Small Group Health Insurance Rates To Spike In 2010...And A Bunch Of Nonsense From The Insurance Industry

I recently had a long chat about health insurance reform with the former CEO of one of the nation's leading non-profit health plans. We were sharing our frustration at the behavior of the health insurance industry's lobbying group, America's Health Insurance Plans (AHIP) in the face of increasing pressure from the White House and Congress to clean up its act. My companion said, "It's as if the insurance industry is crying out, 'Please, please regulate us! Protect us from ourselves'!"

Certainly there is no clearer evidence of this (in the past week or so, anyway) than in this story, which appears in today's New York Timeshttp://www.nytimes.com/2009/10/25/business/smallbusiness/25health.html?th&emc=th. It reports that 2010 will see health insurance premium increases for small businesses which are twice as high as the previous year's. Brokers are projecting an average increase of at least 15% in small group health insurance premiums.

Typically, spokesmen for the health insurance industry blame the rise in premiums on rising medical costs. And one AHIP spokesman, who doth protest too much, says quite clearly (and with a straight face), "profits are not responsible for increased health care costs."

Nonsense....

Certainly there is a component of these projected increases which relates to inflation in medical costs. If you want to know how much, look at the year-over-year increases in costs for large, self-insured employers. Because they mostly self-fund their employees' medical expenses, their cost increases are usually pretty close to the increase in the cost of health care. A good estimate would be about five percent.

The rest?...

2009 was a bad year for health insurers. Typically (and where the AHIP flack's statement is at least partially true), a health insurer's underwriting profits...the difference between premiums collected, claims paid out, and administrative expenses...would be about 2 to 3 percent of premiums.

But the majority of those insurers' income is based on investment returns...income derived from taking premium income and investing it, usually for the short term. And when the stock market crashed, many insurance companies' portfolios took it on the chin.

How much of insurers' profits come from investment income? Unless the insurers are publicly traded, it's impossible to say. Most insurers file their financial reports with state insurance commissions, and State Approved Accounting Principles (special reporting rules for insurance companies, different from the Generally Accepted Accounting Principles most businesses must adhere to) do not require insurers to report income from investments, or from "non-insurance-related activities," such as providing administrative services to self-insured companies.

Small group health insurance rates are increasing to help insurers polish up their balance sheets after a bad year for investments. But they're also increasing due to an old-fashioned phenomenon called "featherbedding." Insurers fear that future health insurance reforms may put pressure on their rating structures, so they're getting what they can now. An actuary might call it "a strategic recalibration of rates."

And of course, as we've pointed out before, when insurers raise their rates 15%, the percentage of those rates which are attributable to administrative costs...which make up 25-40% of small group and individual health insurance rates...tends to go up 15% as well...the equivalent of giving your insurer a 15% raise for doing no extra work.

The Times article points to the underlying truth to these rate increases: small employers have very little marketplace leverage in a small group market which is highly concentrated and in which competition is constrained. They pretty much have to take the rate increase or buy coverage elsewhere.

During my time at COSE in the olden days, our small business members enjoyed premium rates which were as much as 30% lower than rates on comparable plans, and which grew at less than half the rate of small group insurance rates generally. When we once asked our insurer's chief actuary where the differences came from, he said, "COSE can negotiate; the other guys can't."

There is fairly little in any of the current House or Senate bills which would really change that negotiating balance. There is slight hope that a "public option" would develop the leverage to be competitive with health insurers for many years...at least until the public option amasses 10-15 million customers. Health insurance exchanges might help, but if they're constrained by the same rules governing private insurers (which insurers will certainly insist on), they'll have a hard time differentiating themselves in a competitive marketplace. COSE-type co-ops could, but only if they're run correctly (COSE's no longer is), and if they're given time to grow to scale.

We've written here before that there's fairly little in existing health insurance reform legislation which has much apparent promise to reduce even the rates of increase in small group and individual health insurance premiums. And despite broad promises or speechifying, our public officials can offer no solid evidence that small group premiums will do anything but escalate. Which may be a reason that small employers continue to be skeptical about the government's efforts to help them.