HEALTH PLANS/POLICY: Why is the individual market such a mess?

HEALTH PLANS/POLICY: Why is the individual market such a mess?

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Following my post last week on the individual and small group insurance market, the Anonymous Academic declared some of his political colors by saying this:

    I haven’t followed the situation in California, but I am familiar with the situation in Washington State in the late 1990s, when the individual market there was a mess. The main culprit was a package of "progressive" reforms designed to enable chronically ill people to buy coverage, but which ended up making the individual market completely dysfunctional (for example, basically eliminating the market for generous individual coverage). After the reforms, most of the insurers (and many beneficiaries) fled the individual market, and those few insurers that remained offered truly crappy plans.

    Unbelievably, the state’s insurance commissioner, Deborah Senn, and many left-wingers denied that there was a problem–or if they acknowledged the problem they denied that the legislative reforms were in any way responsible. One prominent liberal said that "sometimes things have to get worse before they get better," by which I believe she meant the market for individual coverage had to be destroyed to engender support for a single-payer approach.  Prior to the reforms, the individual market in Washington functioned reasonably well, although admittedly the situation was not very good for someone who got hurt or sick while uninsured. I don’t see how this problem can be avoided in a voluntary insurance market. If (a) people can choose whether to buy insurance and (b) there are few or no adverse consequences for getting sick while uninsured, then (c) few people will bother to buy insurance until they get sick.

A little later in our conversation, while giving the proviso that his comments are directly limited to the insurance reforms in Washington State in the late 1990s (guaranteed issue, community rating, 3-month waiting period for coverage of pre-existing conditions), he adds:

    There were few serious consequences to being uninsured. If you got sick, you could get coverage in just 3 months with no underwriting.  I do think there are some problems with the individual market, but I definitely do not think that guaranteed issue, community rating, etc, are the right way to solve those problems.

Now I’m going to have to agree and disagree with the Academic. He is right. Individual health insurance CAN NOT work as a market if the insurer has any idea who they’re insuring OR if the individual has the choice to buy or not buy insurance. Both of them lead to one extreme–sick people being unable to get insurance–or the other–the adverse selection that kills companies that are compelled to offer insurance to the sick, as under those Washington State reforms. Insurers make money by getting rid of the expensive people. One of my buddies in the consulting business has been looking at individual enrollee profitability, and his analysis for his health  plan customer helped that plan increase profitability by identifying and enrolling the psychogrpahic profiles of a consumer who is less likely to be a big user of health services. Conversely if the plans have any clue in advance who those expensive people might be it’s their raison d’etre to make sure they don’t write them insurance. And funnily enough, crude though they may be, insurers have some tools to help them do that (hence my 300% quote increase when they found out I’d had knee surgery 2 years ago).  It’s the same concept as an insurer who covers fire damage knowing which 15% of houses are already on fire and therefore not covering them.  If an insurer gets it mostly right they do OK; if they get it wrong, they get hosed (pardon the pun).

And, by the way, as both the Academic and on a larger stage Mark Pauly gloss over, there are damn serious consequences for getting sick while uninsured. For example, there’s the raft of stories in the WSJ about denying care to the uninsured at UT Galveston. Another recent story well covered in the medblogs was the hospital in Indiana that carted deadbeat payers off to debtor’s prison.  And anecdotally (but I know her well), there’s my friend who has had no steady job in 30 months, is off COBRA, has a chronic blood-clotting illness (DVT) that flares up occasionally and was quoted (legally) $1200 a month she didn’t have for coverage with a $2,000 deductible (with no coverage of her pre-existing condition for the first 6 months) by California Blue Shield.  Her barely existing middle-class life will be torpedoed the next time she’s carted off to hospital when her condition breaks out, and she’ll probably have to declare bankruptcy to avoid paying the $20,000 bill she’ll likely receive.

I guess that if Pauly and other "free market" economists really believe that an insurance market is "good enough" if it works for the 80% of people who don’t actually need care, then the individual insurance market is fine.  If, on the other hand, you think that sick people should be able to get health care and have their costs spread over a larger group of healthy people (which I believe is the original concept of insurance) then everyone has to:

a) be anonymously community-rated in a big pool and
b) be forced to be in the pool (i.e. have to buy insurance)

But then again, that means that if you take it to its logical extension we should all be in one pool (or have large pools which make genuinely risk-adjusted transfer payments between each other), and then that means that the government is the logical organization to run that process. That then means the premiums we pay are called taxes, and we don’t like that.  So we pay much higher taxes called "premiums" for worse coverage and services (and pay way more out of pocket) and keep a bunch of useless anachronisms called brokers and small insurers in business all for the pleasure of avoiding "socialized medicine"–even though in Japan, Germany, Holland, Germany, etc, etc, they’ve worked out how to do this without nationalizing care delivery.

