was no Individual Mandate.

It is important to note that historically speaking, a national uninsured rate of under 10% is really good, meaning one would expect ~30 million to stay uninsured, or be transitionally uninsured at any one time throughout the year.

Links to submitted HHS/CMS Public Comment in June 2017: HHS Public Comment Reducing Regulatory Burdens of PPACA 12 Jun 17  and in February 2017: HHS Public Comment of PPACA Regulations 17 Feb 17