Chamber, Association Health Plans Worry About Insurance Reform: Is The Gravy Train Grinding To A Halt?

One of the potential casualties of health insurance reform, and of the development of state health insurance exchanges, will be the health plans sponsored by chambers of commerce, trade associations, and professional groups. The inefficiencies, greed, and laziness of these plans and their sponsors make them particularly vulnerable as states experiment with the implementation of electronic marketplaces which might operate more efficiently than the traditional ways of marketing and selling health plans. Some of these groups see the change coming, and are trying to adapt. Most have their heads...in the sand...and pray daily that things will turn out all right. Things probably won't...not for the associations, and not for their members.

I got some interesting feedback from my last entry, in which I wrote about the head of a prominent Chamber of Commerce health plan, who has a conflict of interest because of his participation on the panel crafting regulations for Ohio's health insurance exchange.

I raised the conflict because the Chamber receives about $15 million in commissions and other fees from the insurer whose products the Chamber endorses. My point was that the organization's financial dependency on those fees (which comprise about 75% of its budget) made it unlikely that the Director's decision-making would be focused on the best interests of his organization's members.

I also observed that, rather than freeing the Ohio exchange to become more cost-effective and efficient to help reduce the cost of small group health insurance, his incentive would be to preserve his organization's income stream by assuring that the exchange could NOT operate in a way which might reduce costs (and therefore prices) for exchange participants.

Sure enough, that task force produced a recommendation that premium rates for small businesses both inside and outside the exchanges HAD to be the same. So I asked: if the people who are supposed to be representing the interests of small businesses at such tables have sold out, who WILL speak for small business?

I received some calls and e-mails from people who recognized the guy I was talking about. The correspondents all assured me that he was a splendid fellow, and very smart, and that his FIRST thought was for his members.

But nobody suggested that my key point was wrong: while the Chamber positions itself as a small business advocate, it is completely dependent on its insurer relationship for the vast majority of its income. I'm not an economist, but I understand a few things about the "ecology" of Chamber health plans, and one of them is, you work for who pays you. If members' collective dues are $3 million, and your insurance company is paying you another $15 million of your members' money...you work for your insurer.

And if there's a potential for conflict, you're five times as likely to see things your insurer's way as you are to see them your members' way.

Lots of chambers of commerce, trade and professional associations, and other groups are going to be facing a day of reckoning as health insurance reforms are implemented at the state level. Many of these groups sponsor health plans, largely as revenue-generators for the organizations themselves. There are a lot of tricks. Some permit only agents which are organization members to sell the sponsored plans. Most receive hefty marketing and/or sponsorship fees from their sponsoring insurers, which can add up to hundreds of thousands of dollars. Most such plans are not professionally managed by the organizations' staffs.

The result of all these arrangements is all too often that members are being sold a bill of goods, and are seduced into believing that "their" organizations are providing them with good deals, when in reality, their members are being fleeced.

The Chamber I referenced above keeps all information regarding its health plans a secret (and such secrets are rarely in their members' interests). Nobody really knows how many people participate in the plan, what annual premium volume is, what the Chamber's "take" is...and their lawyers will almost certainly pay me a visit if I use their name. So I'll make my point by telling another story.

A few years ago I did a consulting gig for a pretty good-sized regional business organization. The group had about 4,500 member companies; about 2,400 of them participated in the health plans. But the plans weren't growing, and the leadership wanted to know why, and what they could do to improve the plan's performance.

Discovery was a pain. The insurers (there were three) were not co-operative, nor was the broker who ran the plan. But I've been around a little, so I was able to piece the puzzle together.

In every case, when we added up everything coming out of the health plans... commissions, management fees, overrides, and six-figure "sponsorship payments" to the organization...the administrative cost ratio was up to almost 25% of premium before a claim ever got paid. So total administrative costs were in the 30-31% of premium range.

As a consequence, the cost to members of participating in the association's plans was HIGHER than if they'd signed up directly. So members would join, sign up for the health plan for a year, and come renewal time, their agents would move them out of the association's plans at "street rates," which were lower.

When I presented my report to the organization's Board, they were horrified...for the wrong reasons. They were terrified that their members would find out. But they were so dependent on the income they received from the insurers that they couldn't risk "offending them" by actually negotiating with them. So they shelved the report.

Within three years, membership in that association dropped by 40%...and the income it had been receiving from the insurers disappeared as participation in the health plans declined to almost nothing.

A lot of membership groups are in exactly the same boat. They've been jiving their members in order to get paid by their insurers. But with the pressure on insurers to reduce administration costs, those groups are under a lot of pressure to demonstrate, both to their members and to their insurers, how they add value to the equation. Most of them can't.