But instead we conduct minor and meaningless reforms like HIPAA at the edges of the individual insurance market, and try to get coverage to specific underinsured groups such as kids via tack-on programs like SCHIP which, as Cal Healthline and USA Today report, are incredibly vulnerable to the ongoing fiscal crisis at the state level. There is no way to put lipstick on this pig. But there’s no political interest in fixing it.

My personal solution for this whole mess is for Mark Pauly and all members of Congress to be forced to buy their health insurance on the individual market (even the over-65 year olds!).  Then you’d see a Clinton-style pooling plan implemented in about 3 weeks flat.

Wierd historical footnote: It was of course the smaller insurers who along with the AMA destroyed the Clinton plan with theHarry and Louise ads–the big guys fancied their changes in the pool structure. Ironically enough, a decade later the HIAA and the AAHP just merged!).

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6 Comments on "HEALTH PLANS/POLICY: Why is the individual market such a mess?"


Guest
Aaron
Sep 10, 2005

Bob:
The HDHP’s from Fortis (it’s called Assurant now) are not limited plans in any sense of the word. They are no different than the non-HSA plans when it comes to the total amount of coverage, the only difference is the lack of any “first-dollar” benefits, which is a principal of an HSA plan. All of the plans have Rx coverage, so you are mistaken in claiming they don’t, and out-of-network claims are covered, albeit at higher out-of-pocket cost to the policyholder, which is true of pretty much all individual plans. It’s an incentive to get the insured to stay within the network, since the discounts for claims payments are substantial. When you say “The out of pocket caps apply only to those items covered by contract.”, what is your point? That items not included in the orignal contract would not be covered by the contract? Should they be?
The Right Start HSA is a product designed for people who don’t want or need a comprehensive major medical plan. It has a much lower premium, and thus lower benefits. The product was designed after consultation with a number of focus groups to find out what people wanted in a low-priced plan. These are the people who will often go without insurance because it is so expensive and they are paying for benefits that they don’t find necessary. If anyone buys a Right Start HSA expecting it to be a comprehensive insurance policy they are mistaken, because it was not designed to be, and the agent should (and does) communicate that to the customer.
Jim:
If you think that insurance companies are raising premiums too unreasonable levels, then it would stand to reason that all of this additional premium would show up in their bottom line, correct? Since you use actual numbers of 10-12% inflation but 15-25% rate increases, would you care to show us where that roughly 10% of additional profit margin is showing up? Are you aware of just how slim the margins are for many of the individual insurers? You seem to have no knowledge of the underwriting cycle, and the need for premium increases as policyholders get older and have more claims. You also seem to have no knowledge of anti-selection, and the continual struggle for an insurance company to attract and retain healthy customers to subsidize the unhealthy. Your apples-to-oranges comparison to the med-malpractice market only reinforces my belief that you know very little about the health insurance market. Take a couple actuarial exams and get a job pricing health insurance for a couple years, then you can get back to me on how evil these insurance companies are with their high prices and immoral rate increases.

Guest
Bob
Sep 5, 2005

Ron, I suggest you look closer at some of the HDHP’s offered, particularly from Fortis, a carrier where you seem to have a love affair . . .
The out of pocket caps apply only to those items covered by contract. These are not all encompassing plans. Some plans offer no coverage for Rx, others have no coverage for out of network claims.
And then there is the “Right Start” HSA from . . . Fortis.

