By Matthew Holt

Buried in a quick notice in BusinessWeek was this paragraph:

Health insurance companies have plenty of critics. Now they have one more: Leemore Dafny, an assistant professor at Northwestern University’s Kellogg School of Management. Insurers argue that because they compete against one another, they keep prices down, saving everyone money. Not necessarily, says Dafny in a March paper, "Are Health Insurance Markets Competitive?" Dafny looked at data from 1998 to 2005, provided to her by a benefits consulting firm, that tracked the behavior of 200 major companies to see whether they shopped around to find the cheapest insurers. Dafny found that when these big companies made more money, their insurance providers raised their premiums. But instead of dropping the carrier to get a better deal, Dafny writes, companies generally stuck with their health insurers and paid more. "Carriers can and do take advantage of a firm’s increased profits and extract higher prices from them," she says.

Here’s how this works:

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By Donald Johnson

If you’ve been uninsured in Florida for more than six months, you may be able to buy a stripped down health insurance policy
for as little as $150 a month regardless of your health status and
pre-existing medical conditions. But there are gotchas that could cost
you thousands and even bankrupt you if you get sick.

The new legislation is primarily aimed at people who can afford
health insurance but have chosen to be self-insured so they can spend
their money on something besides health insurance. Nationally, some 14
million people who can afford to buy health insurance don’t. They
effectively self-insure themselves against financially catastrophic
risks. Many become bankrupt after they require financially catastrophic
health care and can’t pay their bills.

In Florida, insurers will be able to offer policies that cover a lot
of primary care and preventive care services, the maintenance services
that you should pay for out of pocket and should not be insured. But
those policies may have onerous caps on payments for expensive hospital
stays and illnesses, according to a report by the New York Times.

To buy real insurance that covers financially catastrophic illnesses, consumers will have to buy optional coverage.

In other words, the new law enacted by Florida has authorized
insurers to sell savings accounts where they are paid to hold
consumers’ dollars until they need primary and preventive care. But
insurers can sell policies that don’t provide the catastrophic coverage
almost everyone needs sooner or later.

The NY Times reports:

The low-cost plans have to include preventive services,
office visits, screenings, surgery, prescription drugs, durable medical
equipment and diabetes supplies.

Some options offered by insurers have to include catastrophic and
hospital coverage. But an insurance company could, for instance, choose
to limit the number of days of hospitalization it will cover or place a
dollar cap on reimbursing certain services.

That makes no sense. Florida politicians have got it backwards. They’re
requiring insurers to cover routine maintenance and not the kinds of
medical care that put people into bankruptcy.

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On blogs like this, people like me write analytically about issues which are often, at best, conceptual to us.Not so to the guys in the rough and tumble world of health care finance. I remember that the first time I went to dinner with Lynn Jennings, I only knew that he was CEO of Alliance Underwriters, working in reinsurance, and that he is a former President and a current Board member of the Self-Insurance Institute of America (SIIA). SIIA is the national association of third party administration firms, the organizations that administer health plans for self-funded employer health plans. As we were walking into the restaurant, he turned to me and said, "In reinsurance you make a very sizable bet and find out three years later how things turned out."Over time, though, as I’ve come to know Lynn better, I’ve found he has a profoundly practical view of the world, supported by a belief that careful management makes it possible for health care to work far better than it usually does.Here is his advice to employers on managing employer-sponsored health plans. Whatever your philosophical orientation, these are sound recommendations for employers who must grapple with the difficult choices associated with employee health benefits.

Brian Klepper

For 40 years, I have worked in the complicated world of self-insured
group health plans. I have led a third party administrator (TPA),
underwritten stop-loss coverage and, with my wife Judy, overseen a
utilization management firm. Now I’m also building employer-based
clinics.

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By Matthew Holt

There’s carnage amongst health insurer stocks on Wall Street this morning. For a long while I’ve been saying that the health insurer party was too good to last and in the past year things have certainly cooled down. Hanging over the industry has been an inability to extend itself further into the commercial market (commercial enrollment has been flat over the course of the boom—and now we’re going into a recession) and of course the lingering concern that payments for Medicare enrollment will be cut at some point.

Last night Wellpoint had at least the first shoe drop when it announced that a combination of higher medical costs and lower than expected enrollment would mean that it was going to miss its profit numbers. The stock is off more than 25% and most of the rest of the sector is well off too. Now this wasn’t a huge cut in the numbers—the reduction in forecast profits is under 10%. But Wall Street as you know hates the concept that earnings will diminish, and Wall Street doesn’t understand health care anyway.

Wall Street likes earnings machines that continually increase profits. To be such an earnings machine that you need to be able to sell an increasing number of widgets to the same people, or widgets to new people, or raise the price of the widgets you’re selling to the same people. Health plans can’t really do the first. They have done the second only because of massive subsidies in the Medicare market since 2004 and they look like they’re running out of steam in doing the third—although it’s been a darn good run! (Medical loss ratios are higher on on a base of greater overall revenue than they were 5 & 10 years ago, but that can’t go on for ever and that appears to be where the problem this morning lies).

And of course the political pressure on all the ways health plans make money continues to grow. Those games in the individual market are being found out, the games with opaque pricing are being investigated as consumer fraud, and although they’ve staved off Medicare private payment cuts for now, that issue isn’t going away.

So perhaps it’s time for health plans to consider their potential future as a regulated industry—one that will be forced to compete on issues that actually matter for the good of the health care system and the nation. And perhaps it’s time to prepare to really cut a deal on that, rather than propose a fake plan that takes but doesn’t give.

Now, there’s no way that under such an approach insurers will be allowed to make the kind of profits they’ve seen over the last five years, and of course Wall Street will freak out. But then again, perhaps there’s no time like the present to tell Wall Street the really bad news.