So they face a Hobson's choice: either they can WAKE UP and recognize the business they're in, have some unpleasant conversations with their members and their insurers, and rebuild their plans, or they can do nothing, and watch their memberships and related income plummet. And in the association business, doing nothing is almost always the strategic choice. So within 3-5 years, they'll be looking at MUCH smaller memberships and MUCH less revenue, and wondering what happened.

Think about YOUR chamber or association. Which choice do you think THEY'LL make?...

Sales Commissions And Health Insurance Exchanges

As Al Franken's Stuart Smalley character was known to say, "Denial is not just a river in Egypt."

Insurance agents and brokers are apoplectic about a recent recommendation to the Obama Administration by the National Association of Insurance Commissioners, stating that sales commissions should be considered as administrative expenses under the new health insurance reform law.

This is significant because beginning as early as January 1st, 2011, insurers are under a federal mandate to spend at least 80 percent of collected premiums on medical expenses. This caps insurer administrative expenses at 20 percent of premiums for small group insurance coverage, and at 25 percent of premiums for individual (non-group) coverage.

Response from the insurance industry and lobbying associations representing agents and brokers has been predictable: they have blamed everybody else (hospitals, doctors, lawyers, pharmaceutical companies) for health insurance cost inflation; they've railed against government interference in health insurance pricing; they've predicted that many insurers may be forced to leave the market if they can't compete in a more efficient world; and they've made dire pronouncements about declining customer service if agents must abandon their roles as "educators and advocates" for their small business clients.

All of which conveniently overlooks some important objective realities.

Health insurance coverage costs an average of 18-20 percent more for small employers than larger companies pay for comparable coverage. The principal reason for the cost differential is administrative costs, which average 25-27 percent of premiums for small groups and 30-40 percent of premiums for individuals.

The largest components of those cost differences are related to marketing, sales, and underwriting. Easily half of the difference is related to commissions and overrides paid both to general agents ("wholesalers")and selling agents ("retailers.")

Despite the onslaught of information technology, small group coverage remains heavily dependent on paper forms, complicated business processes, and a lot of administrative inefficiency, as technology solutions which have permeated other niches of the industry have not touched the small group market.

Why not? Because insurers are almost solely dependent on third-party agents to sell their products. And business processes which might simplify shopping for coverage threaten to "disintermediate" third-party salespeople, who have a lot of power with insurers.

Back in the late 1980's and early 1990's a few small business organizations (including my COSE alma mater) were able to produce genuine cost savings for their members by using the power of large numbers to reduce administrative costs through more efficient marketing and sales, and through the use of management information to negotiate more cost-effective rates from participating insurers.

The growing leverage of these purchasing groups produced a backlash among smaller insurers and agents, which resulted in many states enacting laws which prohibited insurers from "discounting" administrative costs for such groups. This protected agents' income, even as it created a disincentive to develop any cost-related efficiencies in health insurance marketing and administration.

Health costs (hospital, physician, and pharmaceutical among them) being equal, the only way to have a meaningful impact on small business' health insurance costs is to attack these administrative expenses...including sales commissions.

Certainly, a key differentiator for new statewide health insurance exchanges ought to be the ability to use administrative efficiencies...in the form of plan standardization, simplification, and reduced marketing, sales, and underwriting costs...to affect the price of health insurance coverage. A small business owner purchasing coverage directly through an exchange on-line should not have to pay the same cost as a business owner who buys through an agent, whose paperwork is processed by a general agent.

Administrative efficiency can also be a differentiator for insurers who, because of their size or market position, cannot obtain the kind of discounts from provider groups that the big Blues or dominant local insurers can obtain.

There's no doubt that agents are going to be subject to a squeeze in the brave new world of health insurance reform, just as middlemen have been squeezed in virtually every service industry. Many of the protests raised by insurance agents in this instance mirror those of travel agents in the infant stages of Priceline.com.

In the long run, just as with travel services, customers will flock to purchase health coverage in the easiest most transparent and cost-efficient manner...and if that means sacrificing their relationships with agents for a lower-cost, better deal through an exchange, that's what's going to happen.

Insurer and agent fears about exchanges aren't based on fear that they won't work; it's based on fear that they WILL work. Much of agents' business success is based on managing the complexity of the status quo, and insurers use the complexity and pain involved in shopping for coverage as a defensive business strategy. Neither party sees itself benefiting from a system which encourages transparency and simplicity.

That's why, instead of trying to find ways to game the regulatory process, agents should be pressuring insurers to do everything they can to increase simplicity and efficiency, and reduce their costs...even though, since their commissions are largely calculated as a percentage of premium, lower costs may lead to reduced commission income.

And they should start collaborating to develop the means to compete with exchanges through faster, simpler, and more customer-friendly experiences, rather than hoping that the system will continue to reward complexity and lack of transparency.

