I’m viewing the latest rumblings in the US health care debate from the confines of a clear but cold Britain, where the big news is that the country is joining the PIGS in entering economic meltdown—or at least being a lot more broke than it thought it was. (PIGS are Portugal, Greece, Ireland & Spain, not farm animals). And yet it appears that health reform is making if not a comeback then at least vigorous palpitations. The reason for this seems to be the strength that the Anthem Blue Cross/Wellpoint premium rises have imbued into the Administration.
Those of you reading THCB over the years will know that I think the individual insurance market is doomed to fail and should be replaced. It has its apologists; for example Cato’s Michael Cannon here criticizes Paul Krugman who explained last Friday why the individual market goes into a death spiral. Michael claims that Mark Pauly’s research shows that the individual market works. What Pauly’s work (and I despair at having to read it again, so this is from memory) tends to show is that insurers are incompetent at charging sick people to the full extent that they cost them, but do charge them roughly three times what they charge healthy people. Pauly also said in Health Affairs that the individual market works pretty well for 80% of the people in it, but he seems to think that screwing the remaining 20% is OK. Coming from a tenured Ivy league professor who’s probably never had to buy health insurance in his life, that was pretty rich. But apparently Wellpoint’s latest performance shows that it’s not OK for much of the other 80% either—hence their dropping out, leading to Krugman’s death spiral.
But Wellpoint has shown its incompetence in three major ways.
Incompetence one. I severely doubt that Wellpoint loses as much money on its individual business as it claims it’s been doing.
The only figure I’ve seen is allegations that it lost $58m on California COBRA customers, and that California’s law extending COBRA to double the Federal period makes it worse for Wellpoint. I don’t understand why it’s been linked to the individual market problems. At least until the 2009 stimulus paid a big chunk of COBRA, very few people accepted COBRA. Those who do accept COBRA are buying back into the group policy they were previously in, which is precisely the opposite of buying an individual policy. (Of course for most people buying a high-deductible policy is way cheaper than group policies they are leaving. Of course that pricing only holds if you are healthy as those individual policies are underwritten and group policies are not).
What we do know, is that medical loss ratios in the individual market are typically much lower (i.e. the insurer keeps more of the money) than in the group market. In 2008 Wellpoint’s MLR in California overall was 79%, meaning that in the individual market it was lower than that (probably below 70%). Of course if you believe Cannon and Pauly, they were losing money in the individual market to buy market share. Cannon quotes Pauly as saying
Wellpoint had tried aggressively to expand its individual business by setting low premiums, and I think realized the underpricing to gain market share did not make sense in a recession, so they put premiums back up where they should be.
That might appear vaguely plausible until you consider what Len Schaeffer, a minor footnote in Wellpoint’s history (OK, OK, the guy who started it) said in an interview with McKinsey a few years back:
But today the most important thing for us is our actuarial data, which helps us price our premiums. As you might guess, pricing is critical. Our analysis showed that the so-called cycle in health insurance—three good years, three bad years—is simply a function of pricing discipline and pricing mistakes. There isn’t any doubt that the companies with the best pricing are less cyclical. In our case, we have no cycles at all.
We found that the most critical information for good pricing wasn’t how many contracts we had but how many people we had—who they were, their age, their gender, and where they lived. Together with regional and local differences in illness types and doctors’ behavior, these characteristics determined what the costs would be. So we gathered more information than anybody else about those things, and this was a huge competitive advantage. Now almost everybody does things that way.
We also make a point of processing claims quickly because we found that faster processing gives you a better idea of your costs and early knowledge about how trends are changing. By monitoring the landscape, we were able to raise or lower our prices before anyone else, which is really important in this business. You never want to sell an underpriced policy.
So either Wellpoint has been lying to the market, its customers, Wall Street and now the Administration in that it doesn’t need these increased premiums to do anything more than pump up its bottom line, or it’s lost that actuarial competence that Schaeffer was so proud about.
Incompetence Two. The history of health insurer profitability over the last decade has been their ability to increase premiums faster than their underlying costs increased. Over the 2000’s medical loss ratios went down as overall health care costs went up. Health insurers were keeping a larger share of a larger number. This was reflected in their profits and stock prices over the decade.
What they failed to do was to make any impact on what was actually going on in the delivery system. And Karen Ignagni herself has repeatedly and correctly said that health insurers are unable to do anything about underlying health care costs. Which leads to the rather obvious question, why are individuals, employers and the government paying them so much money for their services? Isn’t the societal point of paying an intermediary that they improve the situation between providers and end consumers? Doesn’t this mean that they are incompetent?
It does, and their solution (which Ignagni has consistently stretched the truth to defend) is that the taxpayer pays them over the odds to provide services to Medicare and Medicaid recipients.
Incompetence Three? So apparently Wellpoint can’t manage pricing (supposedly what it was good at) and can’t manage providers (something which now it or at least the head of its trade association admits it’s bad at).
Wellpoint has now also shown that it can’t manage PR. So much so that it’s 39% rate increase has breathed new life into the ashes of the health reform debate—a debate that previously produced a bill that would essentially eliminate the individual market where Wellpoint made (or at least where we thought it made) so much money. And this is a health reform bill that it was desperately trying to torpedo by the end of 2009.
With three such incompetencies, you might be wondering what the point of Wellpoint’s existence is? Or what’s going to sustain it, and the massive salaries it pays Braly et al.
But I’ve think I’ve got the answer. You see Wellpoint didn’t understand that the individual market was going to die, and that their first incompetency was an incompetency.
Now Wellpoint is terrified that its individual market bonanza is disappearing, and it’s desperately looking around for an alternative. And someone there remembered that in that reform bill it was dissing not so long ago are billions of dollars in subsidies—which now look pretty good given that all Wellpoint has to give up is an individual business that on which it’s losing money.
But health reform was dead and buried post Scotty Brown. “Hang on”, someone in the Wellpoint war room thought, “what can we do to change that agenda? Perhaps if the White House had a poster child for health care cost explosions in the absence of health reform?”
“What would happen if we arbitrarily announced a 39% price increase? You know, just to get the music started again?”
I think we have our answer.