"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.

The Massachusetts Connector: Public And Private Lessons About Insurance Exchanges

The Massachusetts Connector, the state's 4-year-old health insurance exchange, is the conceptual model for the kind of electronic marketplace incorporated into the new health insurance reform law.

Through the Connector, individuals and small businesses have the opportunity to shop for, compare, and purchase health coverage from among a number of health insurers. So if you want to see what a public health insurance exchange might look like, go to http://www.mahealth connector.org/portal/site/connector.

I thought I'd take a little tour of the site myself, and here are a few things I found:

1) As is the case with many quoting sites, the Connector's portal contains a few "front doors:"one for individuals and families, one for employers, and one for brokers. There's even a neat little electronic process enabling small business owners to compare plans and enroll without the need for paper forms;

2) State government has clearly established the criteria for the content of plans available through the Connector. They fall into Bronze, Silver, and Gold categories based on plan features. Each category has low, medium, and high options, featuring lower deductibles and co-pays as one moves from low to high option. The plans are standardized, which makes apples-to-apples comparisons easy;

3) For the ZIP code I entered as my business' location, I was able to receive quotes from three health insurers. Don't know how many insurers overall participate in the Connector, but comparisons of standardized plans from among three insurers seemed to give me enough variety without being confusing;

4) With Massachusetts' emphasis on community rating and guaranteed issue coverage, underwriting issues are dramatically simplified, which must have a significant effect on insurer administrative costs through the Connector. And it would appear that individuals and small businesses who apply directly via the connector pay somewhat lower rates, since there are no brokers involved in the transaction;

5) The downside of community rating and guaranteed issue is that the rates available through the Connector seem high relative to other markets. I'd estimate the premiums are 20-25% higher than is the case in Ohio, for example. On the other hand, these rates probably reflect the absorption of previously-uninsured (and uninsurable) individuals into the Massachusetts risk pool. There's no easy way to compare rates within the Connector against rates available outside the Connector, but I'd guess state law keeps the rates comparable.

So on the one hand, the Connector seems pretty easy to use. There seems to be a decent selection of standardized plans at standardized rates, and the presentation is simple enough for a non-insurance guy to understand. So at least publicly, the Connector seems to be a good model for how to use technology to achieve greater transparency in plan design and rating, and in reducing other barriers to access. And state subsidies help to offset some premium costs for lower-income people.

On the other hand, as the politicians touting the Connector have been less willing to discuss, the Connector is hemorrhaging money...

After my little self-guided tour on Friday, I was intrigued to see this article in Saturday's New York Times
http://www.nytimes.com/2010/03/27/health/policy/27massgov.html?emc=tnt&tntemail1=y. The article summarized Massachusetts' dilemma this way:

"...Four years ago, when Massachusetts enacted a health insurance plan that became a national template, state leaders deferred any serious discussion about controlling health care costs, with predictable results. While the law succeeded in covering nearly all residents, the State had to raise taxes and trim benefits to preserve its essential contours." Sound familiar?...

The Connector's future has become a bellwether issue in the Massachusetts governor's race. The Democrat incumbent, Deval Patrick, has taken on the extraordinary power of directing his insurance commissioner to deny any premium increases which the State deems "excessive" starting April 1st. This has the insurance, hospital, and physicians' industries in an uproar...and has been a fundraising boon to Mr. Patrick's chief Republican rival, who happens to have spent the last ten years as CEO of Massachusetts' Harvard Pilgrim Health Plan.

The current governor maintains that price controls are a temporary measure, until a state commission's recommendations regarding how to reduce and control health care costs can be implemented...over a five-year period.

It's going to be a challenge for health insurance reform proponents to continue to point to the Massachusetts Connector as a national model without also acknowledging that the sword cuts both ways: administrative standardization and simplicity on one hand, and rapidly-escalating costs on the other hand. But interested observers should stay tuned. Because as Massachusetts goes, so will the nation.

Passing Laws Vs. Solving Problems

It's hard to recall a vote in the House of Representatives which has been as closely watched or widely discussed and debated as Sunday's vote on health insurance reform legislation.

But it's not hard to be a little concerned that the legislation once again will highlight the confusion Members of Congress and the Administration regularly experience on big issues: the notion that passing a law is the same as solving a problem.

