State seems at a loss to keep companies from closing plans, which drives up premiums

Nicholas Peppler, Fort Wayne, was healthy and only 23 years old, but he appeared to be in the beginning of a death spiral.

A health insurance death spiral, that is.

The Anthem Blue Cross and Blue Shield policy he had purchased was being closed to new enrollees in 2009, a common practice that critics say drives up costs and forces people into the ranks of the uninsured.

When insurance plans are closed, existing members can leave, but new ones can't come in. Younger, healthier people often drop their insurance to seek cheaper options, or they simply go without. Those who are left behind tend to have higher medical costs, so the risk of insuring them rises. The insurer raises rates to cover those higher costs. That drives even more people out of the plan.

A cycle of increasing medical costs and higher rates follows.

Thus, the death spiral.

"They are fundamentally unfair," said Joseph Belth, editor of The Insurance Forum and professor emeritus of insurance at Indiana University's Kelley School of Business. "It's a way of, you might call, cherry-picking in the market to get rid of the sick people."

Peppler discovered evidence of a death spiral in January, when Anthem, part of Indianapolis-based health insurance giant WellPoint, notified him that his premium payment would rise by 32 percent — far more than the estimated 17 percent or less for similar Anthem plans.

His father, an actuary who understood the inner workings of the individual health insurance market, filed a complaint with the Indiana Department of Insurance.

Said the father, David Peppler: "I just kind of wanted them to hold Anthem's feet to the fire."

But the Department of Insurance upheld Anthem's hefty rate hike.

The decision reveals weaknesses in the way Indiana and many other states regulate the individual health insurance industry. Untold thousands of Hoosiers are paying a price for the state's inability or unwillingness to deal with closed-block death spirals.

Insurance regulators here are aware of the problem, but they admit they do not have the answers. And even if they did, some say they are not adequately staffed to carry them out.

Experts say federal health-care reform should put an end to closed-block death spirals in 2014, but the law remains under attack from insurers and others who object to certain provisions.

So, for the foreseeable future, death spirals appear to be a fact of life in Indiana.

Why close a plan?

Insurers benefit from closed plans in at least two ways. "They know this closed block is going to eventually fall apart," said Gary Claxton, vice president and director of the Health Care Marketplace Project for Kaiser Family Foundation. "So what they are trying to do is get as much money as they can."

Closing off old plans and opening new ones also allow insurers to offer attractive rates to healthy members, he said, which can give them a competitive advantage.

Anthem sees it somewhat differently. Spokesman Tony Felts said the company simply offers a variety of options so customers can select a plan that best fits their needs.

Peppler's old health plan, for example, was launched in 2007 and was among the company's original products to feature a consumer-driven health savings account. Anthem took consumer feedback from Peppler's plan, Felts said, to create a new consumer-driven policy last year.

"We refreshed it and updated it," he said.

Limiting a company's ability to do that also could limit consumer choice.

The broader question is the extent to which insurers should be allowed to concentrate risk among certain customers, rather than spreading it across a wider pool.

Some states — including South Carolina and California — require insurers to pool closed plans with similar open plans when setting premium rates. Indiana does not.

In California, two former policyholders sued WellPoint's Blue Cross of California this year over allegations they were caught in a death spiral after their health plans stopped accepting new enrollees.

The lawsuit, which is seeking class-action status, said that California law requires insurers either to pool enrollees in older closed plans with those in newer plans to calculate premium-rate increases, or to offer enrollees in the closed plans an alternative policy with comparable benefits.

The strategy is to even costs out among more customers.

In Indiana, and in most other states, such pooling is not required.

When asked about Peppler's case, a senior insurance department official acknowledged that closed- block death spirals present problems for consumers. But she said the department had no choice but to approve Anthem's plan under current rules.

"Because of the way rate review has always worked across the states in general, it's by plan and it's by the experience on that particular product and plan," said chief deputy insurance commissioner Robyn Crosson. "That's pretty much, at this point, what we're limited to."

For its part, Anthem said pooling together similar health plans to calculate rates is not so simple. "The impact of adding new members, who typically would have lower claims costs, to an existing insurance pool whose members have higher claims costs may not necessarily result in lower rates," Felts said. "In fact, the opposite could occur."

In other words, lowering the rates of those caught in closed blocks may require higher rates for younger, healthier consumers now in the lower-cost plans.

Overall costs might actually rise, according to Felts.

Change on the way

For now, there's one sure way an Indiana consumer can escape a death spiral: choose another plan. That's what Nicholas Peppler did.

Because he was able to qualify for another plan, he sidestepped the 32 percent increase by enrolling in a lower-cost non-Anthem plan. "He was young and healthy," his father said, "and didn't have anything that would result in his denial of coverage or a big rate."

People with existing health problems, however, may not be so lucky.

Insurers can deny them coverage because of pre-existing health conditions. With no options, they are forced to cling to their current plans — and pay whatever price regulators allow.

That may soon change.

The individual insurance market will fundamentally change as part of health-care reform — including in 2014 the creation of exchanges for consumers to buy policies and the requirement that insurers accept applicants with pre-existing conditions.

"Ideally that should make that a problem of the past," said Alwyn Cassil, spokeswoman for the Center for Studying Health System Change. "What you're doing is creating a marketplace where underwriting is not the name of the game any more."

That is, if the law survives attacks from those who would repeal or alter it.

Much could happen before 2014.

In fact, one activist and frequent WellPoint critic sees death spirals as part of a wider industry strategy to increase rates and dilute coverage.

"This shows that the company has a concerted effort of manipulating its policy blocks in order to both raise rates and in some cases cut benefits on its policies," said Jamie Court, president of advocacy group Consumer Watchdog, which is involved in the lawsuit against Blue Cross of California.

Court said as large for-profit health insurers such as WellPoint prepare for changes from health-care reform, they are trying to shift more consumers with thinner benefits and higher out-of-pocket costs.

"They want more and more of the burden to go onto the consumer," he said.

Back home in Indiana

Indiana insurance regulators say they are looking for ways to stop death spirals, but some question whether they are equipped to succeed.

"Closed blocks, the death spiral, are things that we're very sensitive to," said the insurance department's Crosson. "We've been reaching out to other states to see how they deal with it. It's a problem across the country."

Many states of similar size, however, dedicate far more resources to insurance regulation. Indiana's department employs about 100 people and has an annual budget of about $11 million, according to 2009 figures from the National Association of Insurance Commissioners. The department handled 817 premium-related filings last year, Crosson said.

Maryland, by contrast, has fewer residents than Indiana, but it spends $28 million, more than 21/2 times as much on insurance regulation. Mississippi, with about half Indiana's population, spends slightly more. And Washington, whose population is about the same, spends $25 million.

Crosson called the department lean, but effective. "We do a good job with the resources we have," she said. "Times are tight."

As for David Peppler, he conceded that no state law prohibits Anthem from closing off old policies and opening new, similar ones. Yet he added that he had hoped the Department of Insurance would be on the lookout for the practice and pressure insurers such as Anthem to pool those similar plans together when calculating rates.

Still, he's not surprised by the outcome of the case.

"They probably didn't put two and two together," Peppler said. "I'm not faulting them because they're overworked and understaffed."

 

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