Veteran Sacramento-based journalist and policy wonk Daniel Weintraub, who recently launched his HealthyCal.org Website, deserves a big shout out for pointing out California law requiring health plans and insurers spend at least 70 cents of each premium dollar on medical care for plan members and policyholders can do virtually nothing to hold down premium increases. Moreover, it may even lock in the absolute growth of health plan and insurer profits that many consumer advocates blame for rising premiums.
Simple mathematics explains why. Seventy percent of medical treatment costs — a quantity that has been outpacing the rate of inflation over the past decade — is still a growing number in absolute terms. For example, if the cost of providing medical care to plan members and insured policyholders increases from an average of $3,000 annually per plan member or policyholder to $5,000, a health plan or insurer would be required to spend on average at least $3,500 per member versus just $2,100 under the 70 percent minimum loss ratio requirement. Premiums must naturally rise to absorb the increase. The 30 percent left over after health plans and insurers meet the minimum medical loss ratio grows into a bigger pot of cash. The same math would be at work if the minimum medical loss ratio were increased as some policymakers have advocated.
Rising medical treatment costs produce ratcheting upward pressure on both premiums and potentially the profits of health plans and insurers when administrative costs are netted out. This ratcheting effect also undermines arguments by health plans and insurers that if everyone was required to have coverage — the so-called individual mandate — then coverage would become more affordable and accessible since there would be a much larger pool of people with coverage and paying in premiums to cover the cost of their medical care.
An individual mandate might produce some temporary relief by spreading risk across a bigger pool of people. But due to the ratcheting effect of rising health care costs, the same underlying mathematics would be at work, simply subjecting a larger number of people to rising premiums while locking in higher absolute profits for health plans and insurers.
An individual mandate does however make sense when viewed from the perspective of the business model of health plans and insurers when that model assumes profit margins in the low single digits such as suggested last week by Anthem Blue Cross President Leslie Margolin in testimony before a California legislative committee. Low margin businesses (such as grocery chains and airlines, for example) offset their skinny profit margins with big sales volume. So it’s not surprising that health plans and insurers like the idea of forcing everyone to have coverage. It would be like the airline industry requiring everyone to purchase at least one round trip ticket per year. Or requiring everyone to shop at a major grocery chain outlet at least monthly. It’s no wonder that both free market conservatives and more liberal consumer advocates dislike the individual mandate. The former because it’s contrary to free market economics and consumer choice and the latter because they fear consumers will end up trapped on the up escalator of rising medical costs that will be passed through to them by health plans and insurers.
California Assemblyman and Insurance Commissioner Candidate Dave Jones upbraided Anthem Blue Cross in a hearing in Sacramento this week over its sharp individual health insurance premium increases that are now slated to take effect May 1. Jones expressed particular umbrage with Anthem Blue Cross for trying to make an underwriting profit and raising rates to offset an underwriting loss. “How much profit is enough?” Jones asked Anthem Blue Cross President Leslie Margolin. When Margolin suggested a number in the single digit range of 2 to 5 percent, Jones responded “Have you no shame?”
In hearings in both Sacramento and Washington this week, Anthem’s deplorable sin is “putting profits before patients.” But of course. Anthem owes a duty first and foremost to its shareholders. If Jones and other public policymakers have a problem with a for profit model of paying for health care, they should direct their ire — and search for alternatives — at the model itself rather than unfairly beat up those who work within it.
Individual health insurers have largely avoided adverse selection with stringent underwriting standards aimed at excluding or surcharging those with health histories likely to produce high losses. Adverse selection threatens the viability of an insurance risk pool. If too many “adverse” risks enter the pool, its long term viability can be jeopardized since losses can exceed premium dollars coming into the pool.
In California however Anthem Blue Cross is experiencing what might be termed “adverse deselection” in its individual health insurance market segment: the migration of better risks (i.e. healthier policyholders) out of the risk pool, leaving behind poorer (i.e. less healthy policyholders more apt to produce high dollar losses). Anthem Blue Cross officials told a California legislative committee hearing this week this trend requires those remaining in the pool to pay higher premiums to make up the lost premium dollars that were formerly paid by those who dropped their coverage.
This development has major implications for the nation’s individual market. California has more people in the individual market — estimated at between 8 and 9 percent of individuals under age 65 — than the rest of the nation, where the number averages about 5 percent. Also, Anthem Blue Cross has the largest share of the California individual market. If the biggest writer of individual health coverage in the nation’s largest individual health insurance market is having trouble maintaining a viable risk pool, it could well be the harbinger of an impending death spiral in the nation’s individual health insurance market.
I suspect the prospective implosion of the individual market is generating more unspoken concern among the health reform policymakers in Washington than political firestorm Anthem Blue Cross’s rate increase has generated. Especially as more small employers consider dropping coverage due to their own rate increases, leaving their employees to fend for themselves in the individual market. The upshot: a big increase in the ranks of the medically uninsured that would provide further impetus for to get a reform bill passed. But it must collar the underlying rising medical costs driving up premiums that now threaten to take out much of the insurance market starting from the bottom up with the individual and small group segments.
The firestorm over Anthem Blue Cross’s sharp premium increases for individual policies in California has reignited the debate over health insurance reform in Washington that had bogged down amid uncertainly after the holidays. It demonstrates how one event can alter the course of a major policy debate that seemed suddenly without direction. It also shows how the individual market — which covers only a small percentage of all Americans but a larger proprotion of Californians — is now the tail wagging the national health care reform dog.
Update 3/7/10: Los Angeles Times reporter Duke Helfand, who broke the story of the Anthem rate increases a month ago, has a piece in today’s paper co-written by LA Times reporter Mark Z. Barabak laying out the chronology that began early last November of how Anthem’s filing for individual policy rate increases averaging 25 percent breathed new life into the Obama administration’s health care reform agenda. You can read the story here.