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.