Creating Consumer Competition in Health Insurance
Equals Better Control of Health Care Costs

For better or worse, most Americans obtain health insurance through their employers. And while health insurance carriers compete heavily for employers, competition at the employee level is virtually nonexistent. In 2005, 80% of all U.S. employers offered only one health plan to their employees, according to the Kaiser Family Foundation.

The reason carriers are unwilling to compete for employees within a company is that there is no way to predict how many sick or healthy workers are going to choose one carrier’s plans over another’s. Consequently, this single-carrier, no-choice system of health insurance for employees leads to higher costs and dissatisfied customers.

Why Are Health Plan Carriers and Employers At Odds?

Fair competition only exists when multiple suppliers have a level playing field with a chance of making a profit from their target customers. Health insurance carriers refuse to compete for part of an employee population because they don’t want to risk signing up more than their fair share of employees who are chronically ill, which would result in higher costs for the carrier.

Known in the insurance industry as adverse selection, health plan enrollment is based on a population with a health risk profile worse than expected. Regardless of how many enrollees in the population are healthy or chronically ill, health insurance carriers are paid the same amount in premiums.

So even if a particular health plan provides better programs for treating certain conditions, and that health plan serves a larger share of members with those conditions, the health plan carrier is penalized financially. Does this make sense?

Let’s say an employer enrolls all employees in a health plan that has an excellent diabetes care program, including an early detection system that identifies new enrollees with insulin prescriptions; an education program taught by nurses; and a nutrition program in which a dietician contacts patients with nutritional advice. The program might also include a follow-up care program with specialists who help with prevention of other diabetic-related diseases, such as loss of eyesight.
The bad news is that the insurer offering this plan has no financial incentive to enroll the diabetics because the average premium collected from all enrollees is not sufficient enough to cover the costs of the diabetics in the group, no matter how good the care is.

Why These Higher Cost Plans for Employees?

Paying carriers the same rate no matter who enrolls in the plan has forced them to compete at the employer group level – not at the employee level. This ensures carriers that enough healthy employees are enrolled to offset the higher costs (and anticipated loss) of the enrolled chronically ill members as well.

And because employers are forced to use only one carrier, human resources managers tend to choose a one-size-fits-all plan in an attempt to satisfy all employees. But this kind of plan is often more than many employees need or want.

In fact, enrollment experience shows that when employees are offered a range of carrier health plans they make vastly different choices than their employers, with nearly 70 percent enrolling in more cost effective HMOs (health maintenance organizations) and 20 percent choosing PPOs (preferred provide organizations). And, by engaging employees in the decision, they tend to be four times more satisfied.¹

Also, some employees choose the more expensive plans because their employer subsidizes most, or in some cases the whole cost of the premium. Without competition and choice for employees at the carrier level, costs steadily increase.

So Why Are Carriers Paid This Way?

Given the extraordinary cost of health care, we as a society do not feel it is reasonable to expect people born with costly illnesses, such as cystic fibrosis, or who develop expensive illnesses such as leukemia, to bear the full burden of paying for their medical care.

While the funding of health care based on this socially minded method (paying the same for each member) makes perfect sense, the payment to carriers needs to be adjusted for the health status of the member enrolled (risk adjustment).

In other words, if insurers were paid premiums that were commensurate with the number of chronically ill enrollees, they would have greater incentive to provide high quality care to the chronically ill. In this model, aligning insurer payment with enrolled risk creates efficient, high quality, cost effective health care.

So Why Not Adjust for Risk?

This risk adjustment method would promote competition at the consumer level, which does not exist today. Health insurance carriers would compete to enroll every member, especially the chronically ill, since they would now bring sufficient revenue to cover costs. And carriers would be motivated to deliver the best care to that chronically ill member, since the member would have the option of moving to another health plan to better meet their needs. Isn’t that what real competition is all about?

Employers could maintain average cost premiums for their employees, while risk-based premiums would be paid to insurers. Through a risk adjustment model it would be possible to analyze members’ health conditions, based on their utilization. Then premiums would be redistributed to the carriers to compensate them for the health risk of the employees who enrolled in their plan.

At renewal time both carriers would receive underwriting information about the entire group (instead of just their members) and could more accurately predict the rates for the subsequent year. This would enable long-term cost management for employers.

The bottom line: to lower employer health care costs while ensuring quality care, competition amongst carriers needs to occur at the employee level. Risk adjustment enables this competition.

Jeffrey M. Closs is President & CEO of Benu, Inc.