Home > Appetizers, Bp. Breidenthal, Slightly Off-Topic, The Family > Private Health Insurance and Health Care Reform, by Michael Bertaut

Private Health Insurance and Health Care Reform, by Michael Bertaut

29 March 2010

[Elder’s Note:  Mr. Bertaut and I are fellow commenters on StandFirm.  He is a senior healthcare intelligence analyst for Blue Cross and Blue Shield of Louisiana, and has been offering fascinating insights of late, on Obamacare.  Though not directly related to the demise of DSO, I thought the subject to be tangentially important as it relates to families, and also because Bp. Breidenthal did sign this document.  Accordingly, I have asked Mr. Bertaut to write a bit on this for The Oysters and he has agreed. 

I hope that Mr. Bertaut’s analysis will be helpful to the readers of this blog, and I offer to him my profound thanks for taking the time to write this thoughtful article. ]

The United States Center for Medicare and Medicaid Services (CMS) estimates the Health Insurance Coverage status of 305 million people living in America as the following (as of December 2008):

During the period when the Patient Protection and Affordable Care Act (PPACA) was being considered, arguments were made by both supporters and detractors that the Private Health Insurance Markets would be changed drastically by Reform.  Those on the left indicated that the Bill was unfair, because it passed a mandate that forced Americans to purchase health insurance and left private coverage as the only option, thus putting American’s at the mercy of “Greedy, villainous Health Insurance Executives (Nancy Pelosi, August 2009 House Testimony).  In addition, the Progressive Coalition in the House of Representatives, 71 members strong, signed a statement that said that without a “public option” (a private insurance entity run by the federal government as an alternative to for-profit or private not-for-profit coverage) the Senate Bill was a boon for insurance companies, offering up 46 million new customers with federal subsidies to boot.

On the right, and in alliance with the Health Insurance Companies, detractors said the bill would impose so many new government regulations on Health Insurance Companies that insurance pools would be destabilized and runaway premium costs would result.  Thus in the end, the federal government would be ordered to step in anyway, thus creating a Single Payer, or Federally Controlled Health Insurance plan that would interpose itself between patient and doctor and eventually ration the care Americans received through that entity.

Both arguments are compelling and both outcomes undesirable.  In this article I would like to examine the realities from a “boots on the ground” perspective as a Chief Forecaster and Senior Healthcare Policy/Intelligence Analyst in the health insurance business.  To be clear, I am not an attorney, accountant, or actuary.  I am not qualified to comment on regulatory issues as to their specific effects on employer groups.  What I am called upon daily to do, is to coordinate the projections for all the moving parts of the PPACA Bill and its changes and to forecast its effects on the Plan that employs me (The not-for-profit Blue Cross and Blue Shield of Louisiana) and communicate these changes and potential effects in a meaningful way to a whole bunch of smart, experienced stakeholders in the healthcare industry so they can incorporate my projections and background fact and data into their decision making going forward. 

Let’s examine the arguments one at a time.  First, let’s examine the changes the Health Insurance Industry must absorb by 2014 and see how conducive they are to growth.

The PPACA contains some important changes that all insurance companies must build into their product and ratings by 2014 (some sooner) at the latest.  All health insurance sold in the U.S. by 2014 must share the following federally ordered characteristics:

1.  Must accept all comers.  Insurance must be sold on a guaranteed issue basis. 
2.  Must not medically underwrite (this is called Community Rating).  Neither individual nor group insurance will be allowed to be priced based on the health or claims experience of the group or individual. 
3.  Must not “rider out” conditions for any length of time at all.  Health status will probably not even be collected by Health Insurance companies following the enactment of the bill, as the typical medical questions we ask are strictly for pricing and medical management purposes. 
4.  Must not vary pricing in a big way based on age.  Today insurance pricing for a 60 year old in an individual policy may be priced as much as 10x higher than the price for the typical 19 year old.  This bill changes that maximum range to a federally specified 3x. 
5.  Must not vary pricing based on gender.  Actuarial studies confirm that between ages 21 and 64 women typically have almost double the medical expenses that men do.  This is largely due to the expenses of childbirth.  Insurance plans have spread the risk by charging women more for their health insurance over the years (although it is never 2x, typically 15 to 20% more is seen) but this is now illegal.  In effect, all men now will be paying for “pregnancy coverage”.

