Friday, February 06, 2009

Private Insurance Makes Nick's Law More Expensive

Nick Rohde, namesake of Nick's Law

Since the election in November, both the state House and state Senate of Oklahoma are now controlled by Republicans for the first time in roughly forever. And while the House and Senate have only been in session for one month, they've already started kowtowing to corporate interests, especially in regards to health care coverage.

"Nick's Law" was a bill that would require health insurers in the state of Oklahoma to cover the diagnosis and treatment of autism in children. On Tuesday the state House Economic Development and Financial Services Committee voted 10-5 along party lines against a motion to send the mandate bill to the House floor. And if killing this bill wasn't enough, they then voted 9-5 for a "do-not-pass motion that under House rules will prevent the mandate idea from being considered again until a new Legislature is seated in 2011", metaphorically shooting the bill a couple extra times in the head just to make sure it's really dead. Elsewhere though there are 18 states with similar autism mandates and many more with legislatures considering mandates right now, which follows the advice Rep John Carey, D-Durant, will be giving to parents of autistic children: "...move to another state."

According to that article, there was a study performed for the state House that said an autism mandate would increase health insurance rates by at least 7.8% and possibly as high as 19.8%. 7.8% to 19.8%!? Without being privy to the methodology of that study, I think that sounds really high and I would like to quibble with it.

According to that article, one mother of an autistic child said that therapies cost $30,000 a year, and another father of an autistic child said he spends up to $5,000 a month, which could be as high as $60,000 a year. For the sake of this back-of-the-envelope calculation, let's use $45,000 a year. And a well-known statistic from states that 1 out of 150 children are affected by autism. All other data will come from the Kaiser Family Foundation's

If there are 971,331 children in Oklahoma, autism could be expected to affect about 6,475 of them. This would make the cost of all treatments for all autistic kids in Oklahoma $291 million per year. There are about 3.5 million people in Oklahoma, only 2,845,529 of them with health insurance coverage. If we assume all autistic kids will have 100% of their therapies covered by health insurance, then we can expect only the 2.8 million people in the state with health insurance will have to pay any more in premiums. This works out to an average of $102 increase per person per year. Currently, the average premium for an individual in Oklahoma is $3,967 ($635 paid by the individual on average, the rest by his/her employer). If the average premium increased $102, the new average due to autism coverage would be $4,069 ($651 paid by the employee), an increase of 2.6%. For the insured employee, the cost of the autism mandate would be on average $1.33 a month. If you told me we could cover autism diagnosis and therapy for all autistic children in Oklahoma and I'd only have to spend roughly a dollar a month extra, I'd totally be down.

Ah, but of course I'm thinking about this from a not-for-profit and governmental sort of viewpoint. It's fine to think about averages and cost spreading in these terms when your pool of customers is as large as an entire state, but if you're only insuring a few hundred thousand people just like 20 other private insurance companies in the state, you have to be prepared for more statistical anomalies. Like what if for some reason autism just happens to affect 1 in 50 children in your particular pool of customers? This could be within one or two or three standard deviations of the 1:150 rate. In order to break even in such a scenario, you would have to increase rates three times higher than the statistical average calculated in the previous paragraph. Now we're up to a 7.8% rate increase for private insurance simply because private insurers can't spread risk like a government insurer could.

Plus, as an insurance company, you don't simply break even with treatments. There are a lot of claims adjusters and management types to pay, and the probably-publicly-traded company needs to earn a profit for its shareholders. Add a few more percentage points to that total, and you could be up to somewhere like 13% increase in premiums. Oh, and the CEO really likes travelling to exotic getaway vacations, corporate meetings in Switzerland, and owning a few houses and boats, and really, who wouldn't? So if you can squeeze just a bit more out of the pool of insured customers, say to the tune of 19.8%, you could have your shareholder meetings in Tahiti, and of course you'd deserve it because you just figured out a way to turn a mental ailment into ungodly sums of money for your company.

So the cost of "Nick's Law" may in fact be a 7.8% to 19.8% increase in private insurance premiums. This is all the more reason why we need universal health insurance. (Maybe after that we can tackle that cost of $45,000 per year per child by putting socialized medicine in place. But first things first.)

(For more, visit


Shevon said...

"Like what if for some reason autism just happens to affect 1 in 50 children in your particular pool of customers? This could be within one or two or three standard deviations of the 1:150 rate. In order to break even in such a scenario, you would have to increase rates three times higher than the statistical average calculated in the previous paragraph."

I'm curious how insurance companies actually assess risk and set rates. It seems like an interesting subject to look into. I guess I’m a little confused about the math. It seems to me that what you've said isn't necessarily true because insurers will have customers other than the ones who are affected by autism and the risk will be spread among people with other ailments or with no ailments at all, probably resulting in a much more complex calculation than the one you’ve stated. The same insurance company might also encounter rates of other illnesses (or pregnancies, or whatever) that deviate from the mean in the opposite direction, resulting in decreased expense. [Insert other factors about which I am ignorant here.]
Re: costs of adjusters and management – well, a government insurer would have these costs, too. I guess what government wouldn’t have is a fiduciary obligation to shareholders. Or would they have something analogous to taxpayers? And would the government really administer the plan itself anyway, or would that job be contracted out? How does that work with socialized medicine? Regardless: there will always be an incentive to reduce rates and to reduce spending regardless of who is administering the insurance plan. I mean, the people who are spending money (that is, the insureds) have an interest in lower rates regardless of who is taking their money and spreading it around. I think we would see resistance to adding new types of coverage in either scenario.
Other random thoughts: Higher insurance premiums in a private insurance paradigm = less tax revenue for the government, since I’m not paying taxes on my insurance premiums (am I?). Also, you didn’t mention how much more employers would be paying for increased insurance costs, the burden of which will surely come to bear on someone (consumer or employees) other than the employer.

