The Danger of Community Rating

From Boston.com. via a reader:

Thousands of consumers are gaming Massachusetts' 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state's largest private insurer provided the Globe.

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company's data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions.

Other insurers could not produce such detailed information for short-term customers but said they have witnessed a similar pattern. And, they said, the phenomenon is likely to be repeated on a grander scale when the new national health care law begins requiring most people to have insurance in 2014, unless federal regulators craft regulations to avoid the pitfall.

I would argue that these numbers for system gamers would be even higher save for a residual sense of honor in the population that resists such gaming, a sense of honor that will tend to be eroded over time by these incentives.  This is a theme I have discussed before, in answer to the question of why socialized nations seem to do well at first.  My answer to that question was that residual work ethic and values tend to mitigate, initially, against the horrible incentives inherent in socialism, but that these values erode when people see themselves effectively punished for their values and work ethic.

  • Judge Fredd

    I read about this on Fark. The nimrod commenters there seem to fall back on the following: Appeal to Emotion and 2) 936 out of 6.5 million, WOW! What gaming!

    What they fail to realize is that now we have THREE unfunded entitlement programs (Medicare, Social Security, and Obamacare). We do not have enough money to make the first two solvent, much less the money to pay for the latter, even with the smoke and mirrors of "charge you now, get the benefits much later.

    This "gaming" does not surprise me in the slightest.

  • http://ratherbeatthelake.blogspot.com/ gn

    The lobbyists for the insurance companies are the smartest guys in the room when they meet with legislators. They know this will be the result of the pre-existing conditions and equal premiums regulations, as do their masters. What is their long-term plan? If they jack rates to accomodate these rules, eventually they will get blown up (oh the outrage!) and a public plan enacted, don't you think? Just trying to game out why they let this go through like this.

  • Doug G.

    @gn: Exactly. This is not a bug, it is a feature. Failure is intentional, and it will open the door to further government intervention.

  • http://space4commerce.blogspot.com Brian Dunbar

    ... but that these values erode when people see themselves effectively punished for their values and work ethic.

    Indeed. I don't have any great love for gaming the system.

    The guys in Massachusetts were saving about $400 per month for every month they were not on the plan. What's the point in missing out on that gain - I could buy a lot of groceries for $4800 a year.

  • mark

    There is a secondary reason why starting a socialist program works pretty well for a few years say 4 - 5 before going south.

    1: The governement will save by not investing in maintanence, and updating machinery. There will be a little bit of efficiency gained when services are consolidated. Yeah every hospital has an MRI but in a town with 3 Hospitals, two will really do - and the cost is only a few days wait. But then in about 4 years when parts need to be replaced, and that second MRI is down half the time - the government will not invest in a new machine - so lines will start to grow.

    2: Salary controls. This works too for a few years. Doctors have invested many thousands of $ in their career, and especially the older ones are unlikely to leave. But new kids will see that their 150K investment will not get them more then any other job, and many students will decline to go to medical school. Same for Nurses to a lesser extent. This will start to be noticed in about 4 years. Interestingly we will start importing doctors with dubious credentials from foreign lands to try to maintain the doctor level. This might work, but then you have problems of doctors refusing to see patients who do not hold their views. This is a problem particularly in England, where you might not get service if you are gay, or Jewish.

    3: Little investment in new technology. New medical technology for the world is being paid for on the backs of Americans, since the rest of the world artificially caps the price of a new MRI, or new drug. Once America is socialist we will have little new cure development - unless your disease is politically correct. This lowers costs in the short term.

    4: At the same time you right people will learn to game the system. People who see free medical care as really free will show up more often for minor issues. Young kids who never really used the system will say dang if I have to pay 4000 a year, I want something out of this, and will start to show up en mass. It takes about 4 years for attitude shifts about this to take place too.

    So basically, no investment, salary cuts, lack of upgrades will reduce costs for about 4 years and we will get decent service, but once the disinvestment is complete, things will go south quickly.

  • jt

    It's not 936 people out of 6.5 million who are gaming the system--it's 936 people who had huge claims while not spending any money on health insurance. In any given year, the percentage of people with big claims is always a tiny percentage of the total insured pool (or in this case, the uninsured pool). That's how insurance works...

  • Dr. T

    Gaming the system not only makes sense, but it also is ethical. When someone imposes an unwanted mandate with all sorts of rules and regulations, it is perfectly appropriate to act in ways that minimize your economic loss. The fines for not having year-round health insurance in Massachusetts are less than the costs of insurance, so you save money by paying the fines. Since you can get insurance without a waiting period (even for preexisting conditions), why not avoid insurance, pay the fines, and sign-up only when you need expensive care? Such "gaming" is legal, economically sound (for the residents, not the state government), and ethical (because it helps expose the idiocy of these nanny-state programs).

  • Not Sure

    From the linked article:

    “These consumers come in and get their service, and then they leave because current regulations allow them to do it,’’ said Todd Bailey, vice president of underwriting at Fallon Community Health Plan, the state’s fourth-largest insurer.

    ***because current regulations allow them to do it***

    Apparently, it's "gaming the system" when people use the system as designed, but just not in ways those who designed the system wanted them to.

  • Vilmos

    > I would argue that these numbers for system gamers would be
    > even higher save for a residual sense of honor in the population
    > that resists such gaming, a sense of honor that will tend to be
    > eroded over time by these incentives. This is a theme I have
    > discussed before, in answer to the question of why socialized
    > nations seem to do well at first. My answer to that question was
    > that residual work ethic and values tend to mitigate, initially,
    > against the horrible incentives inherent in socialism, but that
    > these values erode when people see themselves effectively
    > punished for their values and work ethic.

    I agree. IMO, any new system (be it social/economical/etc) needs to answer at least two questions:

    Can the system sustain itself? If yes, then the system is viable. It doesn't mean that it is good, or fair, but it simply means that it is viable.

    If not, then can the system change itself to become sustainable? If yes, then see the first question.

    Last, if the system cannot sustain itself, then if the new system is abolished, can the underlying environment (society/economy) go back to the original state?

    And this is where the welfare state fails big time. When after 1-2 generations it runs out of steam, what kind of social values it leaves behind? Parameters include work ethics, solidarity, family values, etc.

    And as a bonus question to ask from social/economical/etc. experienters, who the !@#$ gave them the permission to "experiment" on others? I call these people "Social Mengeles".

    Vilmos