Using Facts To Distort The Truth

Getting one's arms around objective reality in the health care reform debate can be a big challenge because the issues are so complex that one's view of the issues will almost always be affected by the part of the prism you're looking through. Here's an example:

A local Chamber of Commerce holds a half-day session on health reform for its members, which are both large and small businesses. In one break-out session, a senior executive with a big health insurer puts a graphic up on the wall. It's a dollar bill divided up five ways. "Here's the problem," he says. "Health care costs make up 65% of the health care dollar. Prescription drugs make up 10%. Our sales costs make up 10%. Administration is another 10%, and all other expenses, including our profits, make up 5%. You can't really expect health care reform to work unless it successfully addresses the rise in health care costs."

The big business guys harrumph in agreement. For their health plans, 95% of costs relate to health care services. Their insurers administer their self-insured plans for 5% of the cost of claims, and makes plenty of money.

In another room, a senior hospital executive is making a presentation. On the wall is exactly the same graphic. But the hospital executive is saying, "For many people, only 65% of what they're paying for health insurance goes to coverage of health care services; the rest is insurer overhead: drug benefits, marketing, sales, administration, and their profits. The cost of health care is going to continue to escalate until we can get those insurance costs under control, so a greater proportion of their health care dollar is actually paying for health care services."

The small business owners stand up and cheer. They know that for their companies, and for self-employed professionals, between 25% and 40% of their health insurance premiums gets allocated off the top to their insurers before a claim even gets paid. That's if they can obtain coverage at all at a reasonable rate.

Both presenters are right, of course. Just as both points of view have their constituencies in business. That's why the business community is sort of at odds with itself over the goals for health care reform.

But both presenters are also sort of fibbing. They're using the obvious shortcomings of their counterparts to distract attention from their own issues.

Think about the Anthem California case that's got everybody talking. There's no doubt that the state's economy is facing a crisis, that unemployment is rising, and that the pool of those with private health coverage is shrinking due to those market forces.

And pressure on public plans, on a grand scale, places pressure on private health insurance rates due to cost-shifting and creative expense allocation on the provider side. This will drive up health cost trends.

And because health costs NEVER go down, it's understandable that a component of a health insurance premium renewal is due to increasing health cost trends. By all accounts, the rising cost of health care accounts for 9-10 percent of premiums.

Now, the insurer says its pool is shrinking, and that's due to young, healthy people leaving their plans because their costs have gone up, leaving only older, sicker people enrolled. This, they say, is why health insurance coverage should be mandatory for everybody, so we can confidently spread the costs across a known risk pool.

Well, maybe, but...

About half of the group we call "the uninsured" are without coverage for 69-90 days in a given year. So they're folks between jobs, on layoffs, but usually not chronically without coverage. This suggests that the hard-core uninsured consists of about 24 million people.

How many of THOSE folks are uninsured by choice because they're young and invincible: Half? 12 million?

I guess this is where I stop following along with those Anthem folks.

First of all, a good Commonwealth Fund study concluded that fewer than 1 in 10 people who apply for individual health coverage through an insurance company actually end up buying it. Expense is certainly a factor, but an even more significant factor is that applicants reported having health conditions which resulted in either significant "rate-ups" in their premiums or in outright denial of coverage.

What I think all this means is that in general, Anthem's, or any insurer's individual insurance pool consists at the outset largely of younger and healthier people; the older and sicker don't get in in the first place. And that the definition of "sicker" means merely that an individual has one or more conditions, or potential conditions, that make them an unattractive risk.

But let's not focus on the one-third of Anthem customers getting rate increases in the 30-39% range. Let's focus on the two-thirds whose increases will average "only" 25%.

Medical trend is 9-10%. "All other" constitutes the other 15%, I guess.

Except, here's the biggest distortion: Anthem (or any other insurer) just gave ITSELF a 25% raise on this business.

How?...Think back to that dollar bill. For individual health coverage, over 30% of premiums are allocated to administrative costs. So when they raise premiums, they also raise the administrative cost component of those premiums.