Because from where I sit here in the grass roots of America, the problems with implementation of this new law (assuming it passes in the Senate and is actually permitted to take effect) are just beginning...and they're huge.

I take very little issue with the intentions of the bill: especially in the face of our current economic downturn, with high unemployment and great uncertainty about the future, literally millions of families are seeing their health security...if they ever had it..evaporate. And the market for individual health coverage (created by the enactment of HIPAA in the mid-1990's, by a Republican Congress) had plenty of built-in dysfunction which fairly cried out for regulation. Generally, premiums for both small businesses and individuals have more than doubled in the past decade, and the escalating costs have created anxiety among many Americans.

But it takes the naivete of young idealists or the statutory cluelessness of the Congressional Budget Office to see how this bill will have any prayer of "bending the curve" of increasing health costs for the next decade.

I'm not even considering the "process improvements" and pilot projects incorporated into the bill.

I'm thinking about how we will actually pay for the cost of subsidizing access to health insurance for every American family earning below four times the poverty rate...beginning in 2014.

The vast majority of the financing for those subsidies are assumed cuts in the growth of Medicare reimbursements, which have never been enacted in the prior history of Medicare. Those cuts are typically threatened in any given year and restored before the year is over. Do we really think Congress will find the courage to do something which it has yet to find the courage to do in the 45 years since Medicare was introduced?

The other big source of financing is the so-called "Cadillac plan tax" on high-cost health plans. Originally scheduled to take effect in 2014, the House kicked that can down the road till 2018, by which time the cost of even a low-benefit health plan will probably qualify for an excise tax.

Proponents of the reform legislation like to point out the potential benefits to consumers which might materialize in the out-years after the bill takes effect. And there are some real benefits.

But even considering those benefits, it's hard to see many provisions of this legislation which will control health insurance costs for small businesses and the self-employed, and plenty of provisions which could lead us to real fiscal calamity. Once again the Congress has attempted to craft legislation creating a gigantic new entitlement without having the courage to pay for it (or, more specifically, to require US to pay for it).

And that's the embodiment of their confusion over the difference between passing a law and solving a problem.

The Health Care Industrial Complex, And "Why Don't You Give Yourself A Nice Raise?"

I just have to leave it to the Big Brains in Washington to prognosticate on the future of health care reform legislation. I have nothing to add to the white noise.

But here are a couple thoughts that small business people and their friends might find a tad illuminating.

In his final speech to America in 1961, President Eisenhower warned against "the potential for a disastrous rise of misplaced power" among the then-recently-organized relationship between the U.S. Armed Forces and a new industry of private armaments dealers...the "Military Industrial Complex." Because of its economic and political power and pervasiveness into so many sectors of American life, Eisenhower saw how easily this network of military leaders and defense contractors could have outsized influence on politics and policy.

Flash forward to 2010:

The budget for the "military industrial complex" is $782 billion for the fiscal year.
That comprises 23% of budgeted federal spending, and 4.7% of Gross Domestic Product (GDP) for the year. The Federal government spends another $1-1.2 trillion on defense-related activities (the Veterans Administration, Homeland Security, nuclear weapons research) which are financed through other budgetary departments.

Total economic power of the military-industrial complex: $1.982 trillion.

This year, federal spending on Medicare and Medicaid alone are a projected $676 billion. That's 19% of federal expenditures and 4.06% of GDP. Those government expenditures are matched by another $1.99 trillion in private money...from health insurance and Medicare Part B premiums to what we spend on aspirin.

So, the total economic power of the nation's "health care industrial complex:" $2.6 trillion.

How come nobody's warned us about the spectacular rise in economic and political power which has arisen among that health care industrial complex since the mid-1960's? How come we're not all a lot more skeptical of "the potential for a disastrous rise in misplaced power" of the parties involved in the health care debate?

It's not just about the insurance companies. It's about all those providers of products and services who make their livings in the health care sector. As the campaign has illuminated so clearly, those interests have great power to shape events in ways that favor them...and none of it has anything to do with getting paid less...

And another thing...

It's interesting how easy it is, even for experts, to miss the real point.

There has been a lot of (well-earned) outrage directed at big insurers who seem to be taking advantage of the uncertainty in the individual health insurance market by issuing big rate increases to their customers...with the biggest rate increases for those who are actually using their health plans.

