It Ain't Over Even After It's Over: Gaming Health Insurance Reform And Sticking Consumers With The Tab

For all the rhetoric, the relationship many insurers and brokers have with their small group and individual customers seems to be the same as my relationship with my ATM...a means of obtaining cash. It's why being a small business advocate in the health insurance market requires a strong ability to suppress one's gag reflex and fight on behalf of a BIG segment of the market which is virtually unrepresented in the political process of implementing health insurance reform. Here are two current outrages:

First, The National Association of Insurance Commissioners (NAIC) is reportedly considering adding its name to the list of supporters of a bill, drafted by the insurance broker lobby, which would exempt sales commissions from the calculation of insurers' medical loss ratios (MLR's).

You'll recall that PPACA contains a requirement which places limits on insurer administrative costs; insurers whose administrative cost ratios exceed 20% 0f premiums in the small group market and 25% of premiums in the individual market will be required to provide their customers with year-end rebates.

The new rule went into effect January 1st, and threatens to lead to some fairly significant reductions in agent compensation in these market segments. This is especially significant in the non-group market, where administrative costs can account for 30-40 percent of premiums...and up to half of that "retention" is agent commissions.

(The administrative cost share of small group premiums is about 25-27% for small groups. Total commissions there are 10-12 percent of premiums).

Exactly what does NAIC have invested in this debate? First, the lead for the NAIC on this issue is Florida's Insurance Commissioner, who is a vocal opponent of PPACA. So this is just another battle on the ideological front. Second, while most people mistakenly believe that state insurance commissions have a strong consumer advocacy role to play in insurance regulation, very few actually do. Their primary responsibility is to assure the continuing solvency of the insurers operating in their markets.

So, the twisted logic goes, if a new federal rule might in any way affect the financial health of insurers, it's NAIC's role to fight that rule. Consumers be damned.

Let's start with the most obvious issue: if sales commissions aren't administrative costs, what are they? Neither NAIC nor the broker lobby are saying; they just want commissions exempted from the MLR calculation. To do so, of course, would mean that insurers would have no incentive(however draconian) to seek ways to produce marketing and administrative efficiencies. It would also mean that insurers whose non-medical costs are more than 20-25 percent of premiums would pay no penalty for their inefficiency. Andit means that, once these costs have been exempted from the MLR calculation, insurers would be free to raise premiums by any amount, at any time, at will...pretty much like they do now.

So I guess this is the NAIC saying, in effect, "Rules which might require insurers to become more efficient and cost-effective in their operations threaten the financial viability of our insurers, so, irrespective of the possible long-term benefit to consumers, these rules are bad."

For anyone who wonders why it seems that state regulators have been asleep while insurers run roughshod over the small group and individual markets, this just goes to prove how wrong you are. They're not asleep. They just don't work for you. They work for the insurers they regulate...and whose premium taxes (based on volume) fund their operations. So anything which might reduce the increase in premium volume might affect the financial viability of the regulatory bureaucracy, too.

I'm surprised NAIC hasn't offered the helpful suggestion to remove premium taxes from the MLR calculation, too. Maybe that's Act 2.

Here's another variation on the same strategy. In states across the country, groups have begun to organize themselves to establish the rules under which they will operate the health insurance exchanges called for by PPACA.

I found this Operating Principle tucked away in the record of Ohio's Health Insurance Exchange Task Force: The Task Force recommends that, for insurance products available both inside and outside Ohio's exchange, prices should be identical.

Come again?...A key element of the insurance exchange strategy is to give exchanges freedom to experiment with various forms of administrative efficiency, in marketing, sales and distribution. And a key (theoretical) element of this strategy is that the development of a "carrier-neutral" electronic marketplace, together with IT-enabled business processes, should produce administrative cost efficiencies, which should lead to lower rates for exchange customers (I said it's a theory; like much of the exchange strategy generally, there's no real proof yet).

So, theoretically, if exchanges do a good job of streamlining marketing, sales, enrollment and underwriting for small groups and individuals, those efficiencies should result in lower prices for exchange customers, right?

Apparently, not if Ohio's Task Force has anything to say about it.

The health insurance industry and the broker lobby have done a very good job, over many years, of keeping health insurance for small businesses and individuals out of The Information Revolution by using statute and regulation to remove block incentives for insurers to experiment with more efficient ways to market and sell coverage.

The anti-managed care movement of the mid-'90's was not really a consumer-driven movement. It was fueled and funded by (a now vanishing breed)independent insurers who found it increasingly difficult to sell in the marketplace, given the cost advantages and increasing market share of local and regional managed care plans. Rather than find ways to become better at business themselves, the insurance industry collaborated with The Clinton Administration (then hurting after the collapse of ClintonCare) and a Republican Congress to enact HIPAA which, among other things, created a bunch of disincentives for the development of large group purchasing organizations, whose administrative efficiencies were producing price advantages for members of large groups...and laid the foundation for dramatic expansion of (extremely profitable) non-group and "consumer-directed" health plans.

And states followed, by enacting rules which prohibited insurers in their states from "discounting" administrative costs even for their largest purchasing group customers. So even if purchasing groups had the juice to negotiate aggressively with insurers on their members' behalf, insurers had a handy tool for ignoring them: "We're really sorry, but the government says we can't offer you a better price."

What's particularly ironic in Ohio's case is that a member of the Task Force is the president of Ohio's largest local small business group, which operates one of the country's largest small business health plans. What skin does he have in the game? His organization's health plan will earn about about $15 million in fees from its health insurer this year. That income is based on premium volume, too...so the lower his members' premiums are, the less the organization's income is. And the better and more efficiently an Ohio exchange might operate, the greater the chance that the organization's revenues will be affected.

His choice? Become more efficient and cost-effective...or pass a law that will keep anybody from doing better than his organization can.

When even the people who are supposed to be standing up for small business are on the take, what chance do small business consumers have in the continuing politics of health insurance reform?