Saturday, November 21, 2009

How will premiums for “high risk pools” be set under the ‘‘Affordable Health Care for America Act’’?

Anyone with an actuarial or underwriting background understands that determining the risk and setting of premiums associated with large health care plans is as much an art as it is a science. Even in a large group plan, a small number of high dollar claims can skew premiums in an upward direction in only one plan premium cycle. Presumably, since many of these individuals are going to be newly insured or have had significant gaps in prior coverage, they may have latent medical issues that have not been properly addressed. The potential for high dollar medical issues, yet to be discovered and treated looms large as these individuals are brought into the insurance arena.

The House bill proposes to allow premiums to be age and geographic specific so long as the highest premium does not have a ratio greater than 2 to 1 to the lowest premium, or premiums do not exceed 125% of prevailing standard rates for similar coverage. Clearly, without some correlation to actual claims experience, these high risk pools cannot have an actuarial basis for premium setting. By the very nature of applying only age and geographic factors and ignoring actual claims experience, resulting premiums will under price coverage thus leading to a deficit in premium dollars collected. It can reasonably be assumed that individuals eligible for a high risk pool will experience more and larger claims than their non-high risk pool counterparts.

If premiums collected from high risk pooled individuals are insignificant to cover administrative and claims expenses, from where will the balance come? It must come from Federal and/or state revenues?