How will Anthem justify that, in the face of state laws which restrict their administrative costs to not more than 30% of premiums? Well, when you add the 30%-plus they charge individuals, plus the 25% they charge for small groups, PLUS the five percent they charge large groups, and divide by three, you get an "average" administrative cost ratio of 20%, from which Anthem will subtract sales costs, and say with a perfectly straight corporate face that their administrative costs average at or around 10% of premiums.

And that's how, eventually, insurers get pretty much what they want. Based on the facts. They just happen not to be telling the truth.

The Anthem Fiasco: Who's Negotiating For The Small Purchaser?

Ample ink has been spilled covering the attempt by Anthem Blue Cross Blue Shield to hike premiums on its non-group customers in California by up to 39 percent. Everyone is outraged, and parties all throughout the health insurance reform debate have interpreted the case as evidence for their own versions of reform.

But while the numbers in this case are particularly attention-getting, the case itself represents merely a variation on business as usual, and points up an important issue: left to themselves, small businesses and individuals seeking health care coverage at an affordable cost can expect no help from anyone.

It's particularly telling that California's Insurance Commissioner, in a state whose insurance department is considered particularly activist (and which has been a political platform for several commissioners, including the current one, to run for higher office), is essentially powerless to deny Anthem, or any insurer, a rate increase which might be deemed excessive. The State's role is limited to determining whether an insurer's requested increase would increase the insurer's administrative costs above 30 percent of premiums.

In the vast majority of states, insurance departments' regulatory activities are limited to assuring the solvency of insurers doing business in their states.

One of the "unintended consequences" of insurance "reforms" which swept through the states in the early 90's, and culminated in the enactment of HIPAA in the mid-90's, was that insurers became much freer to raise rates for small groups and individuals without the need to provide any information, either to the states or to their customers, to justify the increase. The idea was that the "pooling of risk" made insurers treat all their small group and individual customers in the same way, so it was unnecessary to explain to customers what specific factors may have led to the rate increase being imposed on them.

The idea hasn't worked very well...unless you're an insurer.

Here in Ohio, insurers may splinter the risk pool for small businesses and individuals into as many as 36 classifications, based on age, risk, utilization, geography, industry, and a host of other considerations. Based on these factors, insurers have the right to adjust rates any way they want. For small groups, the only consideration is that the rates in the highest "tier" can't be more than 80% higher than the rates in the lowest tier. No such limitations exist for non-group coverage; it's not unusual for rates for the costliest coverage to be three times higher than the least costly coverage.

So when insurers raise rates, they do so based upon their own criteria, and upon their own "proprietary" utilization data and actuarial assumptions, which are always the most conservative (read: insurer-friendly) scenarios conceivable.

)And consider also that a 30% increase in insurance premiums ALSO means that the insurer generally pays itself a 30% raise in its administrative costs; when the rates go up, the 25-40% of premiums attributable to administrative costs goes up, too.

How about that? A 30% raise for doing no additional work, Nice work if you can get it...)

So the Anthem's assertion that the dip in its customer base was due to younger, healthier people opting out of coverage is very likely not based on documentation, but on actuarial assumptions, which may or may not be accurate, but certainly are irrefutable by anybody who matters. The rates are based on these assumptions, and if you buy the assumptions, you have to buy the rates. And since no one has any data with which to refute the assumptions...the insurers win.

So more than 700,000 insureds get their letters a state-mandated minimum of 30 days in advance of a rate increase, and their choice is to accept the rate increase or go elsewhere...if they can.

Then insurance industry is using this case as a reason to justify its call for an individual mandate. If everybody were required to purchase coverage, the line goes, then younger people participating in our health plans would expand our risk pools and stabilize our costs. Public policy experts seem to buy this idea, as well.

But what if they're wrong (as I think they are)? What if, instead, Anthem, or other insurers, decided it was necessary to increase EVERYBODY'S rates by 30%, and you had no choice but to pay the price?

What's REALLY needed is a means to consolidate the purchasing power of small businesses and individuals into groups which have the knowledge, and the mission, to push back against those proposed rate increases. The only way to establish more of a market for health insurance coverage is to enable the formation of a genuine purchasing dynamic, so that negotiations can evolve from "take it or leave it" to "let's talk."

Because today, nobody...not government, certainly not the industry...is watching the store.

Let's get a bunch of insurance exchanges launched, shall we?