## Thursday, April 10, 2014

### High-cost patients and health plan type: Impact of cherry picking and reinsurance

High-cost patients and health plan type:  Impact of cherry picking and reinsurance

Question:   The table below on insurance payments for three different health plans was created in a previous blog.

 Health Expenditures Number of People Insurance payments plan 1 Insurance payments plan 2 Insurance Payments Plan 3 \$0 8,000 \$0 \$0 \$0 \$500 7,000 \$0 \$0 \$0 \$3,000 6,000 \$400 \$0 \$0 \$6,000 5,500 \$2,800 \$1,400.0 \$0 \$12,000 5,500 \$7,600 \$5,600 \$4,000 \$25,000 2,800 \$20,000 \$15,000 \$17,000 \$150,000 200 \$145,000 \$140,000 \$142,000 SUMPRODUCT \$144,600,000 \$108,500,000 \$98,000,000 Average Insurance Company Expenditure \$4,131.43 \$3,100.00 \$2,800.00

These are the three health plans.

 Three Health Insurance Plans Plan Number One Plan Number Two Plan Number Three Deductible \$2,500 \$4,000 \$8,000 Coinsurance Rate 20% 30% 0% Out of-pocket Expense Limit \$5,000 \$10,000 \$8,000

Here are my questions:

What percent of health insurance payments to insured households are the result of the 200 highest-cost claimants for the three plans?

Plan managers are considering a benefit change that they believe will induce 50% of highest-cost claimants to switch plans.   Under what plan will this cherry-picking strategy have the largest potential impact on insurance premiums or profitability?

A government reinsurance program pays 75% of all claim costs over \$100,000.
What insurance plan will be most affected by this new reinsurance program?

Analysis:  The table below contains information on insurance payments made to the most expensive 200 claimants, total insurance payments to all claimants, and payment to the top-200 claimants s as a percent of total insurance payments for the three insurance plans.

Insurance payments to the top-200 as a percent of total are substantially higher for the less comprehensive health plans because costs to low-cost individuals are lower for such plans.

 Plan 1 Plan 2 Plan 3 Insurance Payments to top 200 claimants \$29,000,000 \$28,000,000 \$28,400,000 Total Insurance Payments \$144,600,000 \$108,500,000 \$98,000,000 Top 200 Payments as a  % of Total Insurance Payments 20.1% 25.8% 29.0%

Below is a table summarizing the impact of a reduction in the number of highest-claim cases from 200 to 100 on average insurance payments for the sample.

 Plan 1 Plan 2 Plan 3 Average Cost No Cherry Picking \$4,131.43 \$3,100.00 \$2,800.00 Average Cost With Cherry Picking \$3,728 \$2,708 \$2,401 Difference Due to Cherry Picking \$404 \$392 \$399 Cherry Picking as Percent of Total 9.8% 12.7% 14.2%
The average reduction in cost is 9.8% for plan 1, 12.7% for plan 2, and 14.2\$ for plan 3.

Many economists will argue that this cost reduction will impact premiums not profits.   The impact on profitability will only occur if there is some deviation from competition or some impediment to plan switching.

The table below summarizes the impact of a government reinsurance program on average costs for the three insurance plans.

 Plan 1 Plan 2 Plan 3 Average Cost No Reinsurance \$4,131.43 \$3,100.00 \$2,800.00 Average Cost with Reinsurance \$3,510 \$2,500 \$2,191 Difference due to Reinsurance \$621 \$600 \$609 Percent Difference due to Reinsurance 15.0% 19.4% 21.7%

Results are similar to the cherry picking case.  (Note I have a 50% reduction in cherry picking and a 75% reinsurance subsidy.)

This should not be surprise because both cherry picking and reinsurance mitigate the impact of high-cost cases.

Of course the impact of reinsurance and cherry picking on the efficiency of the market and the well being of society differ greatly.  The problem with cherry picking is that all firms will try it and there will be a race to the bottom.

Soon I will go back to the NFL DRAFT and analyze more positions.  The link below brings you to some of my thoughts on past QB selections.

#### 1 comment:

1. Hey,
Really enjoyed reading your post. Thanks for sharing such an amazing and informative post. :)

Apu

Medical Case Management