This is the first in a series of posts that will try to pierce the myths and reveal the facts about the reform legislation. This first post focuses on the impact that reform will have on the private insurance industry–and on the industry’s customers.
MYTH # 1: Health Care Reform represents a “boon” for private insurers.
FACT It is true that, beginning in 2014, virtually all Americans will be required to buy insurance, or pay a fine. But while insurers will pick up a boatload of new customers, many will be refugees who have been battered by a health care system that rationed care according to ability to pay. Think of the boat as a life raft. These could be very expensive customers.
Moreover, between now and 2014, insurers will face some serious financial hits. These new rules will make our health care system fairer and more affordable But the rules also suggest that for-profit health insurance may not be a viable business unless insurers learn far more about what is best for patients.
Consider what will happen in the next three years:
1). This year, Washington sliced funding for private insurers who offer Medicare (a.k.a. Medicare Advantage) by 5%. Next year, payments will be frozen. In 2012, the serious cutting begins. Over ten years, Medicare will slash overpayments to Medicare Advantage insurers by $132 billion.
When the Medicare Advantage bill was passed in 2003, Congress agreed to pay Advantage insurers 12 percent more, per beneficiary, than it would cost Medicare to cover those patients itself.
Most agree that this is corporate welfare that our health care system cannot afford.
In recent years, insurers have become increasingly dependent on the windfall payments from Medicare Advantage. As unemployment rises, insurers have been losing customers in the employer-based insurance market, and Advantage has come to represent a larger share of their profits. Humana, for example, has been receiving 60% of its operating income from Medicare Advantage.
Meanwhile, insurers selling plans in the private sector have been scrambling to ratchet up premiums fast enough to keep up with the spiraling cost of healthcare. For ten years private insurers’ payouts to doctors, hospitals and patients have been climbing by roughly 8% a year. Rising prices plus volume have driven reimbursements skyward. Each year, Americans are taking more medications and undergoing more surgeries and tests.And every year, virtually every product and service in our healthcare system costs more.
This is why, according to Morningstar Investment Research, the health insurance industry showed an average profit margin of just 3.4% in 2009, This means that, in terms of profitability, it ranked 87th out of 215 US industries.
As Henry Aaron, a highly-respected progressive reformer and senior fellow at the Brookings Institution observed last fall. Insurance company profits in the larger picture have very little to do with the overall rising cost of health care”
Given the skimpy profits that the industry has seen in recent years, generous subsidies from Medicare Advantage have remained what Carl McDonald, an analyst with CIBC World Markets in New York calls; a “bright spot” for companies such as industry leader UnitedHealth Group.
But under the reform legislation these fat Advantage subsidies will disappear, as they must, and Advantage insurers such as United Health Group will face tighter regulations. By 2014, insurance companies will be expected to pay out 85% of Advantage premiums for medical care, keeping no more than 15% of premiums to cover overhead and profits. Today, United Health Group keeps 19%. This is not unusual. The majority of Medicare Advantage plans pocket more than 15% of premiums according to a recent report released by the House Committee on Energy and Commerce.
Good-bye “bright spot.” Only those insurers that can show that they are providing excellent value for Medicare dollars will continue to receive Medicare payments, and their subsidies will be much lower. Most likely,many insurers will simply give up on the once-lucrative Advantage business.
2) Next year, the new rules regarding pay-outs will apply to private sector plans. Insurers selling in the individual and small group market will be required to spend 80 percent of premium dollars on medical services, and plans in the large group market will have to spend 85 percent. >Insurers that do not meet these pay-out thresholds will have to provide rebates to policyholders.
3) The new pay-outs rules will make premium hikes far less profitable for insurers. Even if an insurer raises its premiums by 10%–for example, lifting a $14,000 annual premium for a family plan to $15,400–the insurer must pay out 85% of the $1,400 increase, or an additional $1,190 to hospitals doctors and patients, keeping only $210 of the $1,400 to cover overhead and profits.Meanwhile, it will lose market share. It’s not clear that it will be worth it.
