Do Health Insurers Deserve the Latest Public Hit?

The federal health reform law arguably wouldn’t have passed Congress if not for health insurers — a dubious and accidental achievement, in the eyes of many payers.

Anthem Blue Cross’ early 2010 decision to hike rates by as much as 39% provided the political cover for some House Democrats to back the reform bill, which at the time was idling in Congress. Seizing the moment, the legislation’s supporters bashed insurers’ behavior and argued that reforms would slow premium hikes while ending the industry’s worst practices, like rescinding coverage from sick patients.

Recent weeks are starting to echo last spring.

A year into the federal overhaul, health insurance premiums are still rising and small businesses have been disproportionately hit, the New York Times notes. In California, Anthem Blue Cross has again announced a rate hike, effective May 1, which means that some policyholders will face a cumulative rise in premiums of more than 40% in less than a year. Blue Shield of California also plans to raise rates by as much as 59%, prompting anger and public protests last week.

Insurers say that soaring health care costs have forced them to raise their rates. But patient advocates blame another culprit: Wall Street.

Point: Health Insurers’ Profits Must Be Reined In

Consumer watchdog Health Care for America Now released a report last week that found the nation’s five largest health insurers had collectively profited by $11.7 billion in 2010. According to the HCAN analysis, the five companies’ profits increased by 51% between 2008 and 2010, with the group citing “Wall Street-driven trends,” like spending less on medical care and collecting more in premiums. The “companies’ financial success is the result of a business model that avoids risk and provides less care,” said Ethan Rome, HCAN’s executive director. The group cites the report as evidence for maintaining the health law.

Others say that focusing on profit margins ignores a statistic that further illustrates insurers’ financial strength: return on equity. The companies are required to carry significant capital in order to cover potential payouts, which tends to tamp down year-to-year profits as insurers stockpile considerable assets. Moreover, “insurance companies rarely ever lose money … they just lay off their staff and start denying claims,” one commenter wrote on economist Tyler Cowen’s financial blog. “That’s what has people upset, not the relative profit margin but rather the consistent profits.”

Counterpoint: Health Insurers Are Less Profitable Than Many Assume

However, some argue that private insurers are being unfairly demonized — again — and their financial success is being dramatically overblown.

Forbes blogger Avik Roy contends that “health insurance is one of the least profitable industries in America.” According to Roy, publicly traded health insurers averaged a “measly 4%” profit margin in 2010, compared with profit margins of 20% for cigarette manufacturers, 13% for soft-drink manufacturers. “If health insurers are profit-hoarding devils, so is the rest of the private economy,” Roy concludes.

Meanwhile, a Government Accountability Office report released last week found the federal government made about $48 billion in improper payments to traditional Medicare fee-for-service plans in 2010. Noting that Medicare fraud represented nearly $4 to every $1 in top insurers’ profits, Jeffrey Anderson of the Weekly Standard concludes that “private insurers may never manage to make nearly as much money as government-run health care programs manage to lose.”

Further, some argue that health providers — and not payers — have more pricing power in the nation’s health care system and deserve greater responsibility for spiraling health costs. Trying to tamp down rising premiums in his state, New Hampshire Gov. John Lynch (D) recently called for a moratorium on new hospital construction, arguing that hospitals are using “excess cash” for “advertising, trying to attract market share from each other, buying physician and laboratory practices across the state, and then increasing overhead charges to patients.”

Looking Ahead: Premium Hikes Promise Continued Scrutiny

The dust-up over insurer profits is setting the table for the next big fight: how the federal health reform law will oversee payers and guard against unnecessary rate hikes.

CMS has laid out its proposal on which information insurers will have to disclose to consumers about excessive premium rate increases. However, Consumer Watchdog warns that many health insurers could keep their reasons for hiking rates a secret under the current plan.

Citing local payers’ planned rate hikes, a San Francisco Chronicle editorial argues that the California Legislature should approve a bill (AB 52) to give the insurance commissioner the power to reject some premium increases. According to the editorial, “Californians deserve to have reasonable prices for health care. These increases are not.”

Meanwhile, insurers are pushing back on other aspects of the reform law, such as requirements to spend a certain amount of premium dollars on patient care. Former Cigna executive Wendell Potter contends that if insurance industry leaders “get what they’re lobbying for, the [medical-loss ratio] requirement will essentially be meaningless, and consumers will probably never see a dime of the promised rebates.”

Here’s a look at what else is making news around the nation.