6.  Insurance companies may not make “excessive” profits.  In reality, there are a trio of codicils in this bill that will more than likely make “for-profit” health insurance a thing of the past.  These are worth visiting now: 
a.   Insurance companies must spend 80% of all premiums on qualified health care expense, and may not have more than 20% overhead (including profits) on all individual and small group business.  15% overhead is the maximum allowed on all Large Group Business.  Violations will inspire federally mandated rebates to all policy holders in the pools affected.

b.  Insurance companies may not claim as a taxable expense, any compensation for any employee from CEO on down in excess of $500,000.  Imagine trying to compete for NBA talent if your team is the only one with a $1M a year salary cap per player, and you get the idea of how this may affect the industry.

c.  Health Insurance as an industry will be required to pay massive, fixed, licensing fees to the Federal Government.  The first payment of $8B is due in 2014.  The amounts grow quickly to over $14B by 2017.  These are fixed amounts due, to be paid by health insurance carriers based on their market share of premiums, and do not change regardless of the financial performance of the health insurance carrier.  The entire industry on over $700B in premiums in 2008 only reported $6.8B in profits. 
7.  Insurance companies may not have “Excessive Rate Increases”.    As of this date, no one knows what “excessive” is, but clearly the profitability and solvency of health insurance carriers will be a matter of politics, not economics going forward.  Witness the reaction of the Administration to the Anthem HealthCare rate increases in their Individual Insurance Pool this year.  Having been privy to the Actuarial Data that was used to compute the “Greedy 39% Increase” (actually a 24% average rate increase) I can say with authority that any insurance carrier subject to the same circumstances Anthem was faced with in their California Individual Market (100,000 people leaving an insurance pool but only taking 5% of the claims with them, in other words, the sickest, most expensive people stayed) would have either had to raise rates in a similar fashion, or face biting questions from their state insurance commission about why they were going to let a pool that covered 700,000 people lapse into insolvency, which is what may happen now.

8.  Insurance Companies must adhere to the Federally Qualified Health Benefit Plan standard.  Many people do not realize that the actual definition of what constitutes a valid Health Insurance Plan is, for most Groups that do not Self-Insure, controlled by the states.  That means we actually have in the U.S. about 52 different definitions of health insurance (including Puerto Rico and D.C.).  The PPACA strives to create a single, overriding standard definition of what constitutes a Health Insurance Plan (called the FQHBP Standard) and apply that to all Insurance Carriers going forward.  The FQHBP standard is a comprehensive standard that shall be defined by the U.S. Department of Health and Human Services sometime in the next 180 days, but we do know a few things about it. 
a.  It is based on the insurance offered to Federal Employees (FEBHP) with some enhancements
b.  It is a rich standard with no lifetime or annual limits on coverage.
c.  It will require first-dollar coverage with no co-pays or deductibles of over 30 different tests designed to screen for a variety of conditions.
d.  It will require either 20 or 25 percent of all Americans (depending on which Actuarial Society you believe) to buy more expansive coverage than they have today. 
9.  Insurance Companies must pay all healthcare providers who treat their customers in the emergency room enough money to hold the patient harmless, regardless of the network status of that healthcare provider.  In other words, insurance carriers must pay anyone who provides healthcare in an emergency situation (as defined by a reasonable person) the total amount they bill the patient, no matter how high it is, no matter whether that provider (doc, hospital, or lab) has an agreement or contract with the carrier.  If you have ever seen doctor, lab, or x-ray “billed charges” compared to insurance company “network rates” you know that this order is going to drive up costs very quickly and enrich a lot of healthcare providers in the process. 
10.  Insurance Companies must sell through government controlled Exchange Marketplaces.  One of the ways Health Insurance Carriers save an enormous amount of money and keep premiums down is that they sell health insurance through vast networks of private Individual and Group brokers.  The commissions these brokers earn pale before the expense of duplicating this sales and support machinery internally, which is why the system is so popular nationwide.  Carriers would have to add tens of thousands of highly-compensated employees nationwide with benefit packages and expenses that far outstrip the investment in broker commissions.  The Exchanges, however, make no allowances in their current form for the engagement of these skilled, regulated, highly trained entrepreneurs who bring so much value and expertise to the purchase of health insurance for everyone from Individual Seniors to Exxon-Mobil.  The onus for the brokerage function in the Exchanges will fall squarely back on the Insurance Carriers, meaning we will have to add many employees and RAISE our costs at the exact time that our profitability and risk management is being reduced and federally controlled. 

