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?