On the Hill

  • On Monday, the House Energy and Commerce Health Subcommittee released a memo describing five provisions of the federal health reform law that Republican lawmakers plan to address during a hearing scheduled for Wednesday. The provisions are: grants for state-based health insurance exchanges; a Prevention and Public Health Fund; a construction and capital cost fund for school-based health centers; state grants for adolescent sexual health education; and grants to establish or expand primary care residency programs in teaching health centers (Pecquet, “Healthwatch,” The Hill, 3/7).
  • Last week, Mississippi Gov. Haley Barbour (R) and Utah Gov. Gary Herbert (R) testified before the House Energy and Commerce Committee on how the federal health reform law’s Medicaid expansion and other provisions would affect their states. The governors called the requirements burdensome and said states need more flexibility to run their own health programs (Pecquet, “Healthwatch,” The Hill, 3/1). Barbour said the Medicaid expansion in Mississippi likely will increase taxes, spending cuts or a combination of both. Meanwhile, Herbert said that increasing Medicaid enrollment would cost Utah an additional $1.2 billion to $1.3 billion over the next decade (Khan, ABC News, 3/1).
  • Meanwhile, Massachusetts Gov. Deval Patrick (D) defended the reform law in a House Energy and Commerce Committee hearing. Patrick said provisions such as the law’s tax credits for businesses and payment incentives for quality care will aid the state in coming years. Patrick said the overhaul is “good for America and deserves a chance to be implemented” (Pecquet [1], “Healthwatch,” The Hill, 3/1). Patrick also praised Massachusetts’ health reform law, noting that it achieved near-universal coverage for residents and that state officials continue to work on controlling costs (Emery, Boston Globe, 3/2).
  • Last week, 42 GOP senators sent a letter asking President Obama to withdraw his nomination of CMS Administrator Donald Berwick. In the letter, Republicans wrote, “As CMS now has the responsibility for restructuring insurance markets across the country, Dr. Berwick’s lack of experience in the areas of health plan operations and insurance regulation raise serious concerns about his qualifications for this position” (Walker, MedPage Today, 3/3). In an e-mail, White House spokesperson Reid Cherlin wrote, “We won’t be withdrawing the nomination” (Fox, National Journal Daily, 3/3).

Rolling Out the Overhaul

  • Last Friday, HHS announced 126 new waivers to exempt organizations from a provision in the federal health reform mandating certain levels of coverage, bringing to 1,040 the total number of organizations that have received an exemption. The Obama administration in 2010 granted 222 waivers to businesses that offer low-cost health plans, or “mini-med” plans, exempting them for one year from a provision in the reform law that prohibits caps on health benefits. An estimated 1.4 million U.S. residents are covered under such plans (Millman, “Healthwatch,” The Hill, 3/6).
  • The White House is dismantling its Office of Health Reform and shifting the work to its Domestic Policy Council as part of greater reorganization efforts. The office existed for 16 months and was headed by Nancy-Ann DeParle, who recently was named White House deputy chief of staff. Health policy analyst Jeanne Lambrew has moved from HHS to DCP, where she will act as deputy assistant to the president for health policy. Meanwhile, Senate Finance Committee staffer Liz Fowler, who helped shape the federal health reform law, has been named special assistant to the president for health care and economic policy in the White House’s National Economic Council (DoBias, National Journal Daily, 3/1).
  • More than 5,000 employers are participating in the Early Retirement Reinsurance Program and as of the end of 2010 have received a combined $535 million from the program, according to a new report released by HHS. ERRP, created by the federal health reform law, aims to prevent employers from dropping coverage before provisions that prohibit insurers from denying coverage based on preexisting conditions take effect in 2014. According to the report, ERRP so far has prevented 61,000 retirees from being dropped from their health coverage (CQ HealthBeat, 3/2).
  • Last week, eight health care advocacy groups launched a new website to help U.S. residents better understand the federal health reform law. The site, which aims to avoid the political debate over the reform law and clarify misinformation, allows visitors to see what provisions of the law already are in effect in their state. It also allows visitors to view explanations of the law and a timeline indicating when certain provisions will take effect. The site’s creators say they hope to add a chat feature to allow users to ask specific questions from experts (O’Connor, “Prescriptions,” New York Times, 3/2).

In the States

  • On Monday, Massachusetts Attorney General Martha Coakley (D) filed an amicus brief in support of the federal health reform law against the challenge brought by Virginia Attorney General Ken Cuccinelli (R). The brief, filed in the Fourth Circuit Court of Appeals, states that former Massachusetts Gov. Mitt Romney’s (R) inclusion of an individual mandate provision in the state’s health care law proves that Congress had a “rational basis” for adding a similar provision to the reform law (Haberkorn, Politico, 3/7).
  • Over the weekend, North Carolina Gov. Bev Perdue (D) vetoed legislation passed by the state Legislature to challenge the individual mandate in the federal health reform law. Perdue said the state legislation would have contradicted federal law, adding that because 27 states already are challenging the provision, “this issue will reach the Supreme Court in a timely manner without North Carolina spending money and energy on it.” The Republican-controlled state legislature could attempt to override Perdue’s veto (Curtis, Politics Daily, 3/7).
  • Last week, Republican state legislators in Colorado introduced legislation that would allow the state to join an interstate compact and opt out of the federal health reform law, provided the plan is approved by the U.S. House and Senate. According to state GOP officials, the U.S. Supreme Court previously has declared legal such compacts, which supersede federal law and give authority to participating states (Sealover, Denver Business Journal, 3/1).

Eye on Costs

  • Health insurance costs are increasing dramatically, particularly for small businesses. Over the last 10 years, premiums have increased by more than 200%, and smaller companies have seen the largest increases, according to federal officials. Republican lawmakers have cited provisions in the federal health reform law as the reason for the higher premiums. Some insurance industry lobbyists also cite implementation of the overhaul as a cause for rising costs. However, the Obama administration has said that several reform provisions eventually will bring down premiums (Pear, New York Times, 3/4).

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