In a world where shopping for health coverage is easy, efficient, and transparent, the only beneficiaries are the small businesses that pay the bill. And that's what health insurance "reform" is supposed to be about.

"Don't Blame The Wolf For Being a Wolf:" The Need For Insurance Industry Oversight.

I'm reminded of the Russian proverb above when I hear people moralize about the "outrageous behavior" of the health insurance industry.

The wolf is the product of its evolution and its environment. Its behavior reflects those elements.

In much the same way, the health insurance industry is the product of the regulatory environment in which it has grown over the last 75 years or so, since the emergence of the first Blue Cross and Blue Shield plans, and the subsequent entry of commercial life insurance companies into the health insurance business.

(Recall that, until relatively recently, life insurance companies sold health insurance coverage as sort of a loss leader: a product which it was necessary to sell to get group customers to buy group life products, which were much more profitable. The emergence of mega-health companies is a product of the last thirty years or so.)

In general, companies selling fully-insured products, whether to groups or individuals, are strongly influenced by state regulations. And since the regulatory process is very closely monitored and managed by insurers, some states have very special and industry-friendly regulatory standards. In Ohio, for example, insurers operate under a special set of accounting rules which enable them not to report investment income on their balance sheets.

And since most states' regulators have as their primary mission the protection of the solvency of insurers doing business in their states, instead of advocacy for the consumer, how insurers account for their costs of doing business tends not to receive too much skeptical oversight.

As the federal government begins to take up a much broader role in industry oversight, some of the cracks in the existing state regulatory structure are going to become increasingly apparent...as will the magnitude of the challenge which federal regulators will begin to confront as they attempt to exercise more control over insurers' behavior.

Late last week media accounts pointed our (rather shrilly) a perfect case study in regulatory inconsistency and the role of the federal government as overseer. Ostensibly in the face of the new federal requirement that health insurers reduce maintain an administrative cost ratio which must not exceed an average of fifteen percent of premiums, accountants at Wellpoint reportedly have reclassified some 500 million dollars in administrative expenses as patient care expenses. Community outreach programs, brochures created for distribution at health fairs, material promoting nurse-on-call programs...the company apparently sought to dump any expense they could possibly justify as patient care into the medical claims cost bucket, in an effort to reduce their administrative cost ratio in advance of the new law's taking effect.

Needless to say, this is not what Our Friends In Congress had in mind. Their focus is on the 25-27 percent of small group premiums, and the 30-40 percent of individual health insurance premiums, which insurers keep as administrative costs. And their intention is that insurers find ways to become more efficient. The combination of the enhanced use of technology and simplified underwriting provide insurers with opportunities actually to reduce their spending.

But of course, the new law doesn't say precisely HOW insurers are to bring their administrative cost ratios down. So Wellpoint just did what insurers typically do: play accounting games to create the appearance of compliance with the law without actually changing their behavior.

The next two or three years will produce dozens and dozens of similar stories. Federal regulators are going to have their hands full trying to bring the wolves to heel.

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.

"Powering Up" Insurance Exchanges

With the likelihood diminishing that Congress' health care reform legislation will include a "public option," the principal hope for expanding health insurance coverage among small businesses and individuals rests with the creation of health insurance exchanges. Through these new entities, small businesses and individuals seeking coverage would have access, via the Internet, to a range of different health plans offered by a wide range of insurance companies, and could shop, compare, apply for and purchase their coverage on-line.

The problem is that these entities are easier to imagine than they are to build and manage. And the track records of many states which have experimented with the formation of such entities in the past...in Texas, Florida, California, and North Carolina, for example...suggest that exchanges face some genuine market-related challenges to their success.

This week in the New York Times, an op-ed piece by the founding Chairman of the Texas Insurance Purchasing Alliance traced the history of his own experience with a state-sponsored, non-profit exchange. While the exchange enjoyed some success over its first three years (1993-1996), it was out of business by 1998. The principal reasons for the exchanges eventual failure were:
...participating insurers, who could sell coverage both outside and within the exchange, used the exchange as a "dumping ground" for customers with unfavorable health profiles, while taking the better-risk groups for themselves;
...the state's political leadership changed, from a governor who founded and advocated for the exchange (Democrat Ann Richards) to a governor who de-emphasized the importance of the exchange (George W. Bush), and;
...ultimately, the exchange was unable to establish enough market share to be able to negotiate effectively with insurers, and without the support of the political leadership, the exchange was forced out of business.

The author's conclusion: "If Congress now creates new exchanges, as seems increasingly likely, it must prevent this phenomenon by setting two national rules: Insurers have to accept everyone and have to charge everyone the same rates regardless of health status.