I don’t know anything, but those are my thoughts, for what they are worth.

Steve said...

Those are quite a few thoughts.

I may be exaggerating the risk-compensation by private insurance companies when compared to Medicare or Medicaid, but the mathematical concept is the same. Suppose you were the CEO of an insurance company and your job depended on making money. Now suppose that your company had a 50% chance of losing money by covering autism. Would you take that chance, knowing everything you have depends on making a profit? You'd probably want to do something to reduce those odds, maybe lowering the chance of losing money to 25%, or lower, like 10% or 5%. The easiest way to lower the odds of failure is by raising rates, since health insurance exists in an opaque market where it's hard to directly compare the rates from other companies. (When's the last time you were able to select your own health insurance company?). You could also just kill the mandate legislation and have a 0% chance of failure.

Could the insurance companies average out the risk of having to pay out for any particular ailment by assuming an average risk over all possible treatments (in other words, diversifying their portfolio of covered treatments)? Maybe. Do they? I really don't know.

Medicare's fiduciary obligation to taxpayers: unlike private companies, the government can just print more money seemingly endlessly (see every bailout discussion ever). Our nation is trillions of dollars in debt and yet we keep spending. If the US was a company, it would have gone bankrupt long before now.

"There will always be an incentive to reduce rates and reduce spending" - sure, that's the ideals behind the free market economy. The way it's supposed to work with insurance companies is that the suppliers of health care insurance want to reduce spending, while the consumers of health care insurance want to reduce premiums. The way this usually works is that we consumers are able to shop for the lowest price, which rewards the company that can produce the service at the lowest cost, which makes the competitors either get more efficient or perish. With health insurance, we don't shop around for stuff. We may be able to select a plan from whichever insurance company our employers go through, but we can't go elsewhere to look for coverage because we know we can't beat the deal that our company has worked out with the insurance company. Plus, there are enrollment periods in which you can't buy insurance, and each plan is so complicated, it's like trying to buy a car with thousands of optional features.

"Less tax revenue for the government" - I've honestly never thought about that, but its a great point, I think.

Increased insurance costs from employers - You got me there. Cost of autism would be closer to $8 per month per employee total for employers that provide health insurance.

Jacob said...

Oh, and the CEO really likes travelling to exotic getaway vacations, corporate meetings in Switzerland, and owning a few houses and boats, and really, who wouldn't?

I would not like to own a few boats, for fear they'd rise up against me and I'd have to move inland to a state with fewer angry boats and worse health coverage.

Wayne Rohde said...

Let's make sure that we use the correct prevalence in the assumptions.

1 out 150 will have autism.
1 out 500 will seek private insurance provided services.
about 10% of that # will seek max benefits (approx $35-50K)

Also, keep the individual market out of the calculations. You do not buy an individual policy for a child, you include them on group policies. That was one of many errors that the House actuary made to inflate the numbers.

Wayne Rohde said...


Steve said...

I agree, the simplified assumptions I used were already vastly higher than the actual cost of coverage that one could expect.

Keep up the good fight.

Wayne Rohde said...

What else has not been said about the cost of Nick's Law is what is the cost of doing nothing.

This huge financial tidal wave for ignoring this issue is so big.

80% of the children are under the age of 16. In a few years if we continue to ignore this, the first big wave will start to consume state and fed services as adults.

That is going to be a big price tag. Pay me now or pay me later.

What a shame.

Shevon said...

"What else has not been said about the cost of Nick's Law is what is the cost of doing nothing."

This is the type of argument that I imagine would be the most effective argument if it's true. Unless I've read it wrong, the argument made in the original post is one that I think appeals to the population's altruism ('it doesn't cost *that* much, and it's a good thing to do'). Maybe I'm cynical, but I don't know how well that sort of thing works. As a taxpayer and one who purchases health insurance, I'm thinking that $8/month isn't much, but autism isn't the only (condition?) that people will want covered that isn't presently included in required coverage. The cumulative expense of all of this coverage might be something that most people are unwilling or unable to bear unless it really does reduce society's costs in the long-term.

Wayne Rohde said...


I understand your concern. Here is what the cost of no action.

Currently, the divorce rate is near 80% and rising due to the extreme emotional and financial burden. Estimated 5 times the bankruptcy rate. Most have liquidated retirement accounts and those of extended family members.

We are building several generations of people who will be dependent on SS not retirement savings. We have at least 2 generations dependent on society for care if we do not do anything.

The cost of care to help recover children from the iron claws of autism is a very small price considering we are piling on a lot of costs down the road.

There are some that say yes to autism coverage but are concerned about what comes behind us. I agree, but since we have been ignoring our children and adults with special needs, the bill is coming due.

There are those that say no to autism coverage and turn their backs.

There are some options, but until insurance companies along with school districts come to the table to discuss with parents and advocates, we all lose.

Anonymous said...

Very nice tips. Thanks for sharing!.
house insurance for llc''s in oklahoma