(4) Another new cost for insurers: beginning in 6 months, all new group health plans as well as new plans in the individual market will have to provide coverage for preventive services at no charge strong. Co-pays and deductibles will not apply to recommended services.
(5) Beginning this year, if you become seriously ill, insurers won’t be able to drop your coverage on the grounds that you forgot some detail of your medical history when you applied for insurance. They will be able to rescind your policy only if they can prove fraud, or that you intentionally set out to deceive them. This won’t be easy.
6) In 2011, insurers will no longer be allowed to cap how much they pay out to an individual over the course of his or her life. If a customer suffers from a serious illness that requires multiple hospitalizations and high-tech treatments over many years, the insurer faces an open-ended bill. Starting in 2014 , insurers will no longer be able to limit how much they pay out annually.
Make no mistake: patients need this protection. Parents should not have to worry that the insurance covering a child suffering from cancer is going to “run out” if her care costs too much in any one year—or if she survives too long. But while the new rule is welcome, it will make the insurance business riskier: Actuaries will have a hard time guesstimating just how high those bills could mount, especially over 10 or 15 years. This is another reason why reform is far from a sweetheart deal for insurers.
(7) In 2011 it will become more difficult to raise premiums. Given falling Advantage reimbursements, coupled with rising expenses, one might assume that insurers would simply lift premiums to make up the difference. But it won’t be quite that easy. Reform legislation helps states insist that insurance companies submit justification for requested premium increases. Any company with excessive or unjustified premium increases may not be able to participate in the new health insurance exchanges. /
Already, some state regulators are getting tougher. In March, the Providence Journal reported that Rhode Island’s state health insurance commissioner slashed proposed premiums increases, keeping rate increases in the single digits, while calling Blue Cross’s proposed 14.6-percent hike “just not affordable.”
And in April the Massachusetts insurance commissioner rejected nearly 9 out of 10 rate increases—ranging from 7% to 34%–that the state’s health insurers had requested for individual and small group plans.
Still, many argue that long-term, insurers will emerge as big winners.
MYTH #2 In 2014 , when the mandate requiring that everyone must purchase insurance kicks in, insurers will capture millions of new customers, government subsidies in hand, and their profits will, at last, soar.
FACT: In 2014, insurers will find that many of those new customers will be coming from low-income households. These are families who are not poor enough to qualify for Medicaid, but too poor to purchase insurance without the government subsidies that will become available in 2014.
Today about one-third, or nearly 15 million of the 47 million uninsured live in households earning between $25,000 and $50,000. These are the families who will be receiving good subsidies—and they are likely to sign up for insurance.
But they will be expensive customers. According to a 2009 report issued by the Kaiser Family Foundation, the uninsured are twice as likely as those with private insurance to be in “fair “or “poor” health. About half of all uninsured adults suffer from a chronic condition. About 75% have gone with insurance for more than one year; 55% have not had insurance for more than 3 years. Some haven’t seen a doctor in a great may years. Others have seen doctors, but have not been able to afford the medications doctors prescribe. These patients are likely to need more tests, treatments and surgeries than the average customer.
Keep in mind that, under the new reform law, insurance companies will not be able to charge these new customers more than they charge others in their community,. Moreover, insurers will have to offer all patients comprehensive insurance that meets a high bar defining basic benefits. No more “Swiss cheese” policies filled with holes. This is all fair. But it does mean that insurers will be operating in an unfamiliar marketplace— a market that aims to put patients first.
Of course, not all of today’s uninsured are poor: 9.7 million live in households earning over $75,000 a year. Why don’t they have insurance? Some suffer from pre-existing conditions that have made it impossible for them to secure insurance. Most likely, they will join the new insurance pool, adding to the number of sick patents in their insurers’ pool.
Many others in this income bracket are healthy, and haven’t bought insurance because they just don’t think it’s a good value. Under reform rules, most earn too much to receive government subsidies. Unless premiums are significantly lower than they are today, many may well decide to pay the penalty rather than buy insurance.
