I had an interesting call from a member of the legal profession the other day, and it got me thinking about the post-reform prospects for my own particular collection of bete noirs—the insurers who prey on desperate people in the individual market. Yes, you can expect the subject of Mega Life & Health to appear later in this article.

Now some dummies are starting to complain about what, to this point, have been broadly accepted parts of the upcoming reform legislation. Robert Samuelson is a typical advantaged recipient of community-rated insurance yet complains about the same concept being extended outside his community-rated group made up of Washington Post employees. AARP suggests in response that he should be sending (his much younger WaPo colleague) Ezra Klein a check, as Ezra is in effect subsidizing Samuelson’s health insurance.

While the political cognoscenti is struggling with the public option and payment rates to rural hospitals (and other bribes needed for DINO Senators from Nebraska & Louisiana, and the NEDINO one from Connecticut), the real issue of health insurance regulation is getting scant attention. In particular three huge issues remain to be resolved:

1. Cross-border insurance sales. Now I’m all for abolishing state insurance departments, allowing one company to sell to multiple states, and Federally regulating health insurance sales. But as Trudy Lieberman points out at the CJR, the insurance industry would be delighted if the law only changed for the first two-thirds of that sentence. And here’s the crux:

The provision, euphemistically named the Health Care Choice Compact, would work like this: Two or more states could join together and allow insurers selling health coverage to be governed by the laws and regulations of the state where the policy was issued, not the rules of the state where they’re sold. So a company wanting to sell in, say, Wyoming or South Carolina—which may have weak regulations—could choose to issue its policies in those states but actually sell them in New York or California—where the rules are tougher. If policyholders have problems with their coverage, too bad: the rules of the weaker state would apply, and they could be out of luck.

2. Are high deductible plans going to be all we get? It certainly appears that there’ll only be enough subsidies around for those receiving them to end up more or less having to buy high-deductible plans. There are both individual problems with high-deductible plans and systemic ones.

Individual—Sick people with high-deductible plans tend to neglect needed maintenance care because of cost. That’s why Pitney Bowes and other smart companies have removed co-pays for medications for those with chronic conditions. But most high-deductible plans don’t do this and so we can expect not only more catastrophic coverage, but more catastrophes as these high-deductible plans spread.

Systemic—I hate to bring this up, I really do. But the math is simple (as I’ve been writing about for years on THCB). If everyone has a high-deductible plan, either they need to be charged pretty much the same premium as they would with a low-deductible one, OR there will not be enough money in the insurance pool to cover the sick. It’s totally obvious. If average health spending is $8,000 per person, average premiums plus out-of-pocket spending need to be $8,000 per person. The overall pool needs to keep 80% of the money for 20% of the people, which means that if average deductibles go much above 20% of average health expenditures, the pool will not have enough money in it to cover the sick.

Of course the reason high-deductible plans are so much cheaper currently than low deductible ones is because insurers don’t allow sick people to buy them! It’s the risk selection not the deductible that impacts the price.

Related to this is the issue of what benefits a plan would have to provide outside versus inside the Exchange. Will the combination of regulation and exchanges prevent insurers from gaming the system to sell lower-cost plans to healthier people, even when such activity is theoretically banned? The obvious way to prevent this (other than abolishing insurers and having one social insurance pool) is to to do back-end risk-adjustment between plans selling exactly the same mandated benefits, as they have in the Netherlands. But there’s no sign of that language in any bill.

3. Junk Insurance. (Yes, Mega Life & Health makes its appearance here). Finally, the last part of insurance regulation concerns the real schlock-meisters. These are the companies that sell essentially fraudulent insurance. Watch any daytime TV, or get involved with “employer association” front groups and these companies will pop up. What they do is sell unsuspecting and usually desperate people insurance, and neglect to tell them that the coverage has detailed limits—such as a few hundred dollars per day in a hospital, when it really costs several thousand.

Mega Life & Health, a brand of HealthMarkets, which is owned by those upstanding citizens at Goldman Sachs, Blackstone and Credit Suisse, is the poster child of this segment of the market. I’ve written about them on THCB before lots of times. In 2006 they somehow convinced the California Supreme Court that their junk insurance was legal, and in 2008 they were fined $20m for actions that to quote the AG of Washington State “hurt alot of people”.

If you want to know more about the practices of Mega in essentially lying, cheating and stealing from some of the most desperate Americans, you might want to settle in and read this post and the long series of comments from several former Mega agents.

I would be very interested to know if Mega (or its sister outfits Chesapeake Life Insurance Company and Mid-West National Life Insurance Company of Tennessee) have changed their practices—particularly in agent training and management—since the 2008 settlement. (Healthmarkets says they have, but they would, wouldn’t they?) They were also fined $17m in Massachusetts in a separate complaint earlier this year. But again that was for offenses dating back to 2007.