Guest
May 10, 2005

Sorry Jim But you are wrong.
you said, “”Basic” health insurance is worthless if a person contracts a serious disease ….. patient’s can’t afford to pay even 20 or 30 percent of the typical $50,000-$100,000 hospital bill out of pocket. Then you said, “If consumers who purchased a “basic” health insurance policy to compliment their HSA contract an illness, their basically inadequate health insurance policy will only pay a small portion of their medical bills”
Jim do you know of a company selling your so-called “Basic” coverage as HSA qualifying insurance? All the HSA programs I know follow federal law which requires a maximum out of pocket then the insurance companies pay 100%. So don’t imply that HSA clients would pay $30,000. If the New York Times found an HSA client that that happenned to it would be front page, get real.
For example, most of my clients have a $5,200 deductible for the entire family, then insurance pays 100%, including RX, to $8 million lifetime max per insured.
Jim you discuss UICI’s Mega Life Insurance Company and their plans are not HSA qualifying. Don’t mix the HSA up with UICI please.

Guest
Richard
Apr 20, 2005

…..So we pay much higher taxes called “premiums” for worse coverage and services (and pay way more out of pocket) and keep a bunch of useless anachronisms called brokers and small insurers in business all for the pleasure of avoiding “socialized medicine”–even though in Japan, Germany, Holland, Germany, etc, etc, they’ve worked out how to do this without nationalizing care delivery…….Wow…run-on-sentence….I can’t beleive that you would call a broker “a bunche of useless anachronims” since a broker is not an anacronym (you spelled it wrong anyways). Brokers and insurers are doing their jobs within the health care system. Neither broker or insurer has any different goal than you or any of your readers…make money. Socialized medicine is not the answer. What I suggest is that all health insurers to be mutual or privately owned companies. That way, the same people who are making $$’s on stock can’t complain about the US healthcare delivery system