Such rules would force insurers to spread risk. But enforcement would also be difficult. Every aspect of health insurance — from the rules for underwriting and setting premiums to the marketing of policies — would need to be monitored stringently to prevent companies from steering all bad risks to the exchanges."

It's best to think about the powers needed by exchanges to be considered in the context of three market realities:
1)...The health insurance market is highly concentrated. In most local communities, three or fewer health insurers control 70% or more of the market; in many communities, one health insurer enjoys market share of 90% or more. This condition severely limits competition, which leads to higher prices for small companies and individuals;
2)...State insurance regulations in most states have established "rating corridors" which govern the ranges in prices which insurers may charge different groups for the same health plans. Most insurers say that these rules do not permit them to provide special deals to groups or organizations which purchase coverage "in bulk," thus giving them the chance to duck the formation of group purchasing arrangements which might require them to become more efficient, and;
3)...Unlike large, self-insured companies, whose health plans are administered by insurers for less than 10 percent of claims costs (and typically 5-6%), administrative costs for smaller groups can average 33-37 percent of claims, which translates into 25-27% of premium costs. The administrative costs for individual health plans can be as high as 30-40% of premium costs.

If we're going to create insurance exchanges that work for small businesses and individuals, here's what we have to do:
1)...Policymakers must state that engendering a higher degree of competition among insurers is a matter of good public policy, and exchanges must have the ability to attract new competition into state and local markets through the development of interstate arrangements. If insurers in Iowa can offer coverage to small companies in Ohio at a lower cost than Ohio insurers can, those Iowa insurers ought to be able to participate in an Ohio exchange;
2)...The federal government must explicitly require the states to examine any existing regulations governing the pricing and underwriting of small group and individual health plans, and in establishing exchanges, establish rules which encourage the aggregation of small businesses and individuals into large, more actuarially credible groups. Insurers will hate this, and will claim that doing so will affect competition. But in states where one insurer controls 90% of the market, how can the effect be anything but positive?;
3)...Even in an environment in which insurers might be required to establish some sort of community rating, guaranteed issue arrangement, those elements of insurance premiums not related to medical risk...that is, administrative costs...must be subject to negotiation between insurers and the exchange. The best way to reduce and control small group health costs is to reduce that administrative cost ratio through the use of technology, a reduction in marketing and sales expenses, the development of "universal" application forms, and the simplification of underwriting, and;
4)...Given market conditions as they currently exist, and the magnitude of technical, process, and cultural challenges facing the insurance industry in the next 3-5 years, there will certainly be a considerable period of transition, as a re-configured private market integrates with expanded Medicaid and other programs to provide access to health care for those close to the poverty line. But in order to add a sense of urgency to the implementation of needed reforms, legislators would be extremely wise to make provision for the development of a "public option," in the event that the industry's efforts don't meet with some agreed-upon performance targets for greater access and more effective cost-containment. Absent such a "doomsday machine," it's likely that insurers will merely temporize, take advantage of the regulatory process, and then do the absolute minimum required by regulations they themselves will write...which is how we got here in the first place.

Taking these steps would enable insurance exchanges, over time, to use their presence in the marketplace to reduce market-related inefficiencies, bring down administrative costs, become stronger competitors, and lead ultimately to a reduction in the rise of small group and individual health insurance costs, both within and outside the exchanges.

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.

Some Numbers Worth Keeping In Mind

As Congress adjourns for summer recess, and members of Congress return home to face the folks and talk about health care reform, here are a few numbers to keep in mind, together with their sources:

-The National Federation Of Independent Business says that for the first time in 2008, fewer than half of companies with fewer than 10 employees offer health care coverage to their workers. Insurance premiums for small businesses have more than doubled since 1999. Small Businesses on the average pay 18 percent more for health insurance than their counterparts in large companies pay for comparable plans. And of the estimated 47 million Americans who went without health insurance for at least part of the year in 2008, 26 million were workers in small companies.

-The Commonwealth Fund estimates that over 90% of individuals applying for non-group health coverage end up not buying it, either because their applications are rejected by insurers due to health conditions, or because health conditions caused "write-ups" which raised prices beyond what the applicants could afford. As result, those "consumer-directed" health plans you hear so much about cover only about 11 percent of the eligible population.

-A Small Business Administration study showed that insurer administrative costs for small group health plans can be as much as six times higher than for large group health plans. Large self-insured plans administered by insurers carry an administrative "load" of 5-10 percent of claims costs; for small businesses, the administrative "load" is 33-37 percent of claims costs, which translates to 25-27 percent of premium (quite a load, indeed).

-The Center For American Progress has estimated that administrative costs for individual (non-group) health plans run between 30 and 40 percent of premium.

Unless your Congressman or Senator can tell you exactly how his or her favorite health care reform plan will address these problems in the small business and individual markets, tell your representatives they haven't done their jobs.

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...