In a discussion this week of potential “red flags” to an investment in UnitedHealth Group (parent company of UnitedHealthcare), The Motley Fool, a financial investment advisory firm, warned, “Health care reform continues a path toward a single-payer model that leaves insurance firms at a competitive disadvantage.” That’s an understatement.
When the Patient Protection and Affordable Care Act (PPACA) was first passed, I commented that the law should more appropriately have been named the Health Insurance Carrier Extinction Act because of all the provisions that stacked the deck against carriers.
Health insurance carriers were easy targets for proponents of single-payer, nationalized healthcare because of their billions of dollars in revenues, sometimes outrageous CEO salaries and supply of claims denial anecdotes. The reality, however, was substantially different than the spin. Health insurance carriers’ profit margins on those billions in revenue were a modest 6% on average – certainly not usury. Multi-million dollar CEO salaries were commensurate with those paid to executives of large corporations in other industries (and significantly less than the mega-millions made by athletes, singers, actors and other people who simply entertain us…). Most importantly, the vast majority of Americans were very satisfied with the health insurance they had and didn’t want to see that change. And we were assured that it wouldn’t.
But the end-game of PPACA has always been a single-payer healthcare system – something Barack Obama has always desired. So, despite assurances to the contrary, the law was written to achieve that end. The environment created by PPACA will surely prove to be impossible for carriers to survive. The inevitable failure of carriers will leave no option but for the federal government to step-in and “save the day” with a national, single-payer system. If PPACA is not repealed or defunded, we are certain to hear Congressmen say in the future, “We gave the private sector a chance under PPACA, but they couldn’t make it work. We have no choice but to nationalize healthcare…”
So what is it about PPACA that stacks the deck against carriers and threatens America’s private healthcare system? Well, there are several things – most of which sound desirable until you examine the long-term implications – including:
- Medical Loss Ratios (MLR) Rules – MLR requires insurance companies to spend at least 80% or 85% of premium dollars for each client on medical care and imposes tighter limits on health insurance rate increases. If a carrier fails to meet these standards, they are required to provide a rebate to their client. Sounds great, right? The problem is that this violates the fundamental premise of insurance whereby those who don’t file claims provide the funds for those who do? Can you imagine auto insurers being required to spend 80-85% of their premiums on each customer or provide them with refunds? Ludicrous, right? The auto insurance market would quickly disappear without the funds necessary to pay the claims incurred by drivers who did have accidents. Even “non-insurance” people understand this principle – but the authors of PPACA either didn’t or they chose to ignore it.
- Government Premium Rate Approval – In August 2013, Aetna (the nation’s third-largest health insurance carrier) decided not to sell insurance on Maryland’s individual health insurance exchange. Reuters noted that Aetna’s decision came after state regulators ordered the company to lower rates dramatically from what it had proposed. In fact, the state-approved rates were 29% lower than what Aetna felt they required in order to properly insure the risk coming into the Exchange. Similarly, other carriers saw their proposals cut back by as much as 33% by Maryland.
- Removal of Annual and Lifetime Maximums – Again, this provision sounds great and necessary. However, as I described in a recent post, Can We Afford “Blank Check” Healthcare?, physicians, hospitals and other healthcare providers no longer need to temper their treatment plans and decisions based on any kind of budget. (In fact, they’d be crazy not to perform “defensive medicine” since nothing in PPACA limits malpractice claims…a topic for another day.) Similarly, pharmaceutical companies now have no financial incentive to limit the cost of newly developed drugs – particularly those that treat rare conditions. And most patients receiving costly care are unlikely to argue with outrageous costs since PPACA limits out-of-pocket maximums (the most the patient has to pay in any given year). That leaves insurance carriers holding the bag with no way to limit the growth of healthcare spending.
- Removal of Benefit Limits (i.e. Durable Medical Equipment) – Another provision of PPACA was the removal of any limits on specific benefits such as Durable Medical Equipment. For example, if a patient has an adequate, working prosthetic arm but wants to purchase the latest, greatest version to upgrade a feature or for a more natural look (despite costing $50,000 in addition to the $30,000 spend on the previous year’s “latest, greatest” device), there is no ability for the insurance carrier to limit that expenditure. Preventing unnecessary healthcare expenditures is a fundamental cost-control mechanism to ensure that funds are available for patients who need specific services. Ironically, PPACA has severely restricted this protection.
PPACA limits insurance carrier rates (regardless of costs or actuarial projections), requires carriers to return premiums to groups with low claims (without also allowing them to obtain additional premiums on groups with high claims) and removes limits on frivolous or excessive spending. As Al Lewis and Vik Khanna noted in their recent blog post The Biggest Urban Legend in Health Economics – And How it Drives Up Our Spending, “Overdiagnosis, overtreatment and overprescribing are far more pressing issues in the commercially insured population than underdiagnosis, undertreatment and underprescribing in the name of ‘prevention'”.
Defending insurance carriers is not a popular position. And I’m not suggesting that there weren’t issues (even abuses) in private health insurance that needed to be corrected. But by disrupting the entire health insurance market (instead of just fixing the problems), PPACA is throwing the proverbial “baby out with the bath water”.
In selling PPACA back in 2009, Barack Obama famously assured us, “If you like your health care plan, you can keep your health care plan.” Unless, of course, PPACA drives your healthplan out of business.