Health Insurers Fear "Public Option," Blame Everybody Else For Health Insurance Crisis

Health insurers are wigging out over the prospect that Congressional health care reform legislation might include a "public option," a government-run program through which individuals and small businesses might purchase coverage as an alternative to the private health insurance market.

An article in Cleveland's weekly business publication, Crain's Cleveland Business (published by the same family firm which produces Business Insurance), featured commentary by a number of industry executives and lobbyists who express concern about the possibility of competing with an entity that "doesn't need to turn a profit, and can negotiate lower payment rates to medical providers because of its huge client base."

The article reports that insurers are lobbying furiously, even encouraging their employees and customers to oppose the development of a public health plan.

And, as usual, the insurer spokesmen blame everybody else in the health care game for runaway costs, high premiums, and underwriting rules which result in limited availability of health care coverage for small businesses (which buy most health insurance products) and individuals, especially those with health problems.

A spokesman for insurance giant Aetna, Inc. blames lack of attention to "the actual cost drivers in health care and the need for quality improvement and payment for quality of care and not the quantity of care being delivered" as the culprit. In other words, it's the fault of hospitals and physicians.

A spokesman for the Cleveland region's largest health plan, Medical Mutual Of Ohio, blames young people who don't buy insurance coverage, and suggests that lawmakers impose high penalties on these "young invincibles" to make them behave (that is, to buy Medical Mutual's products). He goes even further in blaming people for unhealthy lifestyles, and suggests that those people should be charged higher premiums than those who strive to be healthier.

What none of these spokesmen are ready to acknowledge is that the behavior of players in their industry might just bear a teensy bit of responsibility for the fact that most Americans hate insurance companies.

For small businesses and individuals (who make up roughly half the private insurance market), the prices they pay for health insurance is only indirectly related to the cost of health care. Between 25 and 40% of what they pay in health premiums covers the administrative costs entailed in the insurers' management of antiquated and tremendously inefficient marketing, sales, and underwriting processes. These costs are up to six times higher than the cost of administration for the big business market.

As we've pointed out before, the vast majority of those processes are wasted effort. More than 90% of applications for new business in the small group and individual markets do not result in new business for insurers.

The reason the rejection rates are so high? Because the underwriting practices of insurers result in more than 90% of applications being rejected for health reasons, or "written up" because of because of applicants' health conditions to a point where coverage is not affordable.

(This, Medical Mutual Guy, is the penalty people with health conditions pay...either rejection for coverage or significantly higher prices than younger, healthier people. So looks like you got your wish.)

Irrespective of the outcome of the "public option" discussion, there are real opportunities for insurers to look at their current business processes to reduce administrative costs dramatically. The smart ones who do will be much more competitive in the future. One would like to imagine that a few industry thought leaders are trying to figure that out. Because if they can, a public option won't be necessary. And if they can't, a public option will be inevitable.

Unfortunately, the industry's negotiating position will more likely be an effort to make certain that, if such a public option becomes available, it will be required to be just as inefficient as they are. And one can easily envision the Obama Administration accepting that position as a step in getting compromise legislation passed. After all, the President has already assured pharmaceuticals manufacturers that he'll limit their downsides. Whatever the public rhetoric, one can easily imagine the President privately assuring insurers that they'll have nothing to fear from a public option.

What's Wrong With Taxing Health Plans?

The New York Times reported on Wednesday that the Senate Finance Committee "has become intrigued by a version of a health care tax being pushed by Massachusetts Democrat John Kerry that comes dressed in a whole lot of lipstick. It doesn't fall on workers. It doesn't even fall on employers. It falls on everyone's favorite villain: health insurance companies."

The tax would be levied against health plans costing more than a certain amount. The NYT example is plans costing more than $25,000 per year. Insurers offering plans costing more than that would be taxed, and the proceeds would be used to cover the cost of the uninsured. Insurers would presumably pass the cost onto their customers, who would then have an incentive to offer less generous health plans.

There are a whole bunch of things wrong with this idea. But here are just two of them.

Keep in mind that, for small employers and individuals, insurance administrative costs can run as high as 25-40 percent of the premium dollar.

What kind of "silver plated" health plan costs $25,000?

Late last year, our family lost its health coverage when My Charming Wife was laid off from her job. We couldn't afford COBRA continuation coverage under her plan, which would have cost us $1300 per month (that would've been $15,600 per year that we didn't have).

She worked for a large employer, and her benefit plan was very generous. So I went shopping. We raised the deductibles by a factor of ten, dropped the dental and vision coverage, and priced a plan through Cleveland's Council Of Smaller Enterprises (COSE), which makes a big deal about saving small businesspeople money on their health care coverage.

COSE's offer to us: they'd sell us the plan we wanted...for $1880 per month (that's $22,500 per year).

So we shopped further. We raised the family deductible to $3000 per year, and sought coverage through the individual market.

The best cost we could find: through COSE's insurer, Medical Mutual of Ohio, we were quoted $1860 per month (that's $22,300 per year). Assuming we'd have bought that plan (we didn't) and experienced a ten percent rate increase, out hardly silver plated health plan would have cost us nearly $25,000.

The folks in Washington don't get that the price small businesspeople and individuals pay for health insurance is only indirectly related to the cost of health care. On average, small companies pay 18 percent more for health insurance coverage than big companies do.

So taxing a health plan based on its cost would create still more pressure on small business owners...whom I'm told the Government wants to help...and create even more challenges to maintaining a small group health plan.

That's problem #1.

Here's Problem #2. Insurers would readily accept the "responsibility" of taxing those "generous" health plans they offer to small businesses and individuals. As a senior health insurance official said of another recent scam, it'd be "all about shared responsibility, and that's what needs to happen."

But billing for the tax would require effort and expense. So would collecting the tax, accounting for it, and paying it to...whoever. So insurers would insist that it'd be only fair that they be able to recover the administrative costs entailed in collecting, processing, and paying the tax.

That would raise their administrative costs still further, AND enable insurers to treat the new tax as a revenue source. And of course, it all just adds to the cost of health insurance.

Make sense to you?

Me, either...