There are many terms that go along with California health insurance…enough to make it thoroughly confusing to even best and brightest as you have probably found when running your quotes. Unfortunately, we\’re going to have to add yet another more obscure term which will rear it\’s ugly head around 2014-2015 under the current health reform law as it is written. The term that will be very very important to everyone\’s wallet is \”adverse selection\”. Let\’s take a look at this purely insurance jargon and find out what it means to the entire pricing structure of the California health insurance market.

Adverse Selection. It\’s sounds technical enough although some spattering of latin would be a nice finish. What does it mean? If you\’re conjuring up engineers in bow ties with reams of data running around a drab government-like building uttering \”Adverse Selection\” frequently, you\’re not too far off. It is a technical insurance term used almost exclusively within the industry and primarily the underwriting plan design section of the company. Adverse selection in layman\’s terms means this…attracting bad risk. Essentially, it\’s a component of insurance plan design that attracts more risky customers than the average. It make a few months or even a few years but eventually adverse selection will destroy a plan and if not careful, the company that issues the plan. With decades of experience at calhealth.net, we\’ve seen many instances of adverse selection in the California health insurance market. Let\’s take a look at one now.

About six years ago (maybe 2005), a very large, nationwide health insurance carrier decided to jump into the California individual health insurance market. This was a time when the main California carriers such as Blue Cross of California, Blue Shield of California, Health Net, and the like were panicking from the onslaught of brand medication inflation. This carrier offered just a few plans…less than five which were incredibly rich for hospital bills including maternity at a very relatively low cost. I don\’t recall the specifics but it might have a $250 deductible and then no out of pocket on an HMO type plan for hospital with costs below the market standard benefit of $250 deductible followed by co-insurance up to $1500 or so. That rings true all these years later. Guess what…any person looking at having a baby gravitated towards this plan since delivery was going to be $250 and change (copays, etc). The plan imploded so quickly that the carrier actually pulled completely out of the market. I remember warning prospective California health insurance shoppers that the plan/rate would be short lived as it was too good to be true. When the carrier announced to the market that they were leaving the individual health market, roughly 75% of the clients we had on that policy was pregnant! Yes, 3 out of 4. It was so bad that the carrier had to delay the plan withdrawal by 9 months..yes 9 months. Hmmmm…wonder where they got that number from?

That\’s adverse selection. When you attract some type of higher risk by plan design or pricing, it\’s a quick spiral down. What does this have to do with health reform and the California health market? It\’s practically woven lock and stitch through the entire bill. Let\’s just look at the big one screaming from the isles. The penalty for not buying insurance. It\’s graduated to go up over a period of years but it might never get there. The first year\’s premium is just under $100. Now right now, the uninsured break down into roughly 3 components. Can\’t afford coverage, can\’t qualify due to health, can afford it but don\’t want to buy it. Arguably, the penalty is aimed at the latter third. Let\’s take someone who doesn\’t want to buy coverage right now (latter third). Give a 40 year old male this option. You can either pay $100 this year in penalties for not getting coverage or pay roughly $2500 in premium for a policy. Look…they don\’t have coverage now! They\’ve already made that decision. We\’re not even discussing the fact that the new rates will be much higher since mandated coverage will be richer. Now, what if that same person needs a surgery or gets cancer. Coverage will be guaranteed issue. They can qualify regardless of health. They sign up, get that $50K surgery covered and all is well. Well, not all. The underlying insurance rates will explode due to this adverse selection which will force more and more healthy people to contemplate the same options above. Some of them will decide to pay the penalty. This begins the spiral. Less healthy people in the pool, the rates go higher and so on and so on. Adverse selection is the death spiral of any insurance.

The penalty is supposed to go up and needless to say, it will never be as high as the premium and a few years of the above situation at a lower penalty is enough time to explode the market. I wish I was wrong but I\’ve seen it too many times. This is just writ large.

Dennis Jarvis is a licensed California health insurance agent with extensive knowledge of the Individual California health market. affordable California health insurance

Dennis Jarvis is a licensed California health insurance agent with extensive knowledge of the Individual and Small Group California health insurance market. http://www.calhealth.net

Author Bio: Dennis Jarvis is a licensed California health insurance agent with extensive knowledge of the Individual California health market. affordable California health insurance

Category: Finances
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