Group Chap 30: Managing Selection in a Multiple-choice Environment Flashcards
Multiple-Choice Environment Defined
When an ER allows EEs to choose among 2 or more medical insurance options
Favorable vs. Unfavorable Selection
- Favorable selection (aka “positive selection”): when low risk EEs tend to choose the insurer or plan option
- Unfavorable selection (aka antiselection, negative selection, adverse selection): when high risk members
tend to choose the insurer or option
Why Offer Choice if It Costs More?
- Overall cost in a multiple choice environment > single choice environment, because:
a. Individuals choose to minimize their out of pocket costs at the expense of the insurer or ER
b. Less economy of scale and negotiating leverage due to fragmentation of the group
c. Communications more complex and admin expensesg reater
- How insurers and ERs take advantage of a multiple choice environment (even with the additional cost)
a. Introducing a new option
b. Taking advantage of favorable selection: create plan features and pricing to attract the low cost risks
c. Encouraging consumerism: insurers and ERs provide info that entice EEs to choose their option, even at a higher price
d. Implementing a defined contribution concept:
▪ ERs contribution to premium is a fixed dollar amount
▪ EE pays difference between their option’s premium and ER’s fixed contribution
▪ 21st Century Cures Act – Dec 2016 – allows small ERs to forego traditional group health plan and instead contribute to Qualified Small ER Health Reimbursement Arrangement (QSEHRA) that EE can use to purchase coverage from individual market
* Similar act in 2020 with ICHRAs
* HRA based defined contribution plans – allows ER to shift key tasks to issuers in
individual market
e. Choice for the sake of choice: offering choice distinguishes an insurer or ER as flexible and leading-edge
What Factors Influence Employee Choice?
- Inertia
- Plan provisions and cost
- EE and dependent demographics
- ER actions and attitudes
- Eligibility for other health insurance coverage
- Information available about options
- Provider network attributes
- Insurer and administration issues
Common Multiple-Choice Scenarios
- Choice between medical coverage and no coverage
- Creates antiselection because EE who waives ER coverage often has lower average health costs than EE who takes the ERs coverage - Choice between employer’s plan and other available coverage (e.g. coverage from their employer vs. their
spouse’s employer) - Choice based on member cost sharing
- Choice based on provider networks or medical management
- Choice between an open network (i.e. PPO) and a restricted network (i.e. HMO)
- Level of provider choice, degree of medical management, and presence of specific providers may drive EE selection - Choice based on prescription drug formularies
- Choice among insurers
- Insurers compete on price, cost sharing, provider network, covered services, customer service, insurer name recognition
- Splitting EEs among more than 1 insurer creates a dangerous antiselection situation - Optional riders added to core coverage
- Choice between consumer directed plans and traditional plans
- Consumer driven plans combine a high deductible health plan (HDHP) with a savings account
Measuring Selection and Health Status
- Insurers are supplementing traditional age and gender analysis with risk and health status evaluation models, such as:
- Health risk assessments
▪ Questionnaires and EE self-reporting
▪ Assigns a health risk score to each EE based on smoking, body mass index, exercise, seatbelt usage, alcohol
- Risk adjusters
▪ Use a member’s medical claim information to make predictions of future claim costs
- Average health risk assessment or risk adjuster score of members in a particular plan option is a measure of selection
Selection Impact of Employee Contributions
- Amount of EE contributions for each option impacts EEs choice of plan
- Defined contribution (DC) model
- EE contribution is difference between total premium for the option the EE selects and the ERs fixed contribution
- DC creates opportunity for EE selection, which insurer should consider when setting premium rates
- Anticipate mix of subscribers choosing respective plan options and include a selection loading in the premium rate calculation
See TIA video for numerical example
Underwriting Multiple-Choice Situations
- Additional premium margin o Selectionloading
a. May add an additional margin to account for underwriting not perfectly predicting costs - EE contributions or plan design limits
a. Limit spread in EE contributions from lowest cost option to the highest
b. Limit spread in benefits so difference of richest option is not more than 20-30% of the lowest option
c. Mix favorable cost sharing or benefit provisions among options to avoid one option being labeled the best for high risk EEs
d. Avoid options with selection potential for specific issues (e.g. avoid only 1 option covering infertility)
- Employee participation requirements if there is one insurer offering multiple choices
a. Requirement that certain % (e.g. 90%) of eligible EEs enroll
b. Could add a premium load for low or decreasing participation in large group market - Participation requirements if multiple insurers offer multiple choices
a. May require that all insurers have consistent underwriting, eligibility, covered services, design parameters, employer subsidization and employee communication opportunities
b. Insurer imposes an additional minimum requirement and reserves the right to withdraw the quote if additional participation is not obtained
c. All insurers agree to redistribution of income based on the health status of EEs who select each insurer option
d. An insurer expecting a favorable risk mix may waive participation rules to take advantage of a situation
Pricing Strategies
Basic strategy in multiple-choice situations is to determine the aggregate premium necessary to cover aggregate claims for all plan options
Step 1: Determine actuarial value of each benefit option ignoring impact of selection. Consider:
- Expected cost of the benefits
- Provider reimbursement arrangements
- Medical management differences
- Admin expenses and margin requirements
Step 2: Estimate the enrollment mix by plan option
Step 3: Estimate relative health status factor for each option based on the expected enrollment mix from Step 2
Step 4: Calculate the preliminary selection adjusted rates for each option
- Step 1 X Step 3
Step 5: Calculate the average selection load
- Ratio of the (average of Step 4) / (Average of Step 1)
Step 6: Calculate blended selection adjusted rates
- Step 1 X Step 5. Appropriate for a single insurer environment
- In a mullti-insurer environment, Step 4 rates may be more appropriate because each option may be required to be self-sustaining
Monitoring Results
- Claim to premium loss ratios for all options combined and on an option by option basis
- Actual to expected selection patterns and health status indicators
- Changes in health status by ER group and by multiple choice options over time
- For an insurer whose plans are offered alongside another insurers’, compare demographics and health status of employees selecting each insurer
- Competitor pricing and underwriting. Also compare insurer’s health status versus industry benchmarks
- Market research of insureds about what influences their choices of health options