Guest
Mar 22, 2005

Insurance Bills Will Threaten the Health of Consumers
Executive Summary
State legislatures are considering bills to reduce mandates for small group health insurance, which if passed, will result in more medical bankruptcy and more sickness and misery in those states.
Numerous mandates were passed by state legislators in the last few years because state regulators, legislators and health care advocates have learned that mandates are necessary to protect health insurance consumers from unsavory health insurance company practices like drive-by childbirth. Mandates save lives and save money for employers, policyholders and taxpayers. Moreover, it’s not true that mandates are the reason why health insurance premiums on existing small group policies are being raised, forcing small businesses to drop insurance coverage. These 25% or more premium increases are not being imposed as a result of mandates, malpractice, medical inflation or the increased use of medical technology.
In the small group market, large premium increases are not a result, but a method. The purpose of the increases is to induce policyholders to drop the policy before the policyholder files a substantial claim. Thus, eliminating mandates will not eliminate exorbitant premium increases in the small group / small business market. Most of the health insurance companies serving the small group and individual market are exploiting policyholders for a quick buck and only offer short-term policies by design.
In an age of managed care and preventive services, health insurance companies should not be allowed to put their selfish interest above the health needs of the policyholder by denying coverage for medical care that is deemed necessary by a physician. Only insurance companies will benefit from the widespread expansion of “basic” or “bare bones” policies into the health insurance marketplace.
If consumers who have purchased a “basic” health insurance policy to complement their health savings account contract an illness, their basically inadequate health insurance policy will only pay a small portion of their medical bills. The unpaid remainder will ultimately burden the taxpayers.
Insurance Bill Threatens the Health of Georgia Consumers
Senator Cecil Staton (R – Macon) is offering a proposal that would needlessly harm small business owners in Georgia , employees and ultimately the taxpayers, by depriving Georgia citizens of the health insurance protection which was provided to them by previous legislative sessions. Under the proposal by Senator Staton, health insurance companies would eventually be able to offer “basic” or “bare bones” policies that exclude many vitally important types of medical care, like mastectomy treatment and prescription drug inhalers needed by children.
Over the last few years, Georgia legislators, in response to the outcry from citizens harmed by neglectful health insurance companies, have mandated that all group health insurance policies in Georgia contain, in addition to the customary health insurance protections, twenty eight other basic and necessary medical procedures and treatments. Reputable health insurance companies offer coverage for most of these twenty eight treatments and procedures as a matter of course.
In an article in the March 2, 2005 Atlanta Journal Constitution, Jack Shipkoski, Chief Executive Officer of the American Cancer Society’s South Atlantic Division, points out that the result of eliminating mandated preventive tests and screenings will be an increase in employee illness which will cost employers and the taxpayers more in both the short run and the long run. Not only that, but thousands of Americans will needlessly be placed at risk of an early death.
The cost of these mandates to the health insurance company is actually minimal, only five to ten percent, according to Bill Custer, a health insurance expert at Georgia State University quoted in the Atlanta Journal Constitution. Custer says that removing mandates would have a small effect on the number of uninsured.
The reason for this is obvious. In any given year, most policy holders are not seriously sick, and do not avail themselves of any medical treatment or file a claim. Of the policy holders who do file a claim, only a small percentage of individuals need one of the twenty eight mandated treatments. But if a patient with health insurance lacks the coverage for these twenty eight treatments and procedures and cannot pay for the treatment out of pocket, the cost will be shifted to doctors and hospitals, and eventually, to the taxpayers.
The danger with the conveniently undefined “basic” health insurance is that there is no such thing as “basic” cancer or “basic” heart disease or “basic” chronic illness. It’s not possible for individuals to arrange for illnesses to arrive in convenient low cost or high cost varieties to suit one’s budget or health plan. Some hospitals charge more and some charge less, but the average American cannot afford the cost of medical care in either. That’s why comprehensive health insurance is a necessity. “Basic” health insurance is worthless if a person contracts a serious disease or chronic illness. Middle class and working class patients can’t afford to pay even twenty or thirty percent of the typical $50,000-$100,000 hospital bill out of pocket.