Now, if a reasonable person, understanding how health insurance works today, can figure out how to squeeze a future for the health insurance business from these new regulatory limits and changes to the fundamental way that carriers do business today, then I will desist and stop writing about all this. 

But Mike, what about the 46 million new customers?  The Fed is going to order all the uninsured Americans to buy health insurance from the Private Insurance Companies, right?  So what about all that extra money you are going to take in?

Great question (even if I did ask it myself!).  Let’s examine that in some detail.  First, the makeup of the uninsured needs to be analyzed to see what kind of customers they will make.

According to the U.S. Census Bureau Conference Call update on the Uninsured (September 2009), as of December 2008 there were 46.3 million people living in the United States of America who did not carry health insurance.  Presumably, these people are the new “customers” that the insurance companies will gain through the reform process.  Unfortunately, a close examination of both the Census Data and the Individual Mandate as proposed in the PPACA will quickly reveal that this is not the case. 

Census says that of the 46.3 million people in their survey:

9.4 million are illegal immigrants. 
12.3 million are ALREADY ELIGIBLE FOR MEDICAID but have not signed up.
11.4 million have the money and health status to purchase insurance at a whim.
13.2 million make too much money for Medicaid, but are too poor or too sick to buy their own coverage.

So, where are the new customers in this pool?  The 9.4 million illegal immigrants have been forcefully removed from this conversation by the PPACA, which states on almost the first page that they have no part, no regulation, and no benefit from the bill.  This population is clearly out for insurance companies to sell to.

The 12.3 million folks already eligible for government insurance through the Medicaid program are not likely to purchase private insurance coverage for several reasons.  First, the pool is predominately children under 18.  Second, they are all very low income or completely disabled.  Third, they are already refusing coverage either through ignorance of the program or lack of need of medical care, the idea that they would spend out of pocket to buy insurance because of a mandate seems even less likely.  Fourth, the Individual Mandate specifically exempts those who don’t make enough money to file a tax return, into which class these folks specifically fall.  I think it reasonable to assume they are out as well.

The PPACA and its assumptions as assembled by the Congressional Budget Office place a large stock in the belief that the 11.4 million Americans who have the money to purchase health insurance and are ostensibly healthy (else they would buy coverage) will be forced to become health insurance company customers.  In reality, it is unlikely that a majority of them will purchase coverage for a simple reason: Economically, it makes much more sense for them to forego coverage.  The fines for not purchasing health insurance are either $750 per year (up to 3x in a family setting) or 2.5% of modified adjusted gross income.  Thus the upper income person who has never purchased health insurance coverage will be faced with the prospect of obeying a federal law (and paying in the neighborhood of $5500 a year for basic FQHBP coverage in 2014) or paying a fine that does not approach this level of spend until his MAGI reaches the $200,000 mark.  Frankly, the American Society of Actuaries, based on their experience with the Massachusetts mandated coverage (now in its fourth year) expects about 2.5 million of the 11.4m to get into the pool.  The Congressional Budget Office was directed by the PPACA authors to set that number closer to 9 million.  Only time will tell if these assumptions will bear out.  There is another consideration, however.

Because the insurance companies may no longer control pool membership or premiums paid based on health status, or pre-existing conditions, and because all health insurance sold going forward must be on a “guaranteed issue” basis, folks can choose to pay the fines ($750 a year or 2.5% of MAGI) instead of purchasing coverage (at about $5,500 annually) because THEY CAN BUY COVERAGE AFTER THEY GET SICK.  The Blues Plans in Massachusetts are already observing this phenomenon in droves.  Because of the well-meaning insurance regulations that allow everyone in the pool and a very weak individual mandate to buy (albeit stronger than the Federal one being proposed), literally thousands of people purchase health insurance after their doctor diagnoses them with a condition, and then if it is corrected via medication or surgery, they immediately drop that coverage again.  In 2009, this behavior drove so much premium dollars out of the insured pools, that the AVERAGE rate increase for small employer groups across all health insurance companies doing business in Massachusetts in 2009 was 21%, and the projections for 2010 are more like 25%.  People are catching on, and it is strongly in their economic self-interest to delay buying coverage until they absolutely need it. 

Imagine how much insurance will cost if this behavior is spread to the rest of the U.S.?  There is a very good chance that it will be.  But let’s get back to the topic at hand.

