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How to Blow Up the Health Insurance Market In One Easy Step

I call support for giving insurance companies the ability to sell insurance across state lines the cockroach proposal.

As bad as it is, you just can’t kill the damn thing!

Last night, President Trump once again listed this idea in his address to Congress as one of his health care talking points.

Any candidate that suggests such a scheme only shows how unsophisticated he and his advisers are when it comes to understanding how the insurance markets really work––or could work.

I gave a speech to 750 health insurance brokers and consultants in DC last week.

When selling health insurance across state lines, something Trump and a number of other Republican presidential candidates have been pushing, was mentioned the audience literally laughed. That’s what health insurance professionals who spend their days in the market think of it!

This is about as dumb an insurance “reform” idea as has ever been proposed.

This is nothing more than an attempt to take the market back to the days of cherry picking risk––figuring out how to sell policies to only the healthy people. If this were ever enacted it would only serve to shuffle the healthy people into one set of health insurance policies and the sick into another thereby driving down costs for the healthy and in return just driving costs up for the sick––and accomplishing nothing toward fundamentally making insurance cheaper.

People who promote the idea are targeting the many state benefit mandates that drive health insurance policy prices up. The idea is, after the federal Obamacare mandates are repealed, to allow the sale of cheaper policies from states with the fewest benefit mandates to be able to be sold in high mandate states––thereby encouraging the state with more mandates to curtail them.

But if their aim is to eliminate many of these “excessive” state benefit mandates with a federal law, why not just curtail these mandates in all of the states with a federal law? If they are going to stick their federal noses into some of the states that have traditionally regulated insurance, why not just go ahead and stick their noses in all of the states at once and create a level playing field while they are at it?

There are a number of basic problems with this idea:

If it did attract new carriers to a market, it would be a great way to blow up the existing health insurance market––for example, the high market share local legacy Blue Cross plan whose business is in compliance with all of the existing state benefit mandates. A new carrier could conceivably come into the market with much lower rates––because it is offering fewer benefits––and thereby attract the healthy people out of the old more regulated state pool leaving the local legacy carrier with a sicker pool still attracted to the richer benefits.

Stripping down a health plan is a great time tested way for a predatory insurance company to attract the healthiest consumers at the expense of the legacy carrier who is then left with the sickest––cherry picking.

Proponents might argue that creating more competition by allowing carriers with stripped down policies into a state would be a great catalyst to force all of the states to reduce their mandates––like creating market chaos is a great tool for reform.

It’s a 1990s idea that fails to recognize the business a health plan is now in. Health plans these days don’t just cross a state line and set up their business like they did decades ago when the insurance license and an ability to pay claims was all a carrier needed to do business.

This idea was first suggested by the last of the insurance industry cherry pickers back in the 1990s, on the heels of the first generation of insurance underwriting reform (HIPAA), as a way to compete with the more sophisticated managed care companies––and it has long outlasted its relevance.

Today, building a new health plan in a single market can easily cost hundreds of millions of dollars over a plan’s first few years of operation. The most important thing a health plan now offers is not an insurance contract but rather a comprehensively managed provider network. Just look at the capital costs for the new co-ops under Obamacare that often received $100 million or more to set up a new plan––and ended up grossly undercapitalized.

This scheme doesn’t even solve the problem it identifies––too many state mandated benefits. So, solve that problem. Why do we even need to enact this convoluted and market obsolete idea? Why even encourage the return of predatory health insurance cherry pickers? Why create a two-tiered market? Why not fix the real problem and create a level playing field for everyone at the same time? I suggest the supporters of this idea first ask the leaders of the insurance industry if they would even do this under the best of circumstances (They will just laugh like they did in DC last Monday).

And, if it did work, we’re talking about a one-time minor league savings of only a few percentage points. Hardly meaningful cost containment or sophisticated health care policy.

Back in the early 2000s when we had a Republican majority in both houses and a Republican President, the House did pass legislation that would have enabled carriers to sell across state lines. The bill went to the Senate where Republicans couldn’t even get 50 votes for the idea. Largely because state insurance commissioners––Republican and Democratic––were overwhelmingly opposed to this from the beginning and made that clear to their Republican Senators.

The insurance commissioners were universally opposed because this is a dumb idea.

Obamacare needs major fixing.

But not with simplistic sound bites that claim this would increase competition but in fact would only lead to the health insurance cherry picking schemes we got rid of back in the 1990s.

Obamacare has already proven that the Democrats who wrote it never understood the insurance markets.

Things like this just prove that some of these Republicans are no smarter.

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Steve2Paul @ Pivot ConsultingLLCAllanBarry CarolJonathan Halvorson Recent comment authors
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Steve2
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Steve2

Should we mention that 6 states have already put this into law and not one new company has entered any of those states. I would think that doctors would understand this intuitively, but then I guess most don’t do the business side anymore. If a new insurance company enters the market they can offer it at a 50% discount if they want, but they have to sign up providers. Why would I deeply discount my fees just to help out a new company which has no record of being able to pay? Wont happen. It would take a company with… Read more »

Allan
Member
Allan

If no insurer can think of a way to accomplish the feat then it won’t happen. If you say it can’t be done then you should have no fear of permitting this to happen. Innovation is key to the insurers success, but we can never see good innovation if we outlaw the possibility in advance.

Barry Carol
Member
Barry Carol

Insurers will tell you that the biggest single factor by far that influences their ability to offer competitive health insurance premiums is the reimbursement rates they negotiate with providers, especially hospitals. Medical claims consume 80%-85% of premiums at a minimum so even a five percentage point cost advantage vs. competitors is a big deal in this low margin business. As hospitals have consolidated into larger systems, their market power increased. At the same time, quite a few of them are trying to get into the health insurance business by offering a network that’s limited to their own system and only… Read more »

Steve2
Member
Steve2

My network is partnering with another to develop an insurance product. While care in their network is much more expensive and their outcomes much worse, they are really good at insurance which is where they make a lot of money. We have good quality while also being a low cost provider, but little experience with running an insurance product. Should be interesting.