Even with these mandates, most of the health insurance that is offered to small businesses, individuals and the self employed in Georgia is inadequate to provide the comprehensive health care coverage that a worker needs if he or she contracts a serious or chronic illness. The problem lies in the unethical business practices of the companies that offer health insurance to small groups and individual.
As a result, most Georgia consumers who now have small group or individual policies qualify as one of the 30-40 million underinsured, which means they have a policy from an unreliable health insurance company or inadequate health insurance coverage. There are almost as many Americans who are underinsured as who completely lack health insurance. Some experts estimate the total of underinsured and uninsured combined is close to 100 million.
Health policy experts are beginning to realize that the underinsured face serious problems which are integrally related to the problems of the uninsured. The underinsured are in essence a minor league feeder system which provides a steady stream of warm bodies to the uninsurance major leagues.
A recent Harvard study revealed that approximately 2 million Americans file for medical bankruptcy every year. 75% of these bankruptcy filers had health insurance when they contracted the illness. Combine high deductibles, large yearly premium increases, loss of family income due to absenteeism from work or job loss due to inability to work, with health insurance companies that pay only the “usual and customary’ amount of various medical charges, and the typical middle class family has a prescription for financial disaster.
One of the main organizations working to subvert consumer protection in state health insurance laws and regulation by eliminating essential mandates, as well as other reforms, is the Council for Affordable Health Insurance. The CAHI is a front group for the least reputable of America’s small group health insurance companies like UICI of Dallas, which sells insurance through the Mega-Life Health Insurance and Mid-West National Insurance Companies. UICI is under investigation or has been investigated in half a dozen states for insurance fraud and has been sued in several states for insurance fraud and securities fraud. UICI’s questionable activities have been documented in articles published by the Wall Street Journal, Mobile Register and Boston Globe. Families USA has written an issue brief, The Illusion of Group Health Insurance, Discretionary Associations, which documents the predatory business practices of UICI and similar companies that are exploiting small businesses and the self employed.
Presently, at least two UICI employees are publicly affiliated with the Council for Affordable Health Insurance. Phil Myhra of UICI is a vice chairman on the CAHI board of directors, and Ralph Scott of UICI is chairman of the Federal Affairs Working Group, a committee that develops CAHI policy and advocacy strategies.
The health insurance companies represented by CAHI who are attempting to rollback mandates and other reforms tend to specialize in small group and individual policies. These companies are some of the last of the indemnity insurers. As opposed to most managed care insurers who pay a flat fee per person per month to medical care providers, which maximizes the incentive to maintain the policy holder in good health, indemnity insurers pay “fee for service.” The goal of disreputable “fee for service” insurers is to pay as few fees for as few services as possible.
Most consumers do not realize that for-profit health insurance companies are not in the health care business, but the money business, or financial services. The less medical care provided to the consumer, the larger the profit for the health insurance company. This potential for conflict of interest is the reason why responsible state governments should strictly regulate the sale of health insurance. The states that put the interest of their citizens above the interest of unethical businesses tend to have the most comprehensive regulation, and the healthiest citizens.
Although the Council for Affordable Health Insurance blames mandates, among other reasons, for the large increases in health insurance premiums for small businesses, that’s not accurate. The problem is not general medical inflation, expensive medical technology, malpractice suits or government mandates. The problem is that unethical health insurance companies “churn” their customer base. “Churning” is the industry term for the process of inducing policy holders to voluntarily drop their policy.
The following is an actual example of churning imposed on a self employed 47 year man and spouse for an individual health insurance policy obtained through the NASE with Mega-Life Insurance Co., a subsidiary of UICI. Beginning in March, 1997, the initial premium was $230 a month with a $1000 deductible, per person. After one year, in March 1998, the premium was raised to $370 a month. The policy holder opted to raise the deductible to $2500, per person, and the premium was adjusted to $269. In September 1998, the premium was raised to $310. The customer was offered the option of raising the deductible to $5000 per person, for a premium of $281, or raising the deductible to $7500 per person, for a premium of $253. The

