Small Businesses Need Health Insurance Reform That Works. Will They Get It? Part 2

One might conclude that if insurers were seriously interested in the non-group segment, they’d find ways to turn at least a few more of the 90-plus percent of these unsuccessful applicants into customers. And they haven’t been very forthcoming about how they’d make these restrictions go away in exchange for a mandate. Their simplistic answer is that in the face of a mandate everyone would have coverage, and the cost of coverage per individual would therefore be lower.

It’s just as likely that a mandate would blow the lid off health insurance premiums as insurers agree to provide coverage to those whom they’ve previously rejected, but at what insurers consider appropriate risk-adjusted prices. But the cost would no longer matter, because the law requires everyone to have coverage, no matter what it cost. Given the traditional behavior of insurers, which outcome is more likely?

Given that so many uninsured individuals are customers that insurers don’t seem to want, the development of a public option ought to seem like a pretty good idea. But opposition to a public option is at the forefront of the industry’s agenda. One reason seems to be a principled opposition to the idea of “socialized medicine.” The other reason is that a public plan may, through public subsidies and administrative efficiencies, drive private insurers out of the market.

The first objection is nonsensical on its face. Almost half the health care spending in our country is financed through government, via Medicare, Medicaid, The Veterans Administration, and the Federal Employees Health Benefit Plan. Like it or not, the Federal government is in the health care business to stay; cries of “socialized medicine” are a big red herring.

Fear of competition based on administrative costs?...NOW you’re talking.

For all their flaws, the Federal government’s plans are quite efficient administratively. Medicare and FEHBP are run (often by private insurers, or by consortiums of insurers such as Blue Cross/Blue Shield plans) on administrative costs which are about three to four percent of claims costs. For the largest private employers, whose plans are self-insured but typically administered by insurance companies, administrative costs are typically five to six percent of claims costs. For that amount, insurers working with these plans are managing enrollment, paying claims, and making a little money.

For small businesses and individuals? Independent aggregate data is hard to come by, but a study by the Small Business Administration’s Office of Advocacy concluded that administrative costs for a group of small group insurers averaged between 33 and 37 percent of claims costs. That translates into 25 to 27 percent of premium. An article from The Center For American Progress recently estimated administrative costs in the non-group market to be 30 to 40 percent of premium.

(Insurers typically obfuscate this issue by pointing to administrative cost ratios which “average” 15 percent or less. If you take the 5% they charge large employers, add it to the 25% they charge small groups, then divide by two, you get 15%).

Why the huge disparity? It’s not corporate profits; insurers administer FEHBP and self-insured corporate plans efficiently and still make money.

It’s because the process of advertising, marketing, sales and underwriting is enormously inefficient and costly. Unlike other segments of the health insurance market, small group and individual sales are usually still done on paper.

Typically, more than 80 percent of applications for new business are returned at least once to a small business or an agent because they’re filled out incorrectly or incompletely. And because insurers typically will only accept their own application forms, shopping for coverage among three insurers means filling out three sets of paper forms. And nearly 95 percent of new business applications received by an insurer do not result in new business. That’s a huge amount of wasted effort and lack of productivity, the cost of which is passed back to the small business customer.

Agent compensation is relatively high compared to premium costs, but that’s because agents bear a significant chunk of the process’ inefficiency. If coverage were simpler to sell, they’d be happy to take less commission in exchange for making less effort. As it is, many agents no longer seek business from companies which don’t generate sufficient commission income, making it harder still for small employers to shop for coverage.

In addition to all this built-in inefficiency, marketplace dynamics also work against the small employer. Insurers have used state and federal regulations to undercut the ability of small employers and self-employed individuals to put the actuarial laws of large numbers to work for them by aggregating into large co-operative purchasing pools. A large portion of excessive administrative costs relate to the efforts of insurers to enforce their own rules by underwriting every small group employee and individual application as if it were an actuarial universe of one.

Insurers have actively resisted the development of large purchasing co-operatives which could create efficiencies and reduce costs (and therefore prices) because they see administrative efficiencies as reducing their revenues. Unfortunately, their efforts are often supported by Chambers of Commerce and other membership organizations which have come to rely on their sponsored health plans for big chunks of their revenues, and which fear real competition as much as their insurer enablers.