Under Proposed Reforms, Little Rate Regulation, New Customers May Mean Health for Insurers

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OLDWICK, N.J. — With virtually no limits on what they could charge in premiums, coupled with millions of new customers to gain, the U.S. health insurance industry’s financial future certainly isn’t in critical condition. This is boosted by the main goal of health-reform legislation being expanded coverage but not necessarily lowering medical costs, experts said.

The bills do little to lower costs because they’re not addressing what’s driving them, including defensive medicine and the fact that nobody can define quality care, said Debra A. Smith, a physician and an economist who has worked in public health, health care financing and administration and insurance.

Erica Drazen, managing director for emerging practices for CSC, a health care information technology company, agreed. The effort to expand coverage to Americans won’t bring the underlying medical costs under control, she said.

Lawmakers on both sides don’t want to talk about rate regulation because they know insurance companies hate it, said Jerry Flanagan, health care policy director for Consumer Watchdog. Even many Democrats think that would be too much intrusion in the market, he said. Yet Congress requiring people to buy health insurance "is a dramatic market intrusion."

Paying a Penalty

All of the health-reform bills require that people buy insurance or pay some kind of financial penalty — most likely a tax penalty.

America’s Health Insurance Plans, the industry trade group, supports guaranteeing coverage to people with pre-existing medical conditions — coupled with an enforceable mandate that everyone buy coverage. Under its proposal, health plans in the individual market would be required to offer coverage to all applicants.

Guaranteed issue "sounds like some great compromise but the joke is… insurance companies will sell to everyone in the future but there is no oversight on what they can charge," Flanagan said.

Under the main House bill, America’s Affordable Health Choices Act, however, if premiums go up more than 150% of the annual increase in medical inflation, a new health care commissioner can determine whether the rate is too high, said Flanagan. Medical inflation is about 6%, he said.

Health insurance "is one of the most-regulated industries in America with extensive regulation at both the federal and the state level," said Robert Zirkelbach, a spokesman for AHIP.

The bills do set limits on how much premiums can vary by different characteristics, such as a person’s age, in the nongroup market, said Cori Uccello, senior health fellow with the American Academy of Actuaries. They also prohibit premium variations by health status, she said.

The underwriting regulations aren’t related to the cost of coverage, said Kathy Bakich, national director of health compliance for the Segal Co., an employee benefits consulting firm.

A Rosy Bottom Line

Aside from the negative impact on the insurance-buying public, the industry’s bottom line is rosy — at least for the next couple of years.

With millions of new customers they stand to gain, "ka-ching, ka-ching, ka-ching – – the health insurance industry is going to come out of this smelling like a rose," said Robert Lehrer, an agent who sells individual and group insurance in California. "If I was a stock picker, I’d said ‘buy.’"

In a recent research note, Carl McDonald, an equity analyst with Oppenheimer & Co., wrote that provisions like a government-run health plan "seem dead and buried." So, "a seismic shift in how the industry does business over the next few years doesn’t seem to be in the cards, even if the group’s current valuation multiple says differently."

But health insurers may fear rate regulation more than the public option, particularly California-style rate regulation, said Flanagan, referring to Proposition 103, the state law that requires prior approval of property/casualty insurance rates.

Jason Beans, chief executive officer of Rising Medical Solutions, which provides medical cost-containment programs to Fortune 1000 companies, said the real problem is there’s not enough competition among insurers in many markets.

The concept of proposed nonprofit insurance cooperatives makes sense but how the bills are executing them "makes me nervous," Beans said.

Meanwhile, Congressional Budget Office estimates don’t analyze the effect of the proposals on national health expenditures, said  Smith. "Increased utilization will change the entire dynamic and may throw all the current cost estimates out the proverbial window," said Smith, author of the book, "Healthcare Solved – Real Answers, No Politics."

According to a recent report commissioned by AHIP, in the next decade, the current health care system  if left alone  would see consumer costs rise 79%. But if one current reform effort were to become law, that increase could be 111%, the report conducted by PricewaterhouseCoopers concluded (BestWire, Oct. 12, 2009).

PricewaterhouseCoopers was hired to study the impact of four aspects of the plan that could increase costs to consumers. One included potential weaknesses in the individual mandate that could let people ignore the requirement.

The Senate Finance Committee bill, introduced by committee chairman Sen. Max Baucus, D-Mont., is what the cost analysis was based on. The report found that an average family’s insurance costs, which run at about $12,300 today, could more than double to $25,900 by 2019 under provisions of the Baucus proposal (BestWire, Oct. 12, 2009).

Contact the author, Fran Matso Lysiak, senior associate editor, BestWeek at: [email protected]

Consumer Watchdog
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