Guest
Mar 22, 2005

Insurance Bills Will Threaten the Health of Consumers
Executive Summary
State legislatures are considering bills to reduce mandates for small group health insurance, which if passed, will result in more medical bankruptcy and more sickness and misery in those states.
Numerous mandates were passed by state legislators in the last few years because state regulators, legislators and health care advocates have learned that mandates are necessary to protect health insurance consumers from unsavory health insurance company practices like drive-by childbirth. Mandates save lives and save money for employers, policyholders and taxpayers. Moreover, it’s not true that mandates are the reason why health insurance premiums on existing small group policies are being raised, forcing small businesses to drop insurance coverage. These 25% or more premium increases are not being imposed as a result of mandates, malpractice, medical inflation or the increased use of medical technology.
In the small group market, large premium increases are not a result, but a method. The purpose of the increases is to induce policyholders to drop the policy before the policyholder files a substantial claim. Thus, eliminating mandates will not eliminate exorbitant premium increases in the small group / small business market. Most of the health insurance companies serving the small group and individual market are exploiting policyholders for a quick buck and only offer short-term policies by design.
In an age of managed care and preventive services, health insurance companies should not be allowed to put their selfish interest above the health needs of the policyholder by denying coverage for medical care that is deemed necessary by a physician. Only insurance companies will benefit from the widespread expansion of “basic” or “bare bones” policies into the health insurance marketplace.
If consumers who have purchased a “basic” health insurance policy to complement their health savings account contract an illness, their basically inadequate health insurance policy will only pay a small portion of their medical bills. The unpaid remainder will ultimately burden the taxpayers.
Insurance Bill Threatens the Health of Georgia Consumers
Senator Cecil Staton (R – Macon) is offering a proposal that would needlessly harm small business owners in Georgia , employees and ultimately the taxpayers, by depriving Georgia citizens of the health insurance protection which was provided to them by previous legislative sessions. Under the proposal by Senator Staton, health insurance companies would eventually be able to offer “basic” or “bare bones” policies that exclude many vitally important types of medical care, like mastectomy treatment and prescription drug inhalers needed by children.
Over the last few years, Georgia legislators, in response to the outcry from citizens harmed by neglectful health insurance companies, have mandated that all group health insurance policies in Georgia contain, in addition to the customary health insurance protections, twenty eight other basic and necessary medical procedures and treatments. Reputable health insurance companies offer coverage for most of these twenty eight treatments and procedures as a matter of course.
In an article in the March 2, 2005 Atlanta Journal Constitution, Jack Shipkoski, Chief Executive Officer of the American Cancer Society’s South Atlantic Division, points out that the result of eliminating mandated preventive tests and screenings will be an increase in employee illness which will cost employers and the taxpayers more in both the short run and the long run. Not only that, but thousands of Americans will needlessly be placed at risk of an early death.
The cost of these mandates to the health insurance company is actually minimal, only five to ten percent, according to Bill Custer, a health insurance expert at Georgia State University quoted in the Atlanta Journal Constitution. Custer says that removing mandates would have a small effect on the number of uninsured.
The reason for this is obvious. In any given year, most policy holders are not seriously sick, and do not avail themselves of any medical treatment or file a claim. Of the policy holders who do file a claim, only a small percentage of individuals need one of the twenty eight mandated treatments. But if a patient with health insurance lacks the coverage for these twenty eight treatments and procedures and cannot pay for the treatment out of pocket, the cost will be shifted to doctors and hospitals, and eventually, to the taxpayers.
The danger with the conveniently undefined “basic” health insurance is that there is no such thing as “basic” cancer or “basic” heart disease or “basic” chronic illness. It’s not possible for individuals to arrange for illnesses to arrive in convenient low cost or high cost varieties to suit one’s budget or health plan. Some hospitals charge more and some charge less, but the average American cannot afford the cost of medical care in either. That’s why comprehensive health insurance is a necessity. “Basic” health insurance is worthless if a person contracts a serious disease or chronic illness. Middle class and working class patients can’t afford to pay even twenty or thirty percent of the typical $50,000-$100,000 hospital bill out of pocket.
Even with these mandates, most of the health insurance that is offered to small businesses, individuals and the self employed in Georgia is inadequate to provide the comprehensive health care coverage that a worker needs if he or she contracts a serious or chronic illness. The problem lies in the unethical business practices of the companies that offer health insurance to small groups and individual.
As a result, most Georgia consumers who now have small group or individual policies qualify as one of the 30-40 million underinsured, which means they have a policy from an unreliable health insurance company or inadequate health insurance coverage. There are almost as many Americans who are underinsured as who completely lack health insurance. Some experts estimate the total of underinsured and uninsured combined is close to 100 million.
Health policy experts are beginning to realize that the underinsured face serious problems which are integrally related to the problems of the uninsured. The underinsured are in essence a minor league feeder system which provides a steady stream of warm bodies to the uninsurance major leagues.
A recent Harvard study revealed that approximately 2 million Americans file for medical bankruptcy every year. 75% of these bankruptcy filers had health insurance when they contracted the illness. Combine high deductibles, large yearly premium increases, loss of family income due to absenteeism from work or job loss due to inability to work, with health insurance companies that pay only the “usual and customary’ amount of various medical charges, and the typical middle class family has a prescription for financial disaster.
One of the main organizations working to subvert consumer protection in state health insurance laws and regulation by eliminating essential mandates, as well as other reforms, is the Council for Affordable Health Insurance. The CAHI is a front group for the least reputable of America’s small group health insurance companies like UICI of Dallas, which sells insurance through the Mega-Life Health Insurance and Mid-West National Insurance Companies. UICI is under investigation or has been investigated in half a dozen states for insurance fraud and has been sued in several states for insurance fraud and securities fraud. UICI’s questionable activities have been documented in articles published by the Wall Street Journal, Mobile Register and Boston Globe. Families USA has written an issue brief, The Illusion of Group Health Insurance, Discretionary Associations, which documents the predatory business practices of UICI and similar companies that are exploiting small businesses and the self employed.
