The Problem with Open Enrollment

Austin Frakt and Amitabh Chandra propose a common-sense idea at the New York Times:

health-insuranceIf plans could compete on the basis of the therapies they cover, consumers could decide what they wish to pay for. This sounds complicated, but it need not be.

Health plans could define themselves at least in part by the value of technologies they cover, an idea proposed by Professor Russell Korobkin of the U.C.L.A. School of Law. For example, a bronze plan could cover hospitalizations and visits to doctors for emergencies and accidents; genetic diseases; and prescription drugs that keep people out of hospitals. A silver plan could cover what bronze plans do but also include treatments a large majority of physicians find useful. A gold plan could be more inclusive still, adding coverage, for instance, for every cancer therapy shown to improve patient outcomes (no matter the cost) as long as it was delivered at a leading cancer center. Finally, a platinum plan could cover experimental and unproven cancer therapies…

This proposal encounters an immediate problem:

[A]s people become sick, they will prefer plans that cover more treatments, including experimental ones. As sick people disproportionately choose more generous plans, their expenses and premiums will have to rise. This phenomenon, known as adverse selection, is familiar in most health insurance markets, including those for employer-sponsored plans, private plans that participate in Medicare and in the Affordable Care Act’s new marketplaces. One common way to address it is to permit individuals to switch plans only once per year, during an open enrollment period. This locks people into their choice for some time, so they can’t suddenly upgrade their plan after getting sick. If a once-per-year enrollment period proves insufficient in this case, a longer period could be imposed.

This demonstrates the inferiority of open enrollment versus another alternative, health-status insurance (also known as insurance against becoming uninsurable). For example, one area of current conflict between health plans and pharmaceutical companies is the price of specialty drugs such as Sovaldi, for Hepatitis C, which costs $84,000 for a twelve-week course.

Current open enrollment usually happens annually. ObamaCare’s open enrollment ended on March 31. Suppose someone signed up for the cheapest Bronze plan, thinking he was healthy, and then was diagnosed with Hep C in April? Under current ObamaCare rules, he has to wait until November 15, 2014, to choose a better plan for January 1, 2015. And current ObamaCare Gold plans would still offer skimpy coverage of Sovaldi. Under Professors Frakt’s and Chandra’s proposal, I suppose the Gold plans would offer Sovaldi for reasonable co-pays, but they would be even more nervous about adverse selection. So, they might limit open enrollment to every two years, for example

Obviously, the person diagnosed with Hep C in April is in a much worse position than someone who remains healthy until November (in either 2014 or 2015) and can switch immediately to a plan with better coverage. This hardly seems just. Under health-status insurance, the insured person can switch plans whenever he wants, and the previous health plan pays a sum to his new health plan that is appropriate to his new health status. Of course, he pays for this optionality with a slightly higher premium initially, but the advantages far outweigh the cost.

Comments (12)

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  1. Buddy says:

    “health-status insurance (also known as insurance against becoming uninsurable).”

    I don’t know about having insurance for my insurance. I much rather prefer paying a doc cash for my annuals and medical tourism for the more expensive operations.

    • Dave Callaham says:

      I agree that it can get a bit tricky, and that health insurance is less like insurance and more like a requirement. But health status insurance helps those who suddenly become sick from paying newly high premiums. Not all individuals have the means of medical tourism or cash payment health care.

  2. Matthew says:

    Health status insurance gives people the freedom of choice when their health status changes. Having the freedom to switch plans whenever and insurance companies competing on prices seems like a much better deal than what were getting now.

  3. Bill B. says:

    “For example, a bronze plan could cover hospitalizations and visits to doctors for emergencies and accidents”

    This is a great option. Placing the amount of coverage based on each metal plan from basic to most extensive is a simple option for consumers.

    • Erik says:

      This is what we had and people WITH insurance could not afford the treatments so they either did not have them or they are moved to bankruptcy due to cost.

      This is no way to run healthcare, this is a simply a way to get past the MLR rules.

  4. Brad says:

    The person will have to wait more than 6 months before he could receive proper treatment under the Affordable Care Act/Obamacare! That’s crazy. I think that the rules should definitely be changed to encompass the rules proposed by Professors Frakt and Chandra.

  5. Devon Herrick says:

    Health status insurance is an interesting concept. This type of insurance — in addition to other ideas such as stop loss insurance — could provide added flexibility to people traditionally shut out of the insurance market.

  6. Don Levit says:

    There will be a plan available whose benefits increase. It’s called Health Matching Insurance.
    And, while one’s premiums do not change after a large claim, his coverage reduces by the amount of the claim.
    Then, his coverage starts to build again, like tapping a 401(k) plan.
    Don Levit Treasurer of National Prosperity Life and Health

  7. Steve says:

    I am always going to be a fan of any option that allows the consumer to have a greater opportunity to more narrowly define what he or she pays for and what they get. This truly is common sense, which is probably why is not a part of Obamacare. People should not have to purchase any sort of minimum coverage…they should be allowed to purchase insurance against whatever they feel the need to pay for, if anything.

    Health status insurance seems like a smart option, especially as patient needs may change over time. The important thing though is, once again, that consumers can clearly see what they are paying for and the option of purchasing exactly what they want, and not what some bureaucrat determines is best.

  8. Bob Hertz says:

    How common are these payments from the old insurer to the new insurer going to be?

    Like one person out of a thousand for $5,000, or one person out of hundred for $85,000 (in the Hepatitis case??

    Most companies will need to add to surplus to handle these payments. In a time of very low interest rates, they can only do that by raising premiums.

    Just what we need, another reason to raise premiums.

  9. Willow says:

    So, if this applied to home owners’ insurance, I would not have to spend money on insurance UNTIL my house caught fire.

  10. Bob Hertz says:

    I would think if an insurance company that sheds people has to make large payments to the new insurers, this might dry up all the profit in selling health insurance.

    And take it from one in the industry, the insurance companies are making more money by far in Medicare than they make on insurance under age 65.

    Does any insurer really want to write health status insurance?