Inside Perspective on Healthcare Reform

By Bill Hill

Remember the Klaxon horn sound from the movies, the familiar awoooga? It provided a clear message to passengers that your ship was about to hit an object. It is now sounding from the great Northwest, warning the rest of the country that forcing insurance companies to ignore established actuarial protocols will result in higher rates and bankruptcy.

One of the advantages Visor gains by writing business nationally is perspective. Working in many different states and experiencing first-hand the reaction to the different stages of “reform” allows us to give early warnings for clients to prepare for what is ahead.

Commentary included here are some excerpts from an insurance producer newsletter I recently received from LifeWise of Washington, a subsidiary of Premera Blue Shield. In the contents of this newsletter, LifeWise is clearly showing signs of distress from “reform”. You can read the entire document here.

The Economics of Reform

I recently participated in a panel discussion where the other panelist seemed to ignore the economic realities that I am about to discuss, and that concerns me. The following excepts from the LifeWise of Washington State newsletter are highlighted here to represent the real problems with socializing healthcare financing and the reason individuals and insurance companies will soon feel the effects of trying to defy economic reality.

LifeWise Washington State Newsletter points

1. Increase in the cost of care.

“The continued rise in the cost of medical care received by our members. These costs are the primary driver of rates, and include such key factors as the rising cost of new technology as well as the growing prevalence of unhealthy lifestyle choices that significantly increases the frequency of costly – but often preventable – chronic diseases.”

This is not a surprise even though Washington State has one of the most regulated insurance markets in the country; regulations which never address inflation as the root cause of cost increases and drive premium growth.

2. A microcosm of what will happen nationally in 2014 as the Patient Protection and Accountable Care Act will no longer allow medical underwriting or pre-existing conditions.

“Applicants that did not need to complete the Standard Health Questionnaire-only 40% of the applicants are not subjected to underwriting. Those members had 40% more in-patient medical claims and twice the number of prescription costs.”

For those outside the State of Washington, this is no easy task. When reviewing the plan designs offered by LifeWise, most of them do not have a prescription card (the generic only prescription card was recently eliminated by the Insurance Commissioner) and the lowest deductible is $1,800. Unfortunately, these high out-of-pocket plan designs have not really reduced rates when compared nationally. Imagine the volume of claims when 40 million people who previously did not have coverage can suddenly “purchase” an insurance plan.

Purchasing Insurance for 40 million People Without Coverage

During a recent panel discussion, Dr. Johnetta Craig criticized me for claiming coverage was free to those that qualify. She stated, “Nothing about the program is free, everyone has to pay something.” Dr. Craig is correct. Providing coverage for 40 million uninsured will cost all of us actually paying premiums, dearly. Medicaid will be expanded to cover everyone up to 138% of the Federal Poverty Level (FPL). People in this income bracket will not have to pay premiums and their out of pocket expenses will be paid by subsidy.

Recently I participated in a teleconference with HHS and CMS officials. Jay Angoff, HHS Acting Regional Director, reassured social workers on the call to tell Medicaid recipients not to worry and stated, “Medicare is not going change; it is only going to get better.” In my opinion, the only way a free service gets better is if it provides more access and is still free!

Direct Correlation Between Cost and Utilization

As the premium and out-of-pocket expense approaches zero for participants, more utilization of services will occur. Regardless of whether we pay for Medicaid through taxes or increased premiums due to utilization, participants that qualify for subsidy will not feel the effects of premium increases. The government transferred more of the cost of care for Medicaid and non-Medicaid subsidy participants, which guarantees the cost will rise exponentially and bankrupt the health insurance industry.

The inevitable outcome of increased utilization is predetermined. Every purchaser of health insurance with incomes from 138% up to 400% ($43,560) of FPL will be required to pay up to 9.5% of income towards insurance premiums and out-of-pocket expenses. Everything over that must be subsidized by an employer or the government. How long do proponents of Patient Protection and Affordable Care Act (PPACA) think it will take medical inflation to make that 9.5% as meaningful as a $100 deductible? Remember those? Employers would be wise to move to Defined Contribution model quickly.

3. Support for a rate increase

“We have seen a general decline in the overall health of our membership over time.”… “As existing members continue to age and the prevalence of chronic diseases increases, we expect that this decline will increase over time.”

In my opinion, the volume of claims coming with the aging demographic shift is the Black Swan event for the insurance market and the Nation. In 2014, all rates must be community rated, with the exception of some minor variations for smoking, age and gender. Community rating requirements restrict premiums to no more than a 3:1 difference in rates due to age. The median age of a Baby-Boomer is 58. As they age, the insurance companies will find it increasingly difficult to raise their rates sufficiently to help offset the claims Lifewise is already experiencing. The 3:1 community rating differential will force those over the age of 30 to subsidize the premiums of the aging Baby-Boomers, but there are simply not enough younger working adults to offset the claims. The expected increase in utilization will only amplify this demographic disparity. Actuary Troy Pritchett of Milliman recently stated to the Salt Lake City Tribune that “the young and the healthy could see premium increases up to 135%”. Even if the economy was performing well, I doubt young families will take kindly to the news that their health insurance premiums were going to double. The community rating provision has the potential to set off a generational clash once the expected claims are realized.

Economic reality for Washington State will soon come just as it has for Massachusetts. Without a $26 billion bailout from the federal government earlier this year, The Bay State’s universal