Insurers cite many factors to justify their rate increases: the non-group pool is shrinking, they say, as economically hard-pressed individuals decide to go without coverage. That leaves a higher percentage of unhealthy people in the pool, and their utilization rates are higher, thus rates must rise higher, etc.

Okay, but...

For individuals purchasing non-group coverage, somewhere between 30 and 40% of their health insurance premiums relate not to health costs, but to administrative costs. And in general, when they're calculated at all, those costs are calculated as a percentage of premiums.

So when an individual's premiums rise by, say, 25%, the portion of premiums allocated to administration rises 25% as well. In effect, the insurer is giving itself a 25% increase in its compensation, for doing no more work.

As long as we're seeking ways to reduce health care costs without adversely affecting the cost of care, how about focusing on that little bogey: the 25-27% of small group premiums, and the 30-40% of non-group premiums, which insurers pass along as administrative costs?

These are, after all, the same companies which administer the federal employees' health plan for 4-5% of claims costs, and administer self-insured companies' health plans for 5-6% of claims costs...and manage to make money.

There is no doubt that the costs of marketing, selling, enrolling, and underwriting small group and individual coverage is more expensive than for the big guys. But six or seven times as high? Really?

Health Insurance, Small Businesses, And Jobs...Why The Geniuses In DC Better Hope They Get It Right

Politicians like to deal with issues in isolation. It makes it somewhat easier to ignore the potential downstream consequences of their actions. So when advocates attempt to tie the cost of health care to job creation, politicians like to dismiss such concerns as "muddying the waters."

Of course, they're not alone. During the years I served as COSE's Executive Durector (waaay back when the membership was growing by an average of 1000 companies per year, net of losses...which hasn't occurred since...well, since I left), some corporate godfather would ask, during a meeting of the Chamber's Board. "What does helping small businesses get discounts on health insurance have to do with economic development?"

Here's an answer, for politicians and corporate oligarchs alike.

It's by now an article of faith that nearly 80% of the new jobs created in our economy over any given period are created by small businesses. As Cleveland emerged from the recession of the mid-1980's, independent research showed that nearly all the jobs being created in the local economy were produced by small companies.

A survey of Greater Cleveland's economy versus those of a few "competitor cities," showed that, while Cleveland's economy was competitive with these other cities from a wage standpoint, Cleveland was at a labor cost disadvantage compared to those other cities. The reasons were non-wage labor costs...particularly the costs of health insurance and workers compensation.

So, our thinking went, if small businesses are creating the vast majority of new jobs, and they're at a labor cost disadvantage because health care and workers comp costs were high, then working hard to reduce health insurance and workers compensation costs would reduce the cost of creating new jobs

That's what led to a COSE health plan which reduced members' costs by 30%, and to our campaign to create an association-based workers comp program which reduced members' costs by as much as 80 percent.

Reduce the cost of labor, and you reduce an important barrier to job creation among small businesses, collectively, the country's job-generating machine.

Why is this important today?

Well, in the white noise surrounding the health care reform debate, a critical piece of research from the Bureau Of Labor Statistics showed that, between 1999 and 2009, the U.S. economy created virtually NO new jobs...almost zero...even as the U.S. population grew by 21 million people.

Net new population growth of 21 million, net new job growth of zero...this is a recipe for economic catastrophe.

Tax credits for job creation will not work if the cost of creating a new job is increasing every year, both from direct taxation (like payroll taxes) and indirect taxation, such as increases in health insurance premiums.

This is something I guarantee Our Friends In Congress are NOT thinking seriously about as they consider health insurance reform.

Despite public pronouncements, I still see nothing in the massive reform bill bumping and stumbling its way along the legislative process which even suggests reductions in the rapid increases in health insurance premiums for small businesses; in fact, most elements of health insurance reform seem destined to ADD to the hyperinflation of health insurance premiums.

This is an issue that small businesses and the people who supposedly advocate for them should be discussing at every opportunity. There is a correlation between the cost of creating jobs and job creation. Reduce the cost of job creation and, as if, by magic, jobs will grow. Increase labor costs, and job creation stops...or goes backward...among the primary job-growth engine, the country's small companies.

I'd really, really like to hear some acknowledgment on the part of Our Friends In Congress and The White House that they really get this idea. But I haven't. Because they don't.

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.

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?