Small Group Health Insurance Rates To Spike In 2010...And A Bunch Of Nonsense From The Insurance Industry

I recently had a long chat about health insurance reform with the former CEO of one of the nation's leading non-profit health plans. We were sharing our frustration at the behavior of the health insurance industry's lobbying group, America's Health Insurance Plans (AHIP) in the face of increasing pressure from the White House and Congress to clean up its act. My companion said, "It's as if the insurance industry is crying out, 'Please, please regulate us! Protect us from ourselves'!"

Certainly there is no clearer evidence of this (in the past week or so, anyway) than in this story, which appears in today's New York Timeshttp://www.nytimes.com/2009/10/25/business/smallbusiness/25health.html?th&emc=th. It reports that 2010 will see health insurance premium increases for small businesses which are twice as high as the previous year's. Brokers are projecting an average increase of at least 15% in small group health insurance premiums.

Typically, spokesmen for the health insurance industry blame the rise in premiums on rising medical costs. And one AHIP spokesman, who doth protest too much, says quite clearly (and with a straight face), "profits are not responsible for increased health care costs."

Nonsense....

Certainly there is a component of these projected increases which relates to inflation in medical costs. If you want to know how much, look at the year-over-year increases in costs for large, self-insured employers. Because they mostly self-fund their employees' medical expenses, their cost increases are usually pretty close to the increase in the cost of health care. A good estimate would be about five percent.

The rest?...

2009 was a bad year for health insurers. Typically (and where the AHIP flack's statement is at least partially true), a health insurer's underwriting profits...the difference between premiums collected, claims paid out, and administrative expenses...would be about 2 to 3 percent of premiums.

But the majority of those insurers' income is based on investment returns...income derived from taking premium income and investing it, usually for the short term. And when the stock market crashed, many insurance companies' portfolios took it on the chin.

How much of insurers' profits come from investment income? Unless the insurers are publicly traded, it's impossible to say. Most insurers file their financial reports with state insurance commissions, and State Approved Accounting Principles (special reporting rules for insurance companies, different from the Generally Accepted Accounting Principles most businesses must adhere to) do not require insurers to report income from investments, or from "non-insurance-related activities," such as providing administrative services to self-insured companies.

Small group health insurance rates are increasing to help insurers polish up their balance sheets after a bad year for investments. But they're also increasing due to an old-fashioned phenomenon called "featherbedding." Insurers fear that future health insurance reforms may put pressure on their rating structures, so they're getting what they can now. An actuary might call it "a strategic recalibration of rates."

And of course, as we've pointed out before, when insurers raise their rates 15%, the percentage of those rates which are attributable to administrative costs...which make up 25-40% of small group and individual health insurance rates...tends to go up 15% as well...the equivalent of giving your insurer a 15% raise for doing no extra work.

The Times article points to the underlying truth to these rate increases: small employers have very little marketplace leverage in a small group market which is highly concentrated and in which competition is constrained. They pretty much have to take the rate increase or buy coverage elsewhere.

During my time at COSE in the olden days, our small business members enjoyed premium rates which were as much as 30% lower than rates on comparable plans, and which grew at less than half the rate of small group insurance rates generally. When we once asked our insurer's chief actuary where the differences came from, he said, "COSE can negotiate; the other guys can't."

There is fairly little in any of the current House or Senate bills which would really change that negotiating balance. There is slight hope that a "public option" would develop the leverage to be competitive with health insurers for many years...at least until the public option amasses 10-15 million customers. Health insurance exchanges might help, but if they're constrained by the same rules governing private insurers (which insurers will certainly insist on), they'll have a hard time differentiating themselves in a competitive marketplace. COSE-type co-ops could, but only if they're run correctly (COSE's no longer is), and if they're given time to grow to scale.

We've written here before that there's fairly little in existing health insurance reform legislation which has much apparent promise to reduce even the rates of increase in small group and individual health insurance premiums. And despite broad promises or speechifying, our public officials can offer no solid evidence that small group premiums will do anything but escalate. Which may be a reason that small employers continue to be skeptical about the government's efforts to help them.

Health Care Reform Tourism...A Pilgrim's trip To DC

Been down with my own recent encounter with the health care system: a nasty case of pneumonia that's had me tired and wheezy...but no so out of sorts that I'd miss a quick trip to DC to talk about health insurance reform with a few key members of Congress.

We thought briefly of squeezing into the room where the Finance Committee was meeting to narrow down the differences both between and within the parties over the Committee's health insurance reform plan, but between the lobbyists and the media the crowd was 50 deep, so we met with members and staff instead.

