Death by a Thousand Cuts

The Congressional Budget Office (CBO) issued a report today saying that if the Reid bill becomes law, the price of non group policies would be about 10 percent to 13 percent higher in 2016 than it would be under current law. The CBO projects that small group and large group premiums would be about the same in 2016 as they would have been anyway as the benefits of the bill would offset some of its new costs.

But what is likely to happen to health insurance rates in 2010, 2011, 2012, and 2013 before any of the bill’s benefits occur for both the insurance markets and consumers?

I would suggest Democrats not overlook the potential for political fallout in those years.

By delaying the start of most health insurance reform benefits—including insurance subsidies and underwriting reforms—until January 1, 2014 the Reid health care bill creates a real risk of unintended political consequences for the Democrats.

Or, maybe I should have said almost certain consequences that Reid may not have thought of.

On the front end, figuring out he could bring his bill in for under a trillion dollars by collecting ten years of taxes and only providing six years of the most costly benefits sounded good. May not sound so good as the years to 2014 begin to seem like an agonizingly long time.

Over two national election cycles in fact.

Having run a health insurance operation, let me suggest I can give you some insight into how a health plan manager is going to have to look at this.

Even before any health care bill, annual health insurance rate increases are back in the 8% to 10% range—and often more for small businesses and individuals. That kind of rate increase has been the norm over the past ten years and, particularly with health care providers facing cuts and under-reimbursement from government plans because of the pending legislation, there is no reason to see that abating.

To that 8% to 10% baseline, you can add a number of reasons to expect even higher health insurance rate increases each year on the way to 2014:

All of the new taxes and fees the bill creates that begin in 2010. Most notably, the $6.7 billion annual tax on health insurance premiums and the 40% excise tax on “Cadillac health plans expected to hit almost 20% of consumers in group health plans right away. The $6.7 billion tax alone is likely to increase the baseline health insurance trend rate of 8% to 10% by an additional 1.5%. Additional taxes on medical devices and drugs will also just get added to those products’ costs and will eventually be passed through to consumers in the form of higher insurance premiums and out-of-pocket costs.

The $6.7 billion premium tax, as well as the 40% “Cadillac,” tax are scheduled to begin on January 1, 2010. While insurance companies are sure to eventually pass these annual taxes on to their customers they will most often not be able to do so upfront because most health insurance contracts renew early in the calendar year. Posting here a few weeks ago, Wall Street analyst Carl McDonald of Oppenheimer and Company had this to say about the dilemma health insurers will face in 2010 because they are responsible for a tax they will not yet be able to pass on:

“Take Blue Cross Blue Shield of Rhode Island. The company
seems pretty well capitalized at the end of 2008, with a risk based
capital level of almost 745%, well above the Blue Cross industry
average of 700%. However, on a dollar basis, the excess capital held by
the Blue amounts to only about $205 million relative to the minimum
capital allowed by the Blue Cross Blue Shield Association. In 2008, the
Blue generated about $1.76 billion in premiums, or about 0.35% of the
total estimated revenue for the industry. That implies that the Blue in
Rhode Island would be responsible for paying about $23.5 million of the
$6.7 billion tax. With this legislation, over 10% of the excess capital
of the Rhode Island Blue would be wiped away.

“And that’s for a
plan that’s extremely well capitalized relative to the rest of the
industry. Coventry just bought a plan in Kansas this week called
Preferred Health Systems. If we look at the larger of the two
subsidiaries that was bought, called Preferred Plus of Kansas, it had a
risk based capital ratio of 320% at the end of 2008, as it held about
$11.6 million of excess capital at the end of the year above the
minimum 200% RBC ratio requirement. With $285 million in revenue,
Preferred would be responsible for 0.06% of the $6.7 billion tax, or
almost $4 million. So the legislation would eliminate about a third of
the excess capital of the plan, and reduce its RBC ratio to 280%.

while paying the tax in 2010 probably wouldn’t put many smaller plans
out of business, it would create some capital issues that would have to
be rectified through higher premium rates in the ensuing years in order
to build the capital base back up, which would likely result in further
market share gains by the larger plans in the market, resulting in less
competition, a direct contradiction to one of the goals of the
legislation. So, add more on to the underlying health care trend rate
so these health insurers can restore the capital they lost having to
absorb taxes they could not pass on.”

  • The
    Democratic health care bills also make huge cuts to the Medicare
    Advantage products—$118 billion in the Senate bill of which $34 billion
    is reduced through 2014. Medicare Advantage is very profitable for the
    insurers. Particularly the publicly traded plans will need to prove to
    their investors that they can maintain their overall margins in the
    post health care legislation world. Those lost Medicare Advantage
    margins will have to be replaced by compensating from their mainstream
    business—another reason why health insurance trend will have even more
    reason to be higher than the baseline.
  • The proposed 2014
    underwriting reforms are controversial. While the CBO downplays their
    impact, it is generally believed in the health insurance industry that
    there will be increased anti-selection as some consumers wait until
    they are sick to buy coverage. That means no insurance executive is
    going to want to go into 2014 under-reserved, short on capital, or with
    thin pricing margins—every reason to get those rates up as high as the
    market allows before the new rules take effect. Another reason to
    increase health insurance trend yet again above the underlying base of
    8% to 10%.
  • Beginning in 2014, under the legislation there will
    be a three-year $25 billion reinsurance assessment health insurers will
    be responsible for collecting from all customers and paying to the
    government. This assessment is designed to cushion the impact of
    millions of consumers being able to buy health insurance policies
    without having to face pre-existing condition and medical underwriting.
    Any prudent health plan manager will begin to put the money away for
    that monster hit sooner rather than later. Another reason for health
    insurance rate increases to be higher than the baseline in the years
    leading up to 2014.