The question is, how is Mega behaving now? If any former (or current) agents or customers would like to comment on this post (or email me privately) I’d be very interested in finding out more.

And of course, theoretically this type of junk insurance should probably become illegal soon—putting Mega out of business (or forcing them into a different type of business). But that devil is in the details of the legislation to come, and I'm sure HealthMarkets and its like have many smart lawyers and lobbyists focused directly on this topic.

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7 Responses for “The post-reform insurance market, or will Mega survive?”

  1. Barry Carol says:

    Matthew – First, I agree with you on Mega Life & Health. I think they should be driven out of business.
    Regarding health insurance premiums more generally, however, I think it is important to distinguish between what is typically covered by insurers and total healthcare spending overall. Insurance generally covers hospital charges, physician and clinical fees, including labs, PT, imaging, etc., prescription drugs and administrative costs. These four categories combined, including non-covered services and individual out-of-pocket spending account for 70%-75% of healthcare spending. The rest consists of public health initiatives, R&D, long term custodial care, home healthcare, dental and vision care. Some of these costs may be covered under separate policies.
    Moreover, spending per person is much higher for the 65 and older population while Medicare is likely to remain largely intact, albeit with some tweaks and some cutbacks in Medicare Advantage payments. Employer spending per member, including family members, varies widely. As Bruce Bullen, CEO of Harvard Pilgrim Health Care, put is: “When you’ve seen one self-funded account, you’ve seen one account.” From what I’ve seen, however, most employer self-funded plans spend in the area of $4,000 per member per year with some under $3,000 and a few with older workforces above $5,000. Administrative costs in large self-funded plans, by the way, are 5%-11% of total spending according to the Congressional Research Service, not 20%.
    To determine the potential impact of high deductible plans, I think it would be instructive if we could see some data showing the percentage of claims costs, whether paid by the insurer or the member, that are attributable to the first $5,000 of annual spending including the first $5,000 spent on behalf of members with very high costs. Perhaps Nate could help us here. Even though a comparatively small percentage of high cost members drive a disproportionate share of healthcare costs, it wouldn’t surprise me if the first $5K of spending on any given member in a given year accounts for as much as one-third of claims and is probably at least 25%. If that estimate is in the ballpark, it suggests that catastrophic only coverage for everyone in a single pool with a $10K family OOP could / should cost roundly 25% less than comprehensive coverage with a modest deductible of, say, $500 per person / $1,000 per family.

  2. Kim says:

    Matthew — I’m not an actuary, but I don’t think your math is, in fact, valid. On a purely actuarial basis, the premium to cover cost of care can be considered x + y, where x is the value of care up to the deductible and y is the value of the care after. In a high deductible plan — again, from a purely actuarial basis, without selection or behavior changes — y would stay the same, and is obviously lower than x + y. What has changed is that the people with lower expenses are no longer paying x, thus saving money, while the people with higher expenses are paying more than x, up to the actual deductible level, so those initial costs are simply shifted in terms of how much subsidy the more expensive people get.
    Where it gets complicated is that much high deductible business has been sold in a situation where there are other options, have benefited from the favorable selection of healthy people selecting the option, and may have been priced lower than would be sustainable in a full population. Offsetting that to some extent, though, are the behavior changes that proponents of CDHPs cite — people are more judicious about the use of their health care. Those would be real savings. Various studies have suggested that people with CDHP do use less care but don’t skimp on preventive care — partly because such care is often not subject to the deductible — but opponents of CDHPs remain convinced that people won’t always make good judgments about getting necessary care. They are probably right, but people aren’t always making good judgments now either — that elusive waste in the health care system comes, in part, from overuse.
    You also should to remember that most HDHPs have been sold in group settings (77% per the latest AHIP study), where insurers/employers offer it equally to all eligibles in the group (although not everyone selects that option), so it is not accurate to say insurers “don’t allow sick people to buy them.”
    I can’t speak to Mega, but certainly there are practices, particularly in the individual and small group markets, that should be better regulated.