Presently, at least two UICI employees are publicly affiliated with the Council for Affordable Health Insurance. Phil Myhra of UICI is a vice chairman on the CAHI board of directors, and Ralph Scott of UICI is chairman of the Federal Affairs Working Group, a committee that develops CAHI policy and advocacy strategies.
The health insurance companies represented by CAHI who are attempting to rollback mandates and other reforms tend to specialize in small group and individual policies. These companies are some of the last of the indemnity insurers. As opposed to most managed care insurers who pay a flat fee per person per month to medical care providers, which maximizes the incentive to maintain the policy holder in good health, indemnity insurers pay “fee for service.” The goal of disreputable “fee for service” insurers is to pay as few fees for as few services as possible.
Most consumers do not realize that for-profit health insurance companies are not in the health care business, but the money business, or financial services. The less medical care provided to the consumer, the larger the profit for the health insurance company. This potential for conflict of interest is the reason why responsible state governments should strictly regulate the sale of health insurance. The states that put the interest of their citizens above the interest of unethical businesses tend to have the most comprehensive regulation, and the healthiest citizens.
Although the Council for Affordable Health Insurance blames mandates, among other reasons, for the large increases in health insurance premiums for small businesses, that’s not accurate. The problem is not general medical inflation, expensive medical technology, malpractice suits or government mandates. The problem is that unethical health insurance companies “churn” their customer base. “Churning” is the industry term for the process of inducing policy holders to voluntarily drop their policy.
The following is an actual example of churning imposed on a self employed 47 year man and spouse for an individual health insurance policy obtained through the NASE with Mega-Life Insurance Co., a subsidiary of UICI. Beginning in March, 1997, the initial premium was $230 a month with a $1000 deductible, per person. After one year, in March 1998, the premium was raised to $370 a month. The policy holder opted to raise the deductible to $2500, per person, and the premium was adjusted to $269. In September 1998, the premium was raised to $310. The customer was offered the option of raising the deductible to $5000 per person, for a premium of $281, or raising the deductible to $7500 per person, for a premium of $253. The customer opted to pay the $310. In March 1999, the premium was raised to $386. In September 1999, the premium was raised to $510. The customer dropped the policy. No claims were filed during the two and one half years the customer held the policy.
Offering low initial premiums is not a bait and switch tactic. The purpose of the premium increases after year two or three is to chase the customer away before a large claim is filed, and the only way to legally induce the customer to voluntarily drop the policy is with large premium and deductible increases. The goal of the unethical health insurance companies is to essentially get something, your money, for nothing. In three years, the health insurance company can bank $10,000 or more per individual.
The proof is that while the insurance company is charging $475-$500 a month to the third year policy holder, the company is still offering the $225-$250 rate to new policy holders. If the cost of mandates, or technology or malpractice lawsuits has driven the cost of a policy to $475-$500 for the third year policy holder, how can the company still offer the “low” rate to new policy holders for a comparable policy? It can only be because the company knows that $225-$250 represents an affordable sign up amount to many individuals, while $475-$500 will induce those same individuals to drop the policy.
The rate of medical inflation is approximately 10-12%. If a health insurance company raises premiums by 15% to 25% or more each year, it’s churning.
The practice of churning is also the main reason why medical malpractice insurance companies in Georgia have raised premiums so rapidly in the last few years. The goal of the ethically challenged malpractice insurance company is to collect a year of two of premiums, at $5000 to $25,000 a month or more, then use large premium increases to induce the doctor to voluntarily drop the policy. It’s another variation on the theme, take the money and run.
Most small business men and women who work hard to maintain good customer relations find it incomprehensible that any business would deliberately chase good customers away. But this is standard operating procedure in the small group health insurance industry. While most Americans keep the same auto or home insurance company for ten years or more, most of the health insurance companies represented by the Council for Affordable Health Insurance churn their customers within three years. Any consumer signing up with a new health insurance company every three years is playing a dangerous game of health insurance roulette.
The diagnosis is that the American health care system is afflicted with harmful parasites, the small group health insurance companies. These companies bleed hundreds of millions of dollars from the health care system that would otherwise go to providing affordable health care or preventive care.
If a health insurance company cannot provide an affordable, reliable, comprehensive health insurance policy to consumers, that company should not be in the health insurance business. Consumers will be better off without them.
Jim McMeans
5335 Highway 106 North. Danielsville, GA 30633
[email protected] 706-789-3206
Henry Ramsey.
265 Deering Street
Athens, GA 30605
Addendum
In the book, Bitter Medicine, by Jeanne Kassler, M.D. the author discusses the problems facing small businesses, and writes, “many (small businesses) find when they do buy insurance, sudden and steep premium hikes force them to drop coverage – especially when insurers use artificially low initial rates to recruit new business. These low rates tend to fade quickly once the exclusion of preexisting conditions expires. Once workers are eligible to file claims, the insurer prices their premiums out of reach. This practice is sufficiently widespread to have a name, churning. Companies have to switch insurers when they can’t afford to renew.” (Birch Lane Press. 1994. Page 36)
George Halvorson wrote in his book, Strong Medicine, in a discussion of the problems facing Voluntary Small Group Pools, “ the pool managers have two choices: to follow insurance company risk segregation practices by getting rid of the high-cost groups that are causing losses by canceling them or bombing them with very high rates specific to their groups ….” (Random House. 1993. Page 114)
Also, Families USA published an issue brief, The Illusion of Group Health Insurance: Discretionary Associations, in which the authors use the term, “durational rating,” to describe the rate setting practices used by these discretionary associations. “The associations offer a low introductory or teaser rate to the policyholder for the first two years, …then raise renewal rates to reflect underwriting wear off.” Translated into plain English, the company jacks up the premium to an unaffordable level.
The issue brief also discusses two other techniques, “closed blocks” and “re-underwriting on renewal,” used by small group health insurers to effectively eliminate policyholders via the method of large premium increases. (Families USA. Page 8-9)