What I am outlining here is not some
draconian plot to just pump health insurance rates up. The fact is that
every health plan manager—publicly traded or not-for-profit—has a
fiduciary responsibility to keep their health plan in the black and
meeting insurance department minimum capital requirements—not to
mention shareholder expectations.

The Reid bill—as well as the
House bill—treats the insurance industry like a piggy bank with one
revenue cut, tax, assessment, or mandate directed at them after
another. As I have said before, insurance companies don’t pay premium
taxes—they pass them along. As the McDonald comments attest, insurers
will have no choice but to pass all of this along, they simply do not
have the margins to absorb any of it.

So, when the day is done,
come the 2010, 2011, 2012, 2013, and 2014 health insurance renewal
cycles there will be lots of bad news passed on to health insurance
customers in the form of new assessments and taxes—not to mention as
much risk margin as can be loaded in to offset the expected
anti-selection under the new underwriting rules.

politicians might see this as a reason to “control prices.” But the
fact is that these are just the consequences of these bills that
someone is going to have to pay.

For the Democrats, waiting
until 2014 to point to any real gains from their health insurance bill,
it just might begin to seem like a “death by a thousand cuts” as every
bit if this just gets passed on—year after year.

But for right now, they’ve got themselves a health care bill well under $1 trillion!

We may need to remind them of that in November 2010 and November 2012 and November 2014.

Talk about a potential for a political hangover.

Robert Laszweski has been a fixture in Washington health policy
circles for the better part of three decades. He currently serves as
the president of Health Policy and Strategy Associates of Alexandria,
Virginia. Before forming HPSA in 1992, Robert served as the COO, Group
Markets, for the Liberty Mutual Insurance Company. You can read more of
his thoughtful analysis of healthcare industry trends at The Health
Policy and Marketplace Blog
, where this post first appeared.

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5 replies »

  1. I can think of four main determinants of a high premium benefit plan off the top of my head,
    jd your forgetting that at the same time Congress is outlawing lifetime maximums, and putting a cap on annual out of pocket, both guaranteed to cause utilization to take off. How do insurance companies control spending when congress outlaws all controls of spending?
    Ed you don’t seem to know what the word profit means nor how to use yahoo finace, I’ll assume thus your a liberal.

  2. The points made in the article are likely to happen without some regulation on the amount of profit permitted by private health care insurance companies. Profits went from around 5% some 20 years ago to around 20% now. Also pay scales for CEOs and other executives at health care insurance need to be regulated. Medicare, Medicaid, and the VA still have are able to put over 95% of health care dollars actually into providing health care. Health care insurance costs won’t be contained as long as there is a for profit industry running the insurance system.

  3. Other than creating an optical illusion for the actual costs, what is the thinking behind the House proposing 2013 and the Senate besting that by one more year?
    Somebody in the Democratic party must be aware of the obvious consequences to the next few elections and the distinct possibility that there will be no majority by 2014 to prevent a repeal…..

  4. Bob L, I’ve disagreed with you strongly on your sour take on the prospects for the current bills (both likelihood of passage and chances that the net effect of passage will be positive). However, I agree with almost all the points you make here. A four year ramp up is just too much for all the reasons you state, minus one. I disagree that the Cadillac tax will increase net premiums.
    First, political pressures are likely to make this tax have a high threshold so that very few plans are affected in the first year. Second, isn’t this a tax on the purchaser rather than the health plan??? Third, the whole reason for choosing this tax is to put more pressure on employers and unions to be smart purchasers and buy less of the most expensive insurance.
    I can think of four main determinants of a high premium benefit plan off the top of my head, when compared to a national benchmark: high risk population, high cost region, rich benefits and low utilization controls. Every one of those things is controllable to some extent by the purchaser and insurer working together except being in a high cost region. And when I say having a high risk population is controllable, I’m referring to wellness programs, not firing old and sick people.
    So purchasers can and will respond to a Cadillac tax.

  5. Rob,
    The idea of taxation is that there is some flab that can be shed. Consider following possibilities as well.
    1. Insurance companies would decrease MLR by cutting operational costs.
    2. Insurance companies would have healthier consumers as all would be covered by insurance. Though that is very far into future.
    3. Public option, if any would become the receipient of sicker population.
    4. Mandates would get in some new customers at least.
    5. Justified or not, reform would be perfect excuse to raise premium.
    6. Now we know some deals were cut with hospitals and pharma. So that should reduce some outflow as well.
    7. Healthier population=higher GDP, thus greater ability to pay. Though once again its far into future.
    It’s interesting we talk about bringing in competition to reduce price. If there is no flab to be cut then even comptetition will not help. It will merely move customers from one plan to another.
    So the question is, is there a flab and how much could be let go without adverse impact?
    Basically the system of all get all is unsustainable. As such, if insurance industry can draw a scenario where it sees survival for next 4 to 7 years, that would be great accomplishment. In fact best days of insurance industry will be after the universal plan/single payor implementation when it will be much smaller but it’s investors will get better than measly 4% returns by operating in niches and staying away from intense scrutiny.