The enactment of the Patient Protection and Affordable Care Act requiring all Americans to have medical insurance in 2014 follows in the footsteps of nations like Germany and Switzerland that opted not to put in place socialized health care systems like those of Britain and France or Canada’s single payer system where the government pays all medical bills. Germany and Switzerland mandate all citizens have coverage. But it’s no bonanza for medical insurers. They fiercely compete for mere survival and not to earn profits. If they don’t efficiently administer claims and keep providers and government regulators satisfied, they could find themselves out of business. For profit U.S. medical insurers could find themselves in a similar market environment within a decade.
Indications of tighter regulation of medical insurance premiums — and ultimately insurer profits — are already emerging in the nation’s most populous state. Last week, a California state Assembly committee approved legislation that would regulate health insurers like their counterparts in the state that sell property/casualty insurance. Those insurers cannot use premium plans until regulators first approve them.
AB 2578 would similarly subject premiums, co-payments, and deductibles of both indemnity health insurers and managed care plans to this prior approval regulatory scheme. If policyholders or plan members would pay seven percent or more above those currently in effect, it would trigger a provision allowing consumer and public interest groups to protest the filing through a public utility commission style hearing.
Nonprofit health insurers already operate in California, most prominently Blue Shield of California. A de facto shift of medical insurance to a nonprofit business could give Blue Shield a leg up, although it would be under increased pressure to hold down adminstrative overhead. (Notably, Blue Shield supported California reform legislation proposed by Gov. Arnold Schwarzenegger in 2007 including a requirement that all state residents have some form of medical coverage. For profit insurer Anthem Blue Cross opposed the bill).
All payers — whether they are in business to make a profit or not — complain they are increasingly squeezed by raging medical treatment cost inflation. According to Anthem Blue Cross, those out of control costs forced it to sharply raise premiums for its individual insurance products by as much as 39 percent, sparking outrage and giving a political boost to AB 2578. A similar bill went nowhere in 2009.
The Second District California Court of Appeal has reversed a trial court decision upholding the rescission of an individual health insurance policy on the grounds the insurer as a matter of law failed to comply with California law barring ex post facto underwriting after a policyholder files a costly claim.
Today’s ruling in Nazaretyan et al. v. California Physicians’ Service, B213664 reverses summary judgment granted in favor of Blue Shield of California’s rescission of a policy on the grounds a married couple failed to disclose the wife had undergone fertility treatments before giving premature birth to twins, leading to nearly $1 million in medical bills.
The court agreed with the insureds that Blue Shield’s medical underwriting did not meet the standard set in Hailey v. California Physicians’ Service (2007) 158 Cal.App.4th 452. Hailey permits rescissions only for material misstatements or omissions on applications for individual coverage provided the plan or insurer completed medical underwriting prior to issuing coverage or can demonstrate an applicant willfully misrepresented or omitted material information about their medical history.
Blue Shield, which maintains it has no affirmative duty to verify the accuracy of information applicants for coverage provide about their medical histories, unsuccessfully attempted to convince the court Hailey was wrongly decided. In 2008, the insurer’s petitions to the California Supreme Court to review the ruling were denied.
Blue Shield also unsuccessfully tried to distinguish Hailey from a recent ruling in Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60. In that case, the court held Hailey didn’t apply because the rescission at issue in Nieto involved an indemnity policy falling under California’s Insurance Code whereas Hailey, like Nazaretyan involved a managed care service plan regulated by the Knox-Keene Health Care Service Plan Act of 1975, codified in the Health & Safety Code. (The insured in Nieto has petitioned the California Supreme Court for review.)
The ruling in Nazaretyan comes the same day President Barack Obama signed into law H.R. 4872, the sweeping health care reform legislation that bars rescissions except in cases of fraud starting this year.
Under one of the prongs of Hailey, California insurers and health plans can already legally rescind coverage if they can prove an applicant committed fraud in order to get coverage. However, they don’t have to also meet the other test set forth by Hailey: that medical underwriting was completed before coverage was bound.
