The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

AB 8 and Unintended Consequences: Guarantee Issue

Posted by Alan on August 10, 2007

AB 8 requires individual health insurance carriers to accept virtually all applicants for coverage (a practice called “guarantee issue”). Because it empowers the Major Risk Medical Insurance Board (MRMIB) to establish criteria which would divert three-to-five percent of applicants to a high risk pool MRMIB manages, there’s a small safety valve. But it is small indeed — too small to avoid creating dramatically higher premiums and increasing the number of uninsured among self-employed and unemployed Californians.

Health insurance is about spreading risk. Insureds who incur lower than average claims subsidize those who incur higher than average claims. Why? Because the “healthier” group expects their costs to be covered if they’re ever on the subsidized end of the equation.

But if individuals know they can get coverage as soon as they need it, why would they buy it when they’re healthy? A system that incents healthy individuals to forgo coverage, but encourages those incurring heavy expenses to buy insurance is called adverse selection. It can devestate a health care market and AB 8 is a recipe for doing just that.

This isn’t just theory. In Kentucky when a guarantee issue market was created 45 carriers left the market and premiums skyrocketed. Things got so bad Kentucky lawmakers had to reverse their “reforms.” In Maine, guarantee issue, along with other reforms, means only one carrier offers individual coverage.  Significantly, even after the state agency regulating rates approved rate increases totaling 124 percent over six years, the lone carrier left in Maine still loses money in this market segment.

Then there’s New York and New Jersey. As noted in an earlier post, citizens of those states pay, on average, a “health care reform surcharge” of 350 percent. That’s how much more the average annual premiums in those states exceed the average annual premium in California.  Adverse selection will do that.

There’s other ways AB 8’s mandate to sell provision could increase premiums in the individual market. For example, it could result in non-Californians facing surgery or expensive treatment to establish residency in the state just tenuous enough to qualify for coverage. (It appears even opening a California-based post office box might work). Once the treatment is completed, they could “move” back to their home states having paid a fraction of the cost of their care. The majority of their medical expenses would be paid by Californians in the form of higher premiums. And as premiums increase it would make it economically attractive for even more individuals to drop their coverage until they need it, increasing the amount of adverse selection in the system and driving costs up further. The process would repeat in a death spiral that could undermine the entire system.

The problem with AB 8, as it is in Maine, New York and New Jersey, is its creation of a mandate to sell coverage without a corresponding and enforceable requirement that consumers buy coverage.  Guarantee issue, when coupled with mandates to purchase, could go a long way toward achieving universal coverage. This is precisely what Governor Arnold Schwarzenegger proposed and it’s what the California Association of Health Underwriters calls for in their Healthy Solutions plan. Another previous post describes how Healthy Solutions approach to guarantee issue would help mitigate against the adverse selection and higher premiums AB 8 will create.

The proponents of AB 8 are not trying to increase premiums and encourage people to drop their coverage. Unfortunately, as written, the legislation is likely to have that very result. Let’s hope supporters of the bill will slow down and enable the Legislature to reconsider some of its provisions before Californians pay the unintended consequences.


2 Responses to “AB 8 and Unintended Consequences: Guarantee Issue”

  1. Matt said

    All of these adverse reactions to mandatory universal coverage are created by the insurance companies. They will do anything to doom the strategy, because they are all about greed, they need to be taken out of the mix. No matter what plan they come up with needs to be given time to work.

  2. With the exception of controlling healthcare costs this is singularly the biggest issue we face as an industry. I find it very disheartening that people who are responsible, well intentioned but uninsurable can’t find affordable coverage. My experience isn’t much different then many other brokers.

    Just as I finished reading one of your posts I got an email from a client’s parents. They are 62 and 58 and finishing COBRA. They aren’t eligible for CAL COBRA so they are stuck. HIPAA is the government and to a large degree our industry sticking its head in the sand thinking it solved a problem. As many of us who make a living in this industry know that that it hasn’t. Although the coverage is good the costs for pre-Medicare people are exorbitant. I can close my eyes and see the ad for Healthcare (read insurance by the public) costs causing bankruptcy.

    Mandating coverage is a must and should be a no brainer that even our legislature should understand. Since politics now trumps rational thinking they just want to pass something and say look what we did. If they mandated coverage there would be an initial spike (not a bump) in utilization but within a few years rates could stabilize.

    When AB 1672 became law many carriers thought it was the end of medical insurance in California. Many carriers left the small group market for years and have only recently begun to reenter the golden state. Any reform will cause rates to rise but it’s how we do the reform that will ultimately determine how much.

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