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A seemingly innocuous provision tucked inside a proposed state law would make it much more difficult for health insurance companies to drive up the rates of customers who get sick.The proposal would allow customers with high medical bills to buy a different policy from their insurance company – without having to undergo the medical underwriting that screens out people with health problems.That effectively would require insurers to offer those customers new, competitively priced plans that now often are available only to healthy customers.The provision applies to people who buy insurance on their own, such as the self-employed or those who are not offered benefits through an employer.It touches on one of the inherent flaws in the market for individual insurance: the steps that health insurers can take to rid themselves of long-term customers with medical problems.Understanding what the provision would do, though, takes some explaining.”These practices persist because they are amazingly invisible,” said Karen Pollitz, project director of the Health Policy Institute at Georgetown University.The provision is in bills before the Legislature as well as in the budget passed by the Joint Finance Committee late last week.It is one of several proposals crafted with the help of Sean Dilweg, the state insurance commissioner, to tighten the regulation of individual health insurance.The measure would help prevent health insurers from carving out people with high medical bills from the rest of the market. But just how insurers can do this requires some background on the market for individual health insurance.Shared riskHealth insurance, like all insurance, is based on shared risk. Customers pay their premiums, the insurance company pools the money, and that money is used to pay the medical bills of those who have the misfortune of getting sick.People with pre-existing medical conditions – from relatively minor illnesses to serious diseases – generally can’t buy individual insurance in the private market.But once people are customers, health insurers in Wisconsin and most states are required to renew their policies each year. This ensures that someone who is sick won’t lose coverage once the policy expires.That doesn’t prevent the insurance company, however, from taking other steps to get rid of the customer.”You can’t cancel the policy, but you can price it out of reach,” Pollitz said.One way to do this is through so-called “closed blocks” – what the proposed legislation would effectively undercut.A block is a group of people who are issued the same policy.Most people who buy individual health insurance remain customers for less than two years. At the same time, health insurers know that the longer they have a customer, the greater the chances that he or she will develop a medical problem.”It is not in the interests of insurers for customers to buy a policy and stay for a long time,” Pollitz said.Health insurers also know that high medical bills are concentrated among a small number of people – 5% of the population accounts for 50% of health care expenditures.So health insurers have a strong incentive to avoid insuring those people – who also drive up the cost of insurance for everyone else.To get around this, some health insurers eventually will close the block – the group of people who bought the policy – and start up a new block by offering a slightly different health plan.That becomes a new product with a separate risk pool. It also costs less. People who are healthy – and who have the option of going elsewhere – naturally opt for the less expensive coverage. That sets off what insurance experts call a “death spiral.”Here’s what happens:• As healthy people opt for the less expensive policy, their premiums no longer offset the high medical bills of those stuck in the closed block.• With each passing year, the closed block gets smaller and increasingly consists only of people with high medical bills – people who can’t get health insurance elsewhere because of pre-existing medical conditions.• Because premiums are based on claims, the insurance company can steadily increase the cost for the people remaining in the closed block.”It has been a longstanding practice among some health insurers to engage in this,” said Joseph Belth, professor emeritus of insurance at Indiana University.The problem affects a small number of people, but they are the ones who need health insurance the most.Practice variesNot all insurers have closed blocks. Humana doesn’t, for instance, while Anthem Blue Cross and Blue Shield does.UnitedHealthcare and its affiliate Golden Rule Insurance Co., both part of UnitedHealth Group, would not comment.”Some companies are more notorious for this than others,” Belth said.Insurance companies contend that closed blocks can help keep insurance rates low. That in turn encourages people to buy health insurance.But Belth said, “They are keeping rates low for the people who stay healthy at the expense of people who get sick.”He contends that closed blocks undercut the idea of insurance: shared risk.”This is the way insurance works – they take the risk, but they have various ways to transfer the risk back to you if you are one of those who are unfortunate enough to get sick,” Belth said.Letting people with health problems buy a different policy from the same company would effectively end closed blocks.That would stabilize rates for long-term customers. But it also would increase rates for other customers.”There is a balancing act,” said J.P. Wieske, director of state affairs for the Council for Affordable Health Insurance. “You have to find a way to work through these issues.”The provision was the most controversial part of the proposed changes in how the state regulates individual health insurance and was opposed by Wisconsin PPO Association, a health insurance industry trade group.Dan Schwartzer, executive director, said the trade group doesn’t oppose eliminating closed blocks but contends that there are better ways to do it.”Everyone agrees that it needs to be fixed in some way, shape or form,” Schwartzer said.
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