With the “Triple P” Paycheck Protection Program money mostly depleted, we are looking at major layoffs this fall. The airline industry is said to be laying off 32,000 workers. 2.4 million workers have been out of work for 27 weeks, with another 5 million approaching the same benchmark. With Covid-19 spikes here in the city and school closings by zip code, more businesses will shutter their doors. What does this all mean?
For starters, there will be a tremendous number of people losing their group health insurance. This presents a problem due to ADVERSE SELECTION! ALL HEALTH INSURANCE COMPANY DECISIONS ARE MADE TO AVOID “ADVERSE SELECTION!” ADVERSE SELECTION in the insurance industry, involves an applicant gaining insurance at a cost that is below the applicants “TRUE LEVEL” of risk. A cigarette smoker obtaining life insurance as a non-smoker would be an example of “insurance adverse-selection.” Many people get glazed-over when health insurance is mentioned. If you can understand ADVERSE SELECTION, then you can understand how health insurance works, and why insurance companies avoid it at all costs.
Employees that leave or are fired from large companies often get “sticker-shock” when they see the their “true” health insurance rates. Most companies have been subsidizing a portion of the monthly premium. Employees receive their COBRA notice (COBRA is the right to continue the group plan) and the premiums are often unaffordable, leaving them in the “Individual Health Insurance Dilemma.”
The insurance industry is regulated by individual states, which is different from the banking industry (FDIC Federal Deposit Insurance Corporation) and the stock market (FINRA Financial Industry Regulatory Authority). This means that while the banking and stock market industries have the same rules across the country, the insurance industry has different rules (and products) in each state. There is no better example than New York State vs. New Jersey. New York is a “COMMUNITY-RATED” state, meaning that everyone pays the same rate (with traditional Affordable Care Act insurance) regardless of age or health. That means a 25-year-old man or woman pays the same rate as a 55-year-old. Is this fair?
This leads to “adverse selection” in New York. In New Jersey, rates are “age and experience-rated” so older people pay more as do unhealthy people.
Obamacare plans (also known as traditional or fully-insured plans) are what are also known as “guaranteed issue” plans, meaning they have to accept ALL APPLICANTS into their plans. These plans are ALL backed by New York State, who would step in if/when the health insurance company goes bankrupt. This leads to “adverse-selection” which increases current claims and future premiums. There is a whole cadre of non-traditional (also known as self-funded or “boutique”) plans that do not have to accept everybody. They have a huge advantage because they can pre-qualify and exclude those with pre-existing conditions. This avoids “adverse-selection” and keeps their claims and premiums down. ALL licensed brokers have access to the same Obamacare plans; however, very few even know about non-traditional plans, which can be a better option for the right person.
In general, the larger the group/company, the better the plan, which is called “economies of scale.” A numerical example can best illustrate this.
You have 2 groups, A and B. A has 5 enrolled employees, all single, who pay $500/month each. Group B has 52 enrolled, same as A with all single and paying $500/month each. Both groups have 2 sick (unhealthy) people who are going to slam the insurance company, this is called “buying a claim,” with a $10,000 claim each the first month.
The way the insurance company looks at it, Group A is paying them $2500/month and they are going to have $20,000 of claims the first month, which wipes out the majority of the first year’s profit, because there are insufficiently monthly premiums coming in to cover the claim costs.
Group B is paying $26,000/month in premiums ($500/month each for 52 enrolled employees). Even though the health insurance company is going to get hit with $20,000 of claims in month one, they know that there is no way this will happen every month, and they can still be profitable because there are enough healthy employees paying monthly premiums to cover the sick people who are “buying a claim.”
For individual plans, there are not enough healthy people paying premiums to cover 1 sick person. Individual plans are fraught with Adverse-Selection, hence NO insurance companies want this business. Remember, “Health insurance companies do everything they can to AVOID “ADVERSE-SELECTION.”
What is the best way for health insurance companies to do this? By disincentivizing (penalizing) the broker! If the insurance companies reduce or eliminate “insurance broker” compensation, brokers will not sell their products.
This has been happening for years since Obamacare began. Insurance companies know that most brokers sell using the cheapest plans on their spreadsheets. For example:
1. “Health Republic Insurance of New York” had the lowest premiums for individual plans and many unhealthy people flocked to them, creating an unhealthy pool. New York State saw them hemorrhaging millions of dollars/per month and then shut them down with 1-2 weeks notice on 11/30/2015. This created a “scramble” for both individuals and brokers.
2. Most brokers then moved these individuals to Care Connect and to a lesser extend to Oscar. Care Connect was a financially solid company who partnered with North Shore-LIJ Hospital. This was a well-run company whose premiums were too low. They were forced to shut down because of the money they had to kick in (the most profitable companies had to contribute to help the others) to the “shared-risk pool.” New York state would not approve their rate hikes needed to cover this “extra” cost, so they eliminated individual plans then most individuals flocked to Oscar.
3. Oscar just sent brokers a memo that they are “discontinuing” broker commissions on Oscar individual policies effective 1/1/2021.
What does this all mean?
During these Covid-19 times, people need to surround themselves with proficient insurance and financial advisors.
Are you confused yet? Do not fret, we are here to help. Feel free to contact me at 917-359-3985 or Rob@InsuranceDoctor.us.
KEEP THE FAITH!