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Reading into President Barack Obama’s health care summit on Thursday, the massive rate increases recently announced by Anthem/Blue Cross of California shine like a neon marquee over this episode of political theatre.
The magnitude of these rate increases – which are extreme but not unrepresentative of what is happening throughout the for profit insurance industry – expose the viability of all the watered down proposals that have survived the legislative gauntlet of special interest corruption and manufactured public outrage.
The message blinking bright and clear on the marquee: should any one of the extant proposals actually emerge from the summit (unlikely), or be passed by Democrats alone through reconciliation, it will be obsolete and ineffective by the time most of the provisions go into effect in 2014.
The Obama administration is trying to capitalize on Anthem/Blue Cross’s colossal timing blunder. The administration proposed Monday that any health reform plan should be enhanced to empower the federal government to regulate health care premium rate increases. With the government holding the power to deny rate increases that are unjustified, insurance companies would become like regulated utilities.
But this measure will do little to control rate increases. Such a regulatory board may trim a few points off an increase here and there. But after-the-fact review of rate increases will do nothing to alter the forces of technology, inefficiency, misplaced incentives and demographics that are driving the rate increases. Costs will go up. Big rate increases will be justified and approved by the regulators.
By 2014, health insurance costs will be so much higher (and continuing to rise every year) that the mandate to buy insurance will be experienced by tens of millions of Americans as an unaffordable burden. The subsidies intended to render this burden tolerable will be inadequate. People will avoid buying insurance in droves and opt to pay the penalties instead.
Or, at best, they will be forced to buy the only thing that they can afford: plans with high deductibles and co-payments, which in effect will leave them underinsured. Yes, if they ever need to go in the hospital, at least they will have coverage after they pay a very high deductible. But since they won’t be able to afford routine preventive care or properly managed care for chronic conditions, they will end up in the hospital more often and bankrupted anyway by the high deductibles and other costs not covered by their insurance.
Thus the two main goals of the health insurance reform effort will remain unfulfilled: coverage will not be effectively extended (even though many will nominally possess insurance); and because of the rampant under-insurance, health insurance costs will continue to soar out of control.
It is well documented that the greater the barriers to care (i.e. deductibles and high co-pays), the more likely it becomes that patients forego necessary care in order to save money. When that happens, the long-term costs for those individuals goes up. The short-term savings to the system of making the patient pay more up-front for care are more than offset by the lack of prevention and additional costs for people who become ill more frequently and seriously than they should.
The Blue Cross rate increases, up to 39 percent for its 800,000 individual policy holders in California clearly signal that entire segments of the for-profit insurance market are disintegrating at an alarming rate.
Blue Cross’s individual California insurance pool has slipped into what the insurance industry calls a death spiral. Large rate increases will be the norm going forward. The higher the price of insurance becomes, the more people will drop their insurance altogether, leaving fewer people in the insurance pool and requiring even greater rate increases to cover the cost of care, causing more to drop out, and so on.
Numerous states besides California are reporting double digit increases in individual markets as well. In 2008 there were some 13 million people covered by individual policies nationwide. These people are not all grouped into one pool but are divided into much smaller state pools.
The problem is not limited to the individual marketplace. The media has yet to latch onto rate increases in the premiums corporations pay to provide health insurance to their employees, but the same process is in play. Any corporation not large enough to create its own insurance pool and insure itself can testify that it has been years since it has expected annual health insurance premium increase to be less than 10 percent. 10 percent is a good year. Many employers have seen 20 percent-plus increases in the last several years, and some have seen increases that large more than once.
In order to cope, employers raise co-payments and deductibles and increase the amount employees contribute toward the cost of coverage. This trend will continue. Over time we will see more under-insurance posing as “good” insurance in the corporate world. The cost implications are the same. Short-term premium savings for the employers and long-term increases in the cost of providing care. And the more the corporations cut coverage and premiums, while health costs remain the same or increase, the greater future rate increases must be to cover the shortfall. It’s a game of constant catch-up.
None of this is addressed by the health reform bills still considered viable in Congress. The bills are designed as an attempt to maintain the current employer-based, insurance-industry-financed system, which is a major contributor to the cost problem.
Following Blue Cross’s announcement, there has been an uproar about health insurance industry profits. The 5 largest health insurers had record profits of $12.2 billion in 2009.
Democrats have expressed shock and outrage at such huge profits, especially at a time when millions have lost jobs and insurance due to the economic crisis. But there is no excuse for profits in the system at any time, since insurance companies do not add one iota of value to the delivery of health care from doctors and hospitals to patients, and since an estimated 45,000 people a year die in this country because we allegedly cannot afford to extend coverage to them.
It’s not primarily the amount of the profit that is the problem. The $12.2 billion profit is a miniscule fraction of the $2.5 trillion annual cost of the U.S. healthcare system. The real problem, rather, is the layers of inefficiency built into the structure of the system in order to create an opportunity for profit.
Rather than just allowing people to visit health care providers and paying the costs, the for-profit system requires the creation of competing plans, alternative levels of benefits, extensive marketing systems, and legions of underwriters to determine who can and cannot buy insurance depending on their risk profile.
While the average insurance company profit margin is in the range of 4 percent, the share of premium dollars actually spent on health care ranges from 70 to 85 percent. The rest, 15 to 30 percent of the total, is overhead, including profit as a component.
Compare that to Medicare’s 6 percent overhead costs. If we replaced the for-profit insurance companies with Medicare, we’d shave 15-20 percent off the cost of health care for all those now covered by private insurance due to overhead savings alone.
And that’s not counting the savings that would result from being able to eliminate the bureaucracy that is required for doctors and hospitals by the for-profit system. Doctors and hospitals hire legions of employees simply to navigate the complexities of eligibility and payment in the for-profit system.
The savings from eliminating for-profit insurance companies could amount to hundreds of billions of dollars per year. This will not be considered at the health insurance summit.
JEFF SHER lives in the Bay Area. He can be reached at: email@example.com