Barry Carol
Member
Barry Carol

Do either or both networks include an academic medical center? If so, is one of them Penn or Jefferson? Just curious. Perhaps you can let us know how it plays out.

Allan
Member
Allan

Steve, this sounds interesting and perhaps innovative which is what is required to lower costs in an effective and on going manner as opposed to working on the edges. I believe what you say, but you haven’t told us what makes you believe your network has better quality and how you managed to keep costs down. The metrics that define quality are poor and meeting quality testing from insurers, at least in the past, were too often non sensical check list attempts that didn’t prove anything.

Paul @ Pivot ConsultingLLC
Member

Here is my take re insurers: 1. Except for a few markets, they are largely organized as oligarchies, with one player having more than 50% market share. The dominant insurer acts as a regional health care czar. 2. The insurers are in essentially a cost plus business, and thus they hurt themselves when costs go down. (Their “plus” is well over 10%…, when it should be 7%). The mentality is more as a funder of hospitals (this is their origin) rather than a purchasing agent for employers. 3. When the dominant player does try to use their power to drive… Read more »

Barry Carol
Member
Barry Carol

Doesn’t a national plan need a national provider network? Who has one of those today?

Paul @ Pivot ConsultingLLC
Member

My nomenclature is poor….I just meant one that is exempt from state mandates…..like self insured employers are. Probably “national” is a poor choice of words. I edited my post. Thanks.

Steve2
Member
Steve2

So you are advocating for the federal government to take away the states right to regulate their insurance plans? You believe that centralized planning of this sort would be better?

Paul @ Pivot ConsultingLLC
Member

Steve, I am advocating for freeing up associations and employers and individuals be free to choose offerings from carriers free from what has become a balkanized, even corrupt system of state mandates. Here is how it works…..psychologists, chiropractors, social workers, podiatrists, and all other providers pay large contributions to state politicians to mandate their services be covered to maximum levels….they lobby year after year and spend millions in contributions and over time the state coverage mandates explode. It becomes a gold mine for providers as once a providers’ services get covered…the service becomes close to free and demand soars. Employer… Read more »

Allan
Member
Allan

I disagree with much of what you have stated. We have followed this type of logic since the advent of employer sponsored healthcare. It has given us all the problems you lament. Competition requires many players and that is not what exists in many areas of the country. Therefore I can only surmise that your solution is government based,, not market-based care. Government has failed from the beginning and to date hasn’t even figured out how to make Medicare sustainable. That is not a good record. You create reasons why private individuals and insurers cannot contract with each other without… Read more »

Barry Carol
Member
Barry Carol

The crux of the problem as I see it is that healthy people want to pay a low premium that reflects their own low personal actuarial risk, they want to decline benefits that they are virtually certain that they won’t need, and they don’t want to help pay for adequately funded high risk pools that would provide coverage to the unhealthy and already sick that can’t pass medical underwriting. Suppose, for example, that we want to provide comprehensive health insurance, similar to what large self-funded employer plans offer, to the roughly 40 million people who don’t currently get health insurance… Read more »

jamesepurcell
Member

Insurance is about large numbers and spreading risk. We need lots of insureds who DON’T use their coverage to cover the one who does big time. So we can’t allow everyone to self-select too much (I hedged, but you get what I mean). We all buy homeowner’s insurance praying we never have to use it. People’s attitudes about health insurance are quite different.

Barry Carol
Member
Barry Carol

Jim — The key difference between homeowner insurance and car insurance vs. health insurance is that the first two can often be bought for $1,000 per year give or take while health insurance, especially for family coverage, costs far more. It’s psychologically much more difficult to spend $18,000 or more for family coverage and hope you never have to use it. That said, I agree that we need lots of healthy people whose claims are far less than their premium to make the business model work.

Allan
Member
Allan

One of the problems we face is that we have been brainwashed into thinking that healthcare should be free. Imagine, Jim wants to sell insurance to offset risk and people are angry at Jim. You say the key difference is cost, but in your other examples the infrastructure you personally use is paid for by the individual. Think of all the costs involved in owning a home or a car. I agree we pay too much for insurance, but insurance is covering things that have been mandated by government and no longer simply offsetting risk. It isn’t traditional insurance. It… Read more »

Jonathan Halvorson
Editor

Excellent review of why undermining state regulation in health insurance is a terrible idea. TLDR: there is no real savings to the system, only the destruction of the in-state regulated market and a race to the bottom on benefits. Jim Purcell reinforced that with the observation that out of state entrants are not going to get rates with providers even as good as local silverbacks until they scale up, which will take years and hundreds of millions of dollars per plan per state, by which time the local plans will have adjusted by no longer being locally regulated, and the… Read more »

jamesepurcell
Member

ooops…I accidentally posted.

Pricing always comes back to these points;

1. It’s all about the claims expense
2. Which are about the rate of use of services
3. Drive by chronic illness
4. Which is caused by unhealthy lifestyles.

It ain’t so awfully complicated to outline the real issues. It’s in their resolution.

jamesepurcell
Member

You are spot on. Now if I’d said what you said, many would respond that Purcell just wants to avoid competition (I was the CEO of the RI Blue). Fair competition is one thing; unfair another. Plus, as you point out, even if a competitor with scale that dwarfed my old Blue plan came into RI, it still has the other 90% of the premium to consider–the claims expense. It’s always about the claims expense. And with claims expense, it’s price (the fees negotiated) and the rate of use of services. How does a newcomer, however, large, negotiate fees as… Read more »