We have covered the healthcare legislation, and its implications, a few times in the past. We discussed the potential downside of the “Individual Mandate,” and the possible legal conflicts it poses.
This week, there is an interesting new analysis of the future of insurance policy rate-setting, and how that will be affected by the new legislation.
According to the analysis, insurance pricing is based on predictability. Insurers use complex formulas to predict their expenses for claims, and base their rates on those predictions. For those predictions to be accurate and useful, they require stable enrollment trends. A consistent, predictable number of customers signing up, and canceling their policies, makes for solid predictions.
Without a stable base for prediction, the insurer cannot be confident in their estimates, and must cover their risk by employing so-called “Risk Charges.” It is the only way they can be sure to collect enough money to cover claims. These Risk Charges are added to premiums, and can raise policy rates significantly.
So, how does this play out with the new healthcare legislation?
The new laws will radically change the way many people buy their healthcare. Some people will want to stay with their current insurer, and current coverage, while many others may see the new rules as an opportunity to change their coverage. Many people who are not currently insured will be signing up under the new rules. Many employers will be re-structuring or eliminating their offered benefits. In short, there will be unprecedented dynamics throughout the industry, in terms of customers signing up and canceling policies.
This dynamic instability will be impossible to predict, so the customer will need to pay Risk Charges. Premiums will go up considerably, whether or not the insurer will actually have more costs.