In 2009, California Gov. Arnold Schwarzenegger vetoed AB 2, legislation that would have permitted rescissions only in cases where both Hailey tests are met: medical underwriting is completed and an applicant intentionally committed the misrepresentation or omission in order to obtain coverage. Health plans and insurers argued that would require them to meet an impossibly high legal burden of proof to make rescissions stick in court. That argument that found favor in Schwarzenegger. In the previous legislative session, Schwarzenegger vetoed nearly identical legislation citing concern such a standard would harm a “fragile” individual health insurance market.
A post at the journal Health Affairs blog questions what I’ve termed “adverse deselection” — when healthier people in the individual market decide to take their chances and drop their coverage to save premium dollars in the current economic downturn. In California, Anthem Blue Cross contends the flight of these better risks left it with costlier insureds in its risk pool — what’s classically known as adverse selection — thus necessitating sharp rate increases to cover higher dollar claims brought by sicker individuals. The theory is these folks will suck it up and pay the higher premiums in order to stay insured, knowing both that they’ll likely need medical care in the future and that they can’t shop around for lower premiums because no other insurers are likely to accept them due to their preexisting medical conditions.
Jonathan Kolstad, assistant professor of health care management at The Wharton School and Leonard D. Schaeffer of the University of Southern California’s Center for Health Policy and Economics, claim to have developed data casting doubt on that scenario. “There is little evidence of a change in composition and size of the non-group insurance market between 2007, prior to the recession, and March of 2009, near the bottom of the recession,” they conclude.
Initially, I thought regardless of whether those dropping their coverage are healthy or not, the recession has likely shrunk the individual market. Those who need medical services still have to pay the premium to keep their coverage in force. And when comes down to paying the mortgage or a monthly health insurance premium that in many cases nearly equals the mortgage payment, it’s the latter that’s likely to go unpaid. But consider another study issued this week by the UCLA Center for Health Policy Research projects California’s individual market actually grew during the recession, covering 8.5 percent of non elderly adult Californians at its start in 2007 to a projected 9.1 percent in 2009.
Employment-based medical insurance is declining in the nation’s most populous state, falling from 57.3 percent of adult Californians aged 19 to 65 in 2007 to an estimated 51.3 percent in 2009, the UCLA Center for Health Policy Research reported today. Over this two-year period, the portion of this cohort insured through the individual market rose from 8.5 percent to a projected 9.1 percent.
The key driver in the drop in employer-based coverage is steep job losses. Employment is a prerequisite for employer-based coverage and has become much harder to come by in California’s recession-wracked economy where unemployment exceeds 12 percent.
When President Obama took office last year and declared health insurance reform as a top domestic priority of his administration, he affirmed it would preserve employer-based coverage. He rejected calls for a Canadian-style single payer system, branding it too radical and disruptive.
Nevertheless, the reform legislation that could come up for a final vote this month in Congress implicitly acknowledges an erosion of employer paid health care coverage in the United States. It does with a focus on buttressing the individual market as an alternative for those who don’t get coverage through their jobs. While this market segment currently covers only about five percent of the working age population, that number is likely to grow as more small employers stop providing health coverage to their employees. The legislation lacks an “employer mandate” requiring small employers — defined as those with 50 and fewer employees — to slow that trend.
Instead, the reform bill appears designed to prop up the individual market, buttressing it as an alternative for those without employer-based coverage. It does so by expanding the risk pool with a mandate that everyone but the very poor have coverage and requiring individual insurers to take all applicants including those with pre-existing medical conditions.
Individual insurers will have a larger number of insureds to share the risk and generate premiums. But they will also have sicker people in the pool with costly chronic conditions like diabetes they can no longer turn away. The question going forward if the reform bill is signed into law is whether that approach is actuarially sustainable given continued projected increases in medical care expenditures and whether premiums can remain affordable even with subsidies. It’s a critical question given the Obama administration’s reliance on the individual market to fill the coverage gap created by a shrinking small employer group insurance market.