  3. Roger says:

    Implementing American Universal National Health Care is the ONLY thing big enough to fuel our economic recovery.
    Britain grew its bombed out, bankrupt economy out of the ruins of World War 2 by starting its Universal National Health Care system when it had NO money.
    Britain began its Universal National Health Care System immediately after World War II when most of its buildings lay in bombed out ruins and Britain was incredibly bankrupt.
    The Universal National health Care system catalyzed the nation causing economic growth with the training of huge numbers of new doctors and medical personnel and the huge growth of the medical economy.
    Universal National Health Care helped lift Britain out of economic collapse. There was no “option”.
    For this reason the time for American Universal National Health Care is NOW exactly BECAUSE we are in an economic crisis. American Universal National Health Care will cause the high wage jobs and taxable business growth economic recovery in America that we so desperately need RIGHT NOW.
    Read more about it here.
    http://www.vivzizi.com/vivziziAmericanUniversalNationalHealthCareforeconomicrecovery.html
    And if you are extremely frustrated as most Democrats and Independents are by a president and congress who aren’t giving you the healthcare you thought you were going to get (like Medicare and what congress gets) then there is now something CONCRETE and EFFECTIVE you can do. People can show their support for True Universal Health Insurance Every Wednesday with a Driving Slowdown until passage of an American, Free to patient, Universal, Single Payer, Tax Base Funded, non employer or employment based, Health insurance or healthcare system. You can read more about it here http://www.massivemedicalmobilization.org

  4. Matthew Holt says:

    Kim, unfortunately your logic about HDHPs being a big deal in employer groups falls flat when you consider that they are about to be sold to people buying via the exchange who dont have steady work, don’t have as much money as those getting insurance via their insurers and probably dont even have the ability to pay up to their deductibles. The increase in cost sharing to employees by employers is simply a relative reduction in overall wages.
    You’re overall actuarial math is also wrong in theory, although I’ll grant you that it’s irrelevant in the markets HDHPs are sold into.
    And I’m glad that you can quote “various studies” showing that HDHP recipients don’t skimp on needed care, because I merely quote a NEJM study that shows they do….but what would I know….

  5. Kim says:

    Matthew – although neither of us are actuaries, I’m willing to bet that I’ve had more experience with pricing insurance than you have, and I don’t think that my “overall actuarial math is also wrong in theory.” Are any of your readers actuaries who can shed some more light on this?
    I do share your concern that HDHPs may not be appropriate products for lower income individuals, especially without some method for mitigating the impact of the cost-sharing. Cost-sharing ultimately has to take ability to pay into account. I believe there have been some states — Indiana? — that have tested approaches with high deductible plans in conjunction with personal care accounts of some sort. again, can any of your readers shed light on the success of these?
    We could go back to the RAND studies of the 1970′s — it’s clear that increased cost-sharing has an impact on reducing utilization. What I think is more controversial, and subject to differing results by different researchers, is whether that is good or bad. To advocates who view any reduction in use of care as necessarily bad, there can be no debate, but personally I think the world is less clear-cut than that.

  6. Nate says:

    “Of course the reason high-deductible plans are so much cheaper currently than low deductible ones is because insurers don’t allow sick people to buy them!”
    Hey Matt hope all is well, have a good thanksgiving? Oh and buy the way your full of ^&*@W and have no idea what your talking about. But hey why believe the people that actually place sick people in HDHPs when some no experience blogger can just make crap up. Have a great christmas!

  7. Nate says:

    Barry and Kim, not that I would dare disargee with the dear leader but you are correct that HDHPs would have a positive impact on cost not destroy the pool as some people that have never seen a healthcare pool claim.
    In fact, sorry Matt, it is not the healthy groups that are curretnly buying HDHPs. It is sick groups that neglicted their plans that faced with a 30% increase they can’t afford elect to go the HDHP route. Usually this can be a positive experience that will lead to long term solutions, like getting arrested for a minor offence to end your wayword youth.
    If Matt was a thinking commie/liberal he would realize the opportunity in HDHPs instead of bashing them. Risk over 5-10K is much easier to predict then utilization risk that usually occurs under 5-10K. When insurance risk is transparent and predicatle, don’t worry you wont be tested on these basic insurance 101 concepts, the market for it is highl competitive. For example see basic term life. Competition drives down prices and decreases margins. That means by seperating the true insurance from the financing of care billions will be saved. Some interprising commie/liberal could then collect those savings through increased tax, which other way is there for the commie/liberal crowd, and spend it on the financing of care for the poor and other preferred classes.
    A considerable amount of the waste today is from the bastardization of “insurance”. Insurance doesn’t ocver paps and mammograms becuase everyone at a certain age should be having them. Like I have taught you before that is very inefficient insurance. If the federal government wants to open mamo centers avross the country providing free mammograms to everyone over 40, oops sorry 50 now, then in theory that would be considerably more efficient, until the liberals corrupt it but that is a different argument.
    On your last point you would know as much as the NEJM which isn’t much to brag about. A little common sense and a number of their “studies” don’t hold water. That is the thing about a politically driven study with poor assumptions and design it really has no value no matter where it is published.

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