Without state oversight, insurers can raise premiums to cover bad investments.
If the California Public Employees’ Retirement System–the Goliath of buyers–can get stepped on, then without new controls the little guys–small businesses and individual purchasers–will be crushed.
The announcement by the nation’s second-largest purchaser of health insurance that it expects to pay an average 25% more in premiums next year should sound an alarm bell in Sacramento that following the money in the health care system is as important as dealing with abuses of patients’ rights.
While auto, homeowner and commercial insurance companies have to justify premium hikes and seek state approval for them, no such requirements apply to health maintenance organizations and health insurers. For years politicians in Sacramento have rebuffed efforts to require that the state regulate HMO premium increases. Cash register politics contributed to the lack of resolve, but so did a confidence that markets would self-regulate. This confidence shattered in the wake of CalPERS’ failure to control premiums.
Requiring the state’s prior approval for the coming tsunami of HMO premiums is particularly important this year because the rate hikes are far in excess of actual medical cost increases. For instance, analysts at CalPERS, who have greater scrutiny of HMO costs than state regulators, found price gouging at the state’s largest HMO, Kaiser Permanente.
A memo from the analysts stated, “Kaiser‘s proposed rates are not only disappointingly high but also higher than justified target rates. Further, Kaiser‘s current approach appears to be to charge what it thinks the market will bear.”
This is how the HMO is treating a system that represents 400,000 Kaiser patients. Imagine how individual purchasers will fare.
The truth is that poor investment returns on Wall Street for HMOs and insurers are responsible for a good deal of the cost crisis. Insurers raise premiums based not on claims filed (product cost) but on their investment results. When interest rates increase (so investment yields are higher), insurers reduce their price to attract greater capital for investment, underwriting greater risk. When interest rates are low, premiums increase to maintain profit levels. When investments fail, patients and policyholders pay more.
For such reasons, insurers might also stonewall payment on claims to increase interest income on their capital by investing it in capital markets longer. While auto policyholders have some protections against this cycle, there are no comparable tools to prevent health insurers and HMOs from passing on bad investment losses to patients.
Another reason prior state approval of HMO premiums and policies is so critical now is the new breed of policy debuting this year that barely qualifies as insurance. Under these plans, patients must pay thousands of dollars out of their own pockets at varying stages before the HMOs pay. These hollow policies limit employee coverage and employer costs.
The HMO industry no doubt believes it has found a foolproof way to make a healthy profit in the age of a patient revolt: Dissolve the notion of insurance by shifting the risk onto the insured but continuing to charge or it.
The question is whether employers will buy a product about as worthless as a fax machine that prints only every other page. The bet is employers will since it is employees who will bear the increased risks and burdens.
The state, however, needs to inspect these policies closely to guarantee that insurance is not simply another market illusion that disappears when individuals need it most.
How HMOs explain their rate hikes of up to 41% for CalPERS is thorny for an industry that bragged about controlling rising costs. No doubt patients’ rights laws will be an easy scapegoat, but the truth is that HMOs have managed only their own profits.
Politicians could turn a blind eye to gripes about HMO delays and denials when there at least seemed to be some cost savings at the end of the rainbow. With both patients and the bottom line suffering, however, the wreck of the health care system is harder than ever to ignore.
The only silver lining in this dark cloud is that the CalPERS concession to the HMO industry may garner populist support for real solutions as more Californians see the possibility of being uninsured.
This commentary was published by the Los Angeles Times on April 18, 2002