Let’s assume for a minute that all 11.4 million folks who can afford coverage go ahead and buy it and their average price the aforementioned $5,500 per year per person.  That would indicate a total new income to the health insurance industry of $62B.  Now, under the new federally-mandated medical loss ratio rules (think profits as mentioned in item #6 above), the maximum amount of overhead the carriers may charge on this $62B is 20%, or $12.4B, meaning $50B of it would have to be spent on care, or rebated back to the insured customers.  This means insurance companies can have, at maximum, $12.4B to cover overhead and distribute to the bottom line of all the carriers involved.  But the Fed requires the payment in 2014 of $8B from the industry immediately, so now the “take” is $4.4B.  By 2017 the licensing fee is $14.3B and it is indexed to inflation going forward. 

Still not bad, you say?  Except almost all that coverage had to be sold through the Healthcare Exchange, where the carriers will have to pay for all the typical brokerage functions at a much higher rate by internalizing all those processes and all the customer service the brokers now provide at their own expense.  This represents a huge shift of work away from private contractors and into carriers.  If it was cheaper for carriers to do it themselves, we can assume market forces would have driven the brokers out long ago.  Instead, just the opposite has happened and their range of products and services to customers has GROWN freeing insurance companies from having to acquire and maintain all these new capabilities, typically at great savings to the carrier. 

Well, what if CBO is correct and $9M of them get into the pool?  Now the payment is $49.5B and the amount available for overhead $9.9B.  Very close to the $8B payment required in 2014, and actually well below the 2015 and beyond payments ($11.3B in 2015, $14.3B in 2017).

What if the American Society of Actuaries is correct?  They are, after all, the only body in American with real-world experience of mandates and penalties and their affect on the insured marketplace.  If only 2.5 million of these “monied opting outs” gets into the pool, that will generate premiums of $13.75B, leaving only $2.75B available for overhead in a year when the industry will have to pay the Fed, just for the privilege of existing, $8B.  Remember, the PPACA financing DEPENDS on a health insurance industry contribution of $14.3B in 2017.  The only place this money could possibly come from is from raising premiums on every American with private health insurance coverage.  This “stealth tax” seems to be specifically designed to allow President Obama to continue to declare that he has not broken his promise of no tax increases on those making less than $200k per year, even though the vast majority of Americans who will suffer from these “licensing fees” will be Americans who make less money than that. 

I don’t want to forget the other section of the uninsured, that group of “in-betweeners” numbering somewhere north of 13 million people who make too much money to qualify for Medicaid in their states, but not enough money to purchase their own coverage.  The PPACA will simply expand eligibility for Medicaid to any person whose household income is less than 133% of the Federal Poverty Level.  It will also severely limit “means testing” as a way to keep folks with substantial holdings out of the Medicaid Pool.  This expansion means the average family of 4 making $30k per year will get free health insurance, and this will cover almost everyone in the “in-betweener” pool, men, women, and children with federal government sponsored free health insurance.  Again, it will not be necessary for them to purchase private coverage.

I do not think a reasonable person could digest all the realities that I’ve espoused above and come out with some sort of favorable outlook for the health insurance industry.  Industry profits, which average in the 1.5-4% range over the last 10 years, are not likely to grow, neither are for-profit company stocks liable to attract any vast new sources of investment.  The PPACA is specifically designed to lessen control, lessen influence, and lessen solvency of all health carriers in the U.S. by those with the power and wherewithal to do so.  The question we must ask now is, Why?

I leave that to you, gentle reader, to ruminate upon in your own time.

Michael Bertaut,
Senior Healthcare Intelligence Analyst
Blue Cross and Blue Shield of Louisiana
Sunday, March 28, 2010
9:54 AM CDT

  1. Martial Artist
    29 March 2010 at 3:19 PM

    Dear Mr. Bertaut,

    I believe that you have left off of the list of groups at least one community who will also not be “buying” health insurance. I am not sure of its exact size, but I suspect that it is not completely inconsequential. The community to which I refer are the dependents of active duty military personnel and the former active duty personnel now retired from active service, whether by reason of disability or by virtue of 20 or more years of active service.

    I am in the last group listed, and both I and my wife are currently covered at government expense. I will be shifted to Medicare this coming October and my wife will follow me in the spring of 2014.

    Pax et bonum,
    Keith Töpfer

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