The Exchanges Part II

flying cadeuciiI wrote earlier here about the exchanges, how they are failing, and why.  It is unsurprising that what I wrote is coming true, not because I am some clairvoyant, but because I’ve lived in the insurance world and understand it.  The causes are very, very obvious.

The most recent whipping boy is Aetna, which announced that it is exiting most of its exchange markets, citing losses of $200 Million in the second quarter. From correspondence, it is clear that Aetna was willing to be a good citizen and accept such losses if its proposed acquisition of Humana were not opposed by the feds.  Well, the feds are opposing.  And predictably, Aetna is sending back a message that it’s willing to be a good citizen, but only up to a point.

Might we wonder what the Obama Administration is thinking regarding the exchanges?  All of this is so predictable.  The exchanges were designed to fail economically.  Fundamentally, insurance is a financial matter.  Money in, money out.  If the exchanges were designed to be something else (a socially-conscious program to afford (so to speak) coverage to everyone that would require tax subsidies), it might be time to admit to that.

The Administration’s view of private health insurers is reflected in the rather snotty recent comment by Kevin Counihan, Chief Executive of the US government-run individual marketplace, that:

“It’s no surprise that companies are adapting at different rates to a market where they compete for business on cost and quality rather than by denying coverage to people with preexisting conditions.”

That was totally uncalled for and simply does not advance the discussion.  Pre-existing condition clauses were a perfectly acceptable (financially) underwriting technique.  The truth is that if the administration (which is decidedly NOT business savvy) is going to play in the rough and tumble sandbox of health insurance, it needs a reality check, which it appears it is now getting, whether it admits it or not.

One wonders if anyone with true insurance cred was involved in the design of the exchanges.  Steven Brill’s book, America’s Bitter Pill, describes in exhausting detail how Obamacare came about.  At the risk of over generalizing, there were two camps.  One was focused on expanding coverage AND reducing costs.  The other was focused only on expanding coverage.  The latter group “won.”  It was all about getting a win, getting something on the books, and worrying about the costs later.  Well,that later is now.

As the WSJ’s Reporter Greg Ip noted on Thursday, “Selling mispriced insurance is a precarious business model.”  In his article he noted that the average 64 year old consumes six times as much health care as the average 21 year old.  To force insurers to adhere to a 3:1 maximum ratio, an insurer would have to charge the 21 year old 75% more than his actual cost and the 64 year old 13% less.  Go figure.  I know this is about spreading risk, but let’s be clear about the results.

And therefore is it any surprise that young healthy Americans are avoiding exchanges?

So what is going on here?  What is happening is that a fundamentally financial transaction (insurance) has been politicized.  Once that happens, normal actuarial and underwriting rules are out the window.  This is all about “doing the right thing” by the lights of politicians, something that is difficult to oppose in principle, but more difficult to finance.

I’ve never met Aetna’s CEO Mark Bertolini.  Yet, he seems like a forward thinking guy who is the sort of person you’d want as the CEO of one of the major health insurers in the US.  Yet, we’re now vilifying him and his company.  Of course there is a quid pro quo in the willingness to accept losses in the exchanges and the merger.  That shouldn’t shock anyone.

And this isn’t about the insurers mispricing because they were negligent.  Jumping into the exchanges, they had NO DATA on which to price, so they guessed.  Then, as experience progressed, the adverse selection that occurred caused the price spiral to continue.  As Alissa Fox of the Blue Cross Association noted, “We’ve just seen the costs of people increasing.”

It’s all about dollars in, and dollars out.  We unfortunately seem to have a government that legislates based on wishes rather than reality.  Might we please have an administration that undertakes a financial obligation using honest, financial bases?

Jim Purcell is the former CEO of BCBS of Rhode Island and before that a trial lawyer. Today he arbitrates and mediates complex disputes.

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3 replies »

  1. I think physicians and insurance companies alike are tired of getting blamed by politicians for failed empty promise campaigns. Perhaps we should work something out?

  2. “Fundamentally, insurance is a financial matter. Money in, money out. If the exchanges were designed to be something else (a socially-conscious program to afford (so to speak) coverage to everyone that would require tax subsidies), it might be time to admit to that.”

    Many of us have been admitting that – for a long time. “Affordability” is not a “so to speak” equation, it’s what health care should be. Your comments from “the inside” are exactly why insurance and health care are mutually exclusive and it’s time for a different approach.

  3. Jim – as always, good, considered thoughts born of experience in the “rough and tumble.” As I posted in response to comments to my Aetna blog, I think the insurers need to regroup and think hard about their strategy. They are the ones who are apparently playing politics right now. But they are also playing with people’s lives. The die seems to be cast for 2017 coverage and we’ll see how things play out this fall….but we have an opportunity after the election to start to solve the problems that have cropped up in the exchanges (federal and state-run). Fixes are needed. Hopefully the election results yield a new environment that makes those fixes possible. I disagree that the exchanges were “designed to fail” economically. It was good faith effort to creating a working structure. There were inevitably going to be issues/problems. And they are here, as is the cost problem, as you say. The work must continue to build a better functioning, fairer individual insurance marketplace, a more efficient and less wasteful delivery system, and to restrain costs across the board.

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