Bashing Insurers

Obama’s health reform won’t do much to stop the premium increases he deplores.

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Health and Human Services Secretary Kathleen Sebelius

The Health and Human Services Department has posted online a memo documenting health insurers’ insatiable appetite for premium increases. In 2009, BlueCross BlueShield of Michigan asked state regulators for a 56 percent increase in nongroup premiums; the state eventually approved a 22 percent increase. * Regence BlueCross BlueShield of Oregon asked for 20 percent and got 16 percent. In Washington state, Regence hiked some rates by as much as 40 percent, prompting the state legislature to approve new regulations limiting future increases.

The White House calls the memo a “report,” but that glorifies it a bit. The document appears to be a quick-and-dirty survey inspired by last week’s ill-timed decision by Anthem Blue Cross of California, a unit of WellPoint, to raise premiums in the nongroup market by up to 39 percent. (HHS Secretary Kathleen Sebelius protested the rate hike in a Feb. 8 letter; WellPoint replied on Feb. 11 and provided these summary points to the press; Sebelius pronounced herself unpersuaded the same day; and on Feb. 13 Anthem agreed to a request from the California Department of Insurance to postpone the rate increase by a couple of months.) The White House may also have been galvanized by a report released last week by Health Care for America Now, a labor-backed pro-reform coalition, that found the nation’s five largest for-profit health insurers (WellPoint, UnitedHealth, Humana, Cigna, and Aetna) saw a combined profit increase last year of 56 percent, yet provided private coverage to 2.7 million fewer people than they had the year before.

President Obama seized on Anthem’s increase in his Feb. 7 interview with Katie Couric of CBS News. “People need to understand why we can’t back off on [health care reform],” the president said. “One of the major insurers in California just announced that in the individual market, they’re increasing their premiums by 39 percent. That’s a portrait of the future if we don’t do something now.” The HHS memo echoed this theme: “[R]eform will drive down premiums and limit out-of-pocket costs that eat into the family budget.”

But there’s little reason to believe that, in the still-unlikely event that the health reform bill makes it to Obama’s desk, it will do much to curb premiums. The examples cited in the HHS memo underscore this point. Reform, the memo says, will:

1.) “Place additional oversight on health insurance companies to ensure that people get value for the premiums they pay.”

Both the House and Senate bills would achieve this by mandating a minimum percentage of the premium dollar that must be spent on health benefits (“medical loss ratio”). In the House bill the requirement is 85 percent; in the Senate bill it’s 85 percent for large-group insurance and 80 percent for nongroup and small-group insurance. These are good reforms. There is some evidence of industry abuse: According to the report from Health Care for America Now, three of the top five health insurers (WellPoint, Humana, and Cigna) decreased their consolidated medical-loss ratios in 2009. But whether a federally imposed minimum actually lowered premiums would depend a great deal on how the regulations were written; ambiguities exist betwee what insurer expenses count as health benefits and what count as administrative, and the industry would seek to maximize these. A November letterfrom the Congressional Budget Office on the Senate bill’s likely effect on premiums makes no mention of medical loss ratio.

2.) “End arbitrary limits placed on coverage by insurance companies” and “End Insurance Company Discrimination.”

These are references to the bills’ abolition of health insurers’ lifetime spending limits, their prohibition against insurers denying coverage based on pre-existing conditions, and their limits on how much premiums may vary for different demographic groups. All of these reforms are badly needed, but if they had any combined effect on average premiums at all, it would likely be to raise them, not lower them, since they would impose new costs on insurers. (This increase should be offset, however, by health reform’s “individual mandate” requiring everyone to purchase health insurance. Because it’s not wildly popular, the HHS memo doesn’t mention it.)

3.) “Create competition among insurers with a health insurance exchange.”

It’s true that for most people, the exchanges would lower the cost of nongroup health insurance. But that’s not because the premiums would go down; the CBO projects that by 2016 the Senate health reform bill would actually drive nongroup premiums up 10 percent to 13 percent. Rather, health reform would lower health insurance costs on the exchanges through government subsidies. For the roughly 60 percent of people purchasing insurance on the exchanges who qualified for the subsidy, the cost of premiums would end up 56 percent to 59 percent below what they are today, according to CBO. The premium increase would also be mitigated somewhat by the fact that the nongroup insurance purchased through the exchange would tend to cover more than nongroup policies do today. Rock-bottom policies would be available through the exchanges—at prices 14 percent to 20 percent cheaper than comparable policies today, according to Jonathan Gruber, an MIT economist who’s done some contract work related to health reform for HHS—but CBO anticipates that even the unsubsidized exchange customers would usually bypass them.

4.) “Ensure value in our health care system.”

This refers to various small reforms, enacted on a mostly experimental basis, aimed at lowering prices at hospitals and in doctors’ offices. Everyone agrees that these are worth trying, but nobody expects they will yield significant savings in the short term, and anyway most of them concern Medicare, not private insurance.

5.) “Lower premiums.”

This refers to the 14 percent to 20 percent price drop in rock-bottom policies mentioned above. CBO’s main findings were that by 2016 the Senate health reform bill would have virtually no impact on large-group premiums and would raise nongroup premiums 10 percent to 13 percent. (For more on this see, “Forget The Cost Curve.”)

You may have noticed that the HHS memo makes no mention of the Senate bill’s 40 percent excise tax on high-value “Cadillac” health insurance, touted hither and yon as health reform’s boldest bid to control medical inflation. That’s probably because the idea is wildly unpopular—so much so that it had been whittled down considerably even before Republican Scott Brown’s election to succeed Ted Kennedy put health reform in peril. Many called this a sellout to Big Labor, but a new study shows that 71 percent of the Cadillac-tax reductions the White House negotiated with labor leaders accrued to nonunion workers. Since then, labor leaders who previously lent the Cadillac tax their reluctant support have reportedly backed away. That’s no great loss, since the Cadillac tax was misconceived from the start as a tax on gold-plated health insurance. According to a study published in the January Health Affairs, a health plan’s generosity accounts for a mere 3.7 percent of the variation of in the cost of family coverage. What really determines a health plan’s “value” are the demographic characteristics of the people it covers.

The HHS memo also fails to mention the House bill’s public option. Creating a government health insurance plan that would compete directly with private insurers is the surest way to curb the rise in private health insurance premiums. But in the House, the public option had so many restrictions placed on it that CBO ended up concluding it would charge premiums slightly higher than private competitors. The Senate, hampered by its need to muster 60 votes to break a filibuster, jettisoned the public option. Now 18 senators and 119 House members are circulating a letter urging revival of the public option in a “reconciliation” health care bill, should any such emerge. Reconciliation itself—a process that would allow Senate passage of budget-related parts of the bill on a simple majority vote—is looking like a long shot right now, to an amazing (and largely unrecognized) degree because the U.S. Conference of Catholic Bishops is standing in the way. But if divine intercession were to occur once, maybe it would occur twice and restore a muscular version of the public option (or a weak version that might later be strengthened) to health care reform. Without one, I don’t see how President Obama can claim his bill would do anything much to address the plague of rising premiums.

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Correction, Feb. 19, 2010: An earlier version of this column erroneously identified the company as BlueCross BlueShield of Maine. ( Return to the corrected sentence.)