Lila is a high-cost unit in the small-employer health pool I administer through a captive third-party administrator I own in Rutland, Vermont. She’s 58. She’s got Type 2 diabetes, a cardiologist she sees in March, and a college sophomore who’ll need tuition in the fall. The plan she’s on costs her $487 a month. The plan I’ll sell her in January, after the 20% age variation Governor Scott’s executive order permits, costs $1,012. Read the next sentence twice. The difference, $525 a month, is the figure her employer won’t pay, and the figure I won’t subsidize, and the figure Lila, at $44,000 a year, won’t pay. She’ll go to the exchange. The exchange will charge her $1,299 a month for the benchmark silver, which is the figure Hayden Dublois named in the Journal this week as the highest in the nation. Lila will decline the silver. She will ration her insulin. The rebrand on my January letter is “market-based affordability.” By their fruits ye shall know them. Mine are the dividends on a pool that’s healthier on paper because Lila’s no longer in it.
You’re paying for Lila. You paid for her through the uncompensated-care pool the hospital’ll absorb when the insulin runs out and pass to your premium in the next rate filing. You’re paying for her through the small business you own or work for or hire, whose renewal lands on a desk in Rutland at 7:00 a.m. on the second Tuesday of December and gets repriced by an actuary I trained. You’re the contractor on the platform. You’re the handyman on the task. You’re the bookkeeper’s child. The op-ed was correct that the market is finally sane. The market’s sanity looks like Lila, sorted.
Put your finger on the 1,402. The arithmetic Dublois celebrates is mine. I’ve run the regression. The 20% age variation moves 1,847 of the 14,216 lives in my small-employer pool off the affordable rate and onto a quote their employer can’t match. Of those 1,847, my actuary estimates 1,402 will decline coverage rather than pay the difference, and the remaining 445 will move to a high-deductible plan I also sell, at a deductible ($9,860) that meets the IRS definition of catastrophic and a premium ($312) that meets the actuarial definition of uncollectible in the first claim year. I’ve, in plain language, sold 14,216 policies this year. By January, 1,402 of them are sorted out of coverage. The new buyers I take on in February are 9.4 years younger on average than the sorted. I’m invited to call this a healthier pool. I do call that. It’s what the executive order, in the polite language of the press release, calls “structural reform.”
A high-cost unit, by which I mean a 58-year-old bookkeeper whose HbA1c has been under control for 9 years and who is being told, in the polite language of a 20% age variation, that her next year of life costs $525 a month more than her last one.
I kept the $525. I kept the 28% the pharmacy benefit manager took on her prescriptions when she was still in the pool. I kept the spread between the stop-loss premium and the attachment point. I kept the $312 the 445 high-deductible converts will pay for the privilege of a deductible they’ll never meet. The 1,402 who declined aren’t on my balance sheet. They’re on yours. They’ll be on your emergency-room ledger in March or April, and the uncompensated-care pool will reconcile, and the reconciliation will arrive in your premium in October, and you’ll call that the cost of the uninsured and I’ll call it the dividend on the sorted. I have not made room for the figure beneath mine. I do not need to. The plan is sold.
Now widen the frame, because the column is bigger than Lila, and Lila is only the smallest instance of the principle.
For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath. — Matthew 25:29.
The actuary who ran Lila’s regression took my elective on rate-making in the spring of 2019. He was 23. He arrived sentimental, like most of them, and he left knowing what a 20% variation does to a pool’s average risk profile, which is the only figure the firm he now works for (which is also mine) sells. He runs the regression in 22 minutes. The textbook he learned it from is mine. The textbook is in its fourth printing. The textbook has been adopted by 38 programs. I don’t have to set the rate anymore. The rate sets itself, in offices I’ve never entered, by hands I trained and then forgot. The 20% Mr. Scott permitted isn’t the upper limit of what the market will bear. It’s the lower limit of what the actuarial class I’ve graduated will permit itself. The firms I’ve staffed will push the variation higher the first year they can, and they’ll call the increase a correction, and the op-ed writers will call it sanity again, and the next Lila will be sorted the same way.
Vermont got the sanity it voted for. The 20% is the floor. The textbook is in its fourth printing. The dividend on the new pool is the figure on the line. I have not priced the next Lila. She will price herself. The loss ratio improves.
Sterling A. Varice holds the Hayek-Friedman Chair and serves as Dean of Instruction at Warden University’s College of Business and Economics in Richmond, Virginia. He is the author of three textbooks: Divine Mandates for Labor Utilization, Social Obligations for Profit Maximization, and Calibrated Deprivation: A Manager’s Guide to Employee Motivation.