Industry Greed, Not Patients’ Interest, Drives Consolidation of Health Insurers

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Los Angeles Business Journal

Bigger isn’t better when it comes to health insurance.

Two recent mergers, PacifiCare with United Health and Anthem with WellPoint, reveal that getting bigger is, in fact, all about insurance industry greed, not better value for the businesses that pay for coverage or the patients who use it. Take a look at what the stakeholders won and lost.

Business and patients: The WellPoint merger, and its $4 billion in payouts to top executives and financing costs, is being paid off by California businesses and consumers in the form of 30 percent to 50 percent rate increases.

PacifiCare’s chief executive, Howard Phantsiel, awarded himself a $130 million “retirement” increase a month before the merger with United was announced and WellPoint‘s Leonard Schaeffer made off with $250 million in cash and stock following the merger with Anthem.

All told, the fine print of the PacifiCare deal eviscerated $834 million with bonuses for PacifiCare executives and excessive corporate cash reserves — enough money to provide health care for 278,000 Californians for an entire year! Guess who’s going to pick up the tab?

Doctors, nurses and hospitals: Health care providers have long argued that every dollar spent on executive handouts means that there will be fewer resources for the front lines of medical care.

Reckless spending by insurers — including merger bonuses and financing costs, administration, advertising, profit and bloated cash reserves — has consistently pushed premiums up 250 percent faster than hospital costs and physician fees. Following the merger with Blue Cross, WellPoint‘s profits increased 235 percent. In 2002, insurer overhead costs became the fastest growing segment of health care spending — increasing faster than even prescription drugs.

Shareholders: Responsible investors see platinum parachutes for executives as a tax on shareholders. Citing huge cost increases, CALPERs, the nation’s largest retirement investment fund and second largest public purchaser of health care, opposed the PacifiCare merger.

As CALPERs investment committee chairman, Charles Valdes said, “They’re doing a great job of fleecing the shareowners.” Such extreme greed, and the associated cost shift to health care purchasers it requires, is a product of a health care system managed like OPEC.

WellPoint and United Health already control a third of the nation’s health insurance market and the five largest HMOs provide health care to half of insured Americans. Just five companies account for 80 percent of California’s HMO market.

Now the buzz on Wall Street has it that Aetna and HealthNet are gearing up for a merger of their own. More market consolidation will mean lower quality, higher costs, and fewer choices for the businesses, patients, health care providers and investors who should have the final say in how our health care dollars are spent.

Four hundred mergers in the last decade have fueled a 400 percent increase in the cost of health care coverage. How? Fewer competitors and a total lack of government oversight of rates have given insurers the freedom to spend our money frivolously. These days insurer overhead costs exceed 20 percent while public programs such as CALPERs and Medicare spend just 2 percent.

HMOs argue that bigger size means more efficient operations, cheaper services, and better choices. But every business knows that health insurers have failed to live up to their affordability promise and consolidation has given insurers more control over prices and the power to limit which hospitals and doctors a patient can visit.

When is business going to say enough is enough and embrace a health insurance system like Medicare where payers are insulated from further market consolidation?

Some are getting there. As Rick Wagoner, the chief executive of General Motors, recently told the New York Times, “Like it or not, if we pay $1,500 per car for health care and our cheap global competitors pay $200, that’s a disadvantage. [One possibility] is leveraging the buying power of the government, which is the biggest purchaser of health care under Medicare.”

In the past, business has opposed Medicare models for health care because they feared government involvement, but as mergers and profiteering ruin their financial health, employers are looking toward government for protection.

The public is already onboard. According to a Public Policy Institute of California poll, 60 percent of Californians support a universal health insurance program in which everyone is covered under a program like Medicare that is run by the government and financed by taxpayers.

Such a plan steals a page from the HMO playbook by merging all payers, spreading risk, and increasing buying power. It differs from the failed HMO system by cutting out big overhead costs and profits.

If business were to turn its back once and for all on insurer greed and join the effort for a California Medicare program in full force, along with the doctors and nurses and patients who are already there, then California could out-merge the insurers.
Jerry Flanagan is the Health Care Policy Director for the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Consumer Watchdog
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