Rules were revealed by the Obama Administration today that will forever change how health insurance companies look at potential customers. The new rules are designed to coordinate with the exchanges that many states are in the process of creating. It will cause health insurers to compete on “a level playing field” for customers.
Right now, health insurance companies try and “cherry pick” the healthiest customers. They have a history of refusing to cover people who have expensive, chronic, pre-existing health conditions. Insurers typically will charge a person who has a serious medical condition a much higher premium than they would for a person who was healthy.
The biggest reason why insurers were choosing to conduct their businesses that way had to do with risk. A person who requires a lot of visits to doctors each year, frequent medical tests, or hospital stays, is going to create some very expensive bills. A healthier person, however, who doesn’t need nearly as much health care, is going to end up creating very small medical bills.
Insurance companies want to be able to make a profit. If they wind up covering too many people who are severely ill, this decreases their chances of making a profit. That group of customers will be extremely expensive to insure.
The new rules that were revealed today are going to change that entire dynamic. For the first time, health insurance companies will begin sharing their profits with other, rival, insurance companies. The insurers who worked hard to select the healthiest, lowest-cost, customers are current generating the biggest profits. They will be sharing that revenue with other insurance companies who have customers that run up much higher bills.
Health insurance companies can qualify for $20 billion subsidies, (in the years 2014 through 2016), when those insurers take on the sickest patients as customers. The money for those subsidies will come from fees that have been levied on the insurance industry.
Essentually, what these new rules do, as Health and Human Services Secretary Kathleen Sebelius has stated, is create a “level playing field” for insurance companies to compete on. It will help to drive down the cost of insurance. It also removes the incentive that health insurance companies currently have to avoid customers who have chronic, or serious, medical conditions.
In the future, insurers who end up with $10 million of projected costs, and that are competing in a market that generates a $500,000 overrun will receive $100,000 from the U.S.. In that same market, insurers who only spent around $9.3 million in one year’s time would owe $200,000 to the U.S.
These new rules are designed to offset the costs that health insurance will be facing when the sickest customers sign up for health insurance in 2014 through the exchanges. Another factor that will help offset those costs is the requirement that all Americans purchase health insurance in 2014, (or pay a fine if they choose not to buy insurance).
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