Over at the New Republic, Jon Cohn reports that the Affordable Care Act gives Kathleen Sebelius great latitude in regulating insurers. And Cohn thinks that she is likely to use it.
“It's not impossible,” to regulate private sector insurers, Cohn writes. “Countries like the Netherlands and Switzerland both have adopted this model with considerable success. But it's a difficult task, particularly in a country like ours without the same tradition of strong regulation and enlightened corporate management.
“The architects of the Affordable Care Act understood this and, to the extent they could, they packed the law with regulations designed to force insurers change their behavior. But, by design and necessity,” Cohn notes, “the law was relatively vague on a lot of matters, leaving final determination of the rules to the Secretary of Health and Human Services and her department.”
Let me add that this is what many commentators don’t understand. Because the Accountable Care Act doesn’t spell out exactly how it’s going to pare costs and reduce waste in various areas, opponents claim that the legislation won’t rein in health care spending. But the very vagueness of the law leaves both the Secretary of HHS and Medicare with unprecedented power to reform care without interference from lobbyists.
“The good news,” Cohn observes, “is that Secretary Kathleen Sebelius has recruited some of the country's most respected and seasoned regulators to carry out this task. And, so far, they seem determined to get aggressive with the insurance industry. Very few people outside the world of health care policy seem to have noticed this. But, if you're interested, I have a longer explanation in an article I wrote for the American Prospect, whose 20th anniversary issue includes a special report on health care reform implementation.
“One surprising thing I learned, while reporting, was that insurers seemed to be playing nice–that, notwithstanding the scorched earth strategy they'd pursued during the legislative debate, they'd made their peace with reform and were sending signals of cooperation. But that was earlier in the summer and, just recently, they've started to make noise about regulation of the so-called medical loss ratio.
“Here's the background–again, from my Prospect story:
“‘The Affordable Care Act sets a minimum threshold for what's known as the ‘medical loss ratio’– the percentage of premium dollars that go into medical care (a ‘loss’ from Wall Street's view) rather than into overhead or profits. For plans sold to small businesses or directly to individuals, that ratio must be at least 80 percent; for plans sold to large groups, it must be at least 85 percent,’” Cohn explains.
This means that, beginning in 2011, health plans that don’t spend 80% of premiums on medical care when covering small groups (or 85% when covering large groups) will be required to return the difference between the minimums and actual spending to sponsors and consumers. According to Carl McDonald, a Wall Street analyst at Oppenheimer who follows insurers, if the new law had been on the books in 2009, the six largest for-profit health insurance companies would have been required to refund $1.9 billion in that year alone for spending too much on profits, CEO pay and administration. In other words, if Sebelius enforces this provision in the ACA, it has the potential to save billions over ten years; see the table below. (Thanks to Health Care for America Now for calling attention to McDonald’s calculations—mm.)
“For big insurance companies that sell predominantly to big employers, the medical loss ratio shouldn't be hard to meet,” Cohn continues. “With their economies of scale, these insurers and employers together provide coverage at relatively low administrative cost (although, it should be noted, Medicare's overhead is even lower). But smaller insurers that deal primarily with individuals or small businesses will have a tougher time. Among other things, they typically lose 8 percent of premiums on commissions to agents and brokers who sell policies on their behalf. (Once the insurance exchanges exist, much of that cost will disappear.) These are also the insurers most likely to bilk consumers, since individuals buying coverage on their own typically lack the knowledge — or ability — to bargain as shrewdly as corporate benefits managers do. (The exchanges should also help with improved information and bargaining leverage.)”
This is why I continue to predict that many insurers that now sell in the individual market may well go out of business. (Or, go into a different business. Some may decide to sell supplementary insurance that covers “extras” including cosmetic surgery for aging boomers. ) As Cohn indicates, too often these insurers rely on “bilking consumers” to make a profit, and many are not large enough to use economies of scale to keep administrative costs down. By contrast, a public option that competed with private insurers has the size to enjoy lower administrative costs, and if it followed Medicare reform by shifting away from fee-for-service payments, it might well be able to offer better coverage at a lower price. This is why I think that, in the end, we may well wind up with a public option as part of the mix.