In addition roughly 40% or about 19 million of the 47 million uninsured are 18-to-34-years old. Most in this group are healthy and just don’t believe that they need protection. Under the reform legislation, some under the age of 26 will sign up for their parents’ insurance– though their parents will have to pay a higher premium to cover them. But many of these invincible youngsters are likely to shrug their shoulders, and pay the puny penalty.
As a result, analysts at Fitch, the bond rating agency, observe: It is not unreasonable to envision that too many new sick customers will overwhelm the individual segment of the market, driving many health plans from it altogether.” In other words, these Fitch analysts are suggesting that a fair number oy insurers may not even try to compete for the new but unprofitable business in the Exchange.
“This could become most acute under a scenario in which healthy, younger individuals decide to pay the penalty as opposed to purchasing coverage,” the Fitch analysts write, “and older individuals let policies lapse during periods when they do not need medical services, and purchase coverage only when they face a pending medical need, such as a surgery or expensive sets of tests or treatments.”
I agree. This is why I predict that sometime between now and 2014, Congress will recognize that the penalties are too weak and amend reform legislation to strengthen them. We need young, healthy people in the pool or insurance will become unaffordable for everyone. But, even so, I doubt the penalties will be draconian.
Make no mistake, there are many unknowns. We don’t yet know whether premiums will be high enough to guarantee that insurers will recover the dollars they spend on new customers. But industry analysts predict that rate increases will be held in check by the new rules on [the percentage of premiums’ that insurers must pay out, and by heightened competition for customers, who will have more choice of plans than they currently do in the individual market. Insurers “will be free to price themselves into oblivion if they choose to do so,” Sheryl Skolnick, an industry analyst with CRT Capital Group, told the Washington Post.
When all is said and done,it strikes me that the cuts and regs that go into effect in the next four years could easily lead to an industry shake-out. My guess is that some for-profit insurance companies won’t make it to 2014
On Wall Street , analysts vary in how they assess the net effect of reform legislation on insurers, but no one is jubilant. Keep in mind that Wall Street analysts would prefer to be optimistic. Most of their companies are in the business of selling stocks. It is not good for business to be gloomy.
But everyone on the Street knows that while insurers will have more customers, profit margins are likely to be even lower than they are now. At best, this could prove to be a wash.
Offering a moderate assessment of the damge, Ana Gupte, an analyst with Sanford Bernstein, suggests that “insurers come out a net negative, but not severely net negative.”
What Will This Mean For You?
If for-profit insurers are going to survive and thrive, they will be compelled to be more creative and efficient than they are today. Competing in the Exchanges where they will be offering comparable policies that promise the same essential benefits with few hidden holes, they will be far more transparent, making it much; easier for customers to make head-to-head comparisons. This should mean that if you are buying your own insurance, or work for a small company, you will find insurers are offering products which provide better value for your health-care dollars.
This will not mean that premiums for employer-based insurance will climb. If insurance companies selling to large corporations try to jack up premiums, many corporations will simply switch to another insurance company. In the new, more regulated environment, buyers will have more leverage.
Meanwhile, the best of not-for-profit insurers are likely to do well in a regulated market. Some already have pioneered using comparative effectiveness research to learn how to keep customers well. Kaiser Permanente, for example has been honored for its work in preventing heart disease.
Some for-profits also have been trying to create provider networks that do a better job of managing chronic disease. But too many-profit companies have relied on various gimmicks to stay in the black: cherry-picking, Swiss cheese policies, canceling policies when patients become ill, and caps on annual and lifetime pay-outs . . . Others have stayed afloat thanks to floated forward on Medicare Advantage’s generosity.
Now, they are going to find themselves operating in a very different environment. Some of these companies just don’t know how to make money unless they are able to do it the old-fashioned, predatory way. I suspect that more than a few will go under.
Finally, if for-profit insures have difficulty designing affordable plans that meet the new rules, my guess is that Congress will revive the public option.
So readers, my advice: – Buy the Insurance, but stay away from the stocks.
Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.