Here are a few thoughts:

1)...The President seems to be of a mind to get some sort of health care reform plan signed by Thanksgiving recess. It'd be a nice symbol, but we encountered some genuine skepticism (especially among veteran staffers) that such a timetable was practical. After the Finance Committee finishes its mark-up, it must reconcile its version of the bill with the Senate Health, Education, Labor, and Pension Committee's mark-up...and the same exercise must go on among the three House Committees which have already passed their own (considerably more liberal) versions.
That's a lot of brinksmanship over a fairly short time, especially given that not even all the majority members of the Finance Committee seem willing to support their own bill;

2)...There seems to be some degree of resignation that whatever does manage to pass both Chambers will consist of a less ambitious plan than previously advertised. The big impact will largely be on insurance regulation, a necessary, but insufficient, component of health care reform. Reforms to the individual health insurance market will not take effect until 2013, at the earliest, and won't reach the small group market until five years after that. And while there are considerable political benefits to pushing the implementation of "reforms" out past the 2012 elections, the political calculation could backfire if people don't see the personal benefits of reform before the vote in 2012. And a bunch of Blue Dog Democrats fear voter backlash in 2010, regardless of what they do;

3)...It's hard to see how the reform plan actually saves anybody any money. Tax subsidies (which have yet to be paid for) may help to offset the cost of coverage for some people, but it seems clear that most insurance reforms will have the effect of, at best, re-distributing costs, and will probably cause a significant net increase in spending for small businesses and individuals, whether through taxes, through premiums, or more indirect means, such as bogus "excise taxes" on insurers, drugmakers, equipment companies, or other health care players, who'll just pass them on to consumers downstream.

We spent a considerable amount of time talking with Members and their staffs about the hug differential that exists between large employer groups, and small companies and self-employed individuals, in the realm of insurer administrative costs, and discussed ways to use information technology to make the process of shopping for insurance faster, easier, and more transparent for insurers, consumers, and brokers. This would be the best way to create a material and sustainable reduction in insurance costs...to focus on the 25-40% of insurer administrative costs which have nothing to do with medical claims, and everything to do with the institutionalized inefficiencies in the small group and individual insurance markets.

Technology could also be used to introduce a little much-needed competition into the health insurance market. In most local communities, three or fewer insurers control 70% or more of their local markets; in some communities, one insurer holds market share of 90% or better. With these realities, it's hard to see how insurers can say with a straight face that the introduction of a public option, or purchasing co-operatives, or insurance exchanges, could have a negative effect on competition...unless it's Opposite Day in Insuranceland.

NFIB Nails Small Group Health Reform Priorities In Short Words And Simple Sentences

The National Federation Of Independent Business (NFIB) is the nation's largest small business advocacy organization, with over 600,000 member companies throughout the U.S.

The organization's politics has usually run toward the conservative side. NFIB was one of the organizations often prominently mentioned when talking about the failure of the Clinton Administration's health reform plan.

But this year, NFIB deserves recognition for the clearest and most actionable small group market reform agenda out there in the political process. And the organization has taken to the Net to spread its gospel.

Here's a link to their cover page:http://nfib.matrixgroup.net/tabid/565/Default.aspx?cmsid=49240&v=1 (If the link doesn't work, please copy and paste in to your browser)

NFIB is selling their agenda under three important principles. They're the 3 C's: Cost, Choice and Competition. Here's a summary:

"Cost...We must bring down the cost of health insurance for small businesses and their employees. Currently, they pay 18% more for health care than big businesses. Creating an equal playing field starts with improving the small group insurance markets.

"Choice...Small business owners and employees need more choice when shopping for insurance plans. Health care reform needs to expand the number of providers and affordable plans available to small businesses and their employees.

"Competition...Lack of competition makes it easy for providers and insurers to raise their prices. In many states, small business owners have only one or two choices of insurance providers. A recent study shows that in most states the five largest insurers control 90 percent of the market. We need more competition in the marketplace and access to larger purchasing pools to help lower the cost of insurance for small businesses."

This is a reform agenda to salute. It's concise, well-documented, and recommends action steps which, if enacted, would actually help small businesses control their health care costs. Contrast it to the fuzzy, murky rhetoric coming from other national groups, like the US Chamber of Commerce, The National Small Business Association, and even my COSE alma mater.

But NFIB is in for a fight.

For several years, NFIB has been thinking about the evolution of health insurance toward a national market. They're making a big bet that with their 600,000 member companies, they would be an early favorite to meet the criteria to form a non-profit health insurance exchange or co-operative that could cast a big shadow in the marketplace, and easily move their membership past the one million mark. The organization has developed a health plan for small employers administered by a big broker specializing in association health plans.

The principal impediments: Big local or regional health plan, like Blue Cross Blue Shield plans, who are already the largest insurers of small groups at the local level; and local or statewide Chambers of Commerce and other associations which have used exclusive relationships with these insurers to build their memberships and generate a ton of revenue from sales commissions and other fees.

These groups fear the emergence of national competitors, especially big ones which could negotiate very favorable rates with insurers and providers.

That's why you'll hear them say that, if such co-ops are to be formed, they should be subject to the same rules as insurers, including rules that protect insurers from having to negotiate with associations as big customers on behalf of their members. In effect, they'll demand that any national co-op should be required to be as inefficient as they are.

And that's why I'm cheering for NFIB to win.