“There's leeway in the rule in two key places,” Cohn adds. “The law doesn't dictate a precise formula for calculating the medical-loss ratio. It's up to the administration which ‘care management’ activities count as medical care, whether taxes should be part of the calculation, and the extent to which carriers can average out the ratio among different plans. . .
Cohn concludes: “The Affordable Care Act stipulates that the HHS Secretary consider the commissioners' recommendations when writing regulations. But it doesn't say she has to follow it. If indeed the commissioners recommend scaling back the regulation, it will be interesting to see whether Sebelius goes along.”
I think the whole concept of minimum MLR regulations is unnecessary and could well lead to adverse unintended consequences. Once the rules surrounding the exchanges are fully in place by 2014, insurers will have to offer a standard benefits package in four different versions, I believe, and each will have an actuarial rating which is a measure of the scope of coverage. Customers will be able to quite easily and transparently compare insurance offerings and premiums and they can’t be turned down due to a pre-existing condition. There should be plenty of competition just as there is currently in the Medicare Advantage and Part D markets. Minimum MLR’s could discourage innovation including investments in analytics to prevent or reduce fraud because such investments would likely be categorized as administrative costs.
State insurance commissioners, who are drafting the MLR rules, have a strong interest in ensuring that insurers are sufficiently well capitalized to pay medical claims as they come due. They don’t want the health insurance market to become so unattractive that insurers exit the business in their respective states. The Superintendent of Insurance in Maine, who is a strong supporter of both President Obama and health reform, raised this issue in her state. Currently, only two insurers, Anthem Blue Cross and Health Markets sell individual health insurance in Maine to some 39,000 customers. Maine already has a minimum MLR ratio of 65%. Raising it to 80% next year could cause both remaining insurers to exit the state because premiums would be inadequate to cover their costs. Maine is a rural and comparatively poor state. Market conditions vary considerably around the country and don’t lend themselves to one size fits all rules of this sort. I think it is interesting to note that Secretary Sebelius was once the insurance commissioner in Kansas. The current Kansas insurance commissioner, Sandy Praeger, is leading NAIC’s summer long effort to draft the MLR rules and there were many complex issues that they had to deal with. Since they’re the ones with the most expertise on the subject, their effort, hopefully, will count for something and not be overruled by vindictive (toward insurers) liberal politics.
Regarding Jon Cohn’s reference to Switzerland, insurers are not allowed to make profits on the basic insurance package there. Yet, premiums within a canton can vary by as much as 20%. Switzerland uses risk adjustment payments to try to address this but the system is far from perfect and insurers still have an incentive to risk select or, to use the U.S. term, cherry pick. Premiums can also vary by as much as two to one between cantons where living costs are high and those where they are comparatively low. People in the high cost cantons pay much higher premiums for the same coverage. Large families also pay more than small families for a similar benefits package. Associations representing insurers negotiate prices for services with associations representing providers. All insurers pay the same rates for a given service to all providers within a canton. There is no government run plan. Moreover, both comparative effectiveness and cost-effectiveness are used to determine coverage decisions, unlike with Medicare in the U.S. See the August issue of Health Affairs for a detailed discussion of the Swiss healthcare system.
A billion here, a billion there, pretty soon we’re talking about some real money. I think this will be a growth industry for accountants and auditors as they play the game of hide & seek for where the money actually went. I bet 50% of that money rebate would disappear had the regulations been in effect 2 years ago. But the profit line would remain the same.
Great article. I was watching CNN today where they where mentioning about it being a mistake giving money to the large financial institutions to give the public a sense of confidence, when they should of provided help to the smal business and promote more jobs to be available would raise confidence
“Because the Accountable Care Act doesn’t spell out exactly how it’s going to pare costs and reduce waste in various areas, opponents claim that the legislation won’t rein in health care spending. But the very vagueness of the law leaves both the Secretary of HHS and Medicare with unprecedented power to reform care without interference from lobbyists.”
Very, very important concept to point out!
According to a paper written by Amy Monahan and Daniel Schwarcz entitled “Will Employers Undermine Health Care Reform By Dumping Sick Employees,” on page 10 it states “PPACA also reinsures insurers in both the individual and small group markets against the risk that their medical costs will be greater than 103% of expectations
(PPACA section 1342).
Is this risk assumed by the govermnment and payments come out of general revenues from the Treasury?
What about the large employer market – why are they not reinsured?
Go to: http://ssrn.com/abstract=1651308, or you can go to BenefitsLink.com, and search the news on 8-13-10.
Don Levit
Gregory, Barry
Gregoy: Thank you.
Yes, those vague spots in the legislation are very, very important. They shield health care reform from lobbyists.
Barry–
We must put a cap on private insurers’ administrative costs and profits.
If they can’t spend a larger share of premiums on health care, they shouldn’t be in the heatlh care insurance business. They are just not providing value for our heatlh care dollars.
We cannot afford to bail out another industry that isn’t able to do its job efficiently.
Bruce-
I’m more hopeful than you are.
We’ve reached a crisis in health care spending. My guess it that most states will crack down on insurers.
Dictating profit margins for insurers is dangerous and misguided regulation. Draconian MLRs appear to be consumer friendly. But industry profits are not the problem. Unsustainable medical trend is the culprit. Much of that is caused by underpayments by Medicaid and Medicare and dumped on to the private market.
If regulating profits is such a good idea, let’s do it for Exxon, Microsoft, Apple and all large profitable companies.
Regulating away profit margins will ultimately lead to flight of capital and and companies exiting the industry. Cohn is right to make the prediction. That will leave us with the public option and a disaster of trifecta proportions.
Medicare is a runaway train wreck, Medicaid is bankrupting states. Do we want another entitlement that is a black hole?!
To buy into the view that there is “free” money to take from insurers shows a fundamental misunderstanding of the capital markets. In the large group market are we positing that IBM and GE cannot fend for themselves?
The individual market appears to have “wasted administrative costs,” but it is inefficient compared to the large group market and requires higher costs to operate.
My recommendation to the writers is focus on the ongoing medical trend. We have to slow the escalator, not remove a couple of steps!
Bill–
You are entirely right that the underlying cost of medical care has been driving health care inflation–not insurance co. profits.
I have said this many times on this post.
But reining in inflation means saving 2% here, 3% here . .
Reining in insurer’s administrative costs is one of many places where we can save.
Insurers’ administrative costs are so high in part because they spend a great deal of money “underwriting”–deciding how much to charge people suffering form pre-existing conditions,and who to refuse to insure altogether.
This does not add value to our health care system.
The problem with for-profit health insurance is that it adds a layer of cost to the system, but it’s hard to make an argument that it adds equal value.
The truly innovative insurers are all non-profits– Geisinger, Kaiser, etc.
No other country in the developed world relies primarily on for-profit insurers to organize their health care system.
They also offer care that is usually as good, sometimes better, for less–to all of their citizens.
Why cap insurers’ profits? And why not cap Microsoft’s profits?
Becuase health insurance is a necessity, like heat and light. This is why, if individuals can’t afford it, taxpayers wind up paying for it. As a society, we cannot afford to continue to pay 7% more each year.
Insurance companies that “cherry-pick” healthy patients and leave sick patients uninsured add to the problem because those sick patients often wind up deferring care until they are extremely sick.
We regulate utilities (or at least we used to) and we need to regulate health care costs.
AS for “understanding capital markets,” I was sernior editor at Barron’s for 12 years, then wrote a column about int’l markets & economics for Bloomgerg, then wrote a book about our bull market (Titled Bull!) that Warren Bufffet recommended in his annual report.
So I understnad capital markets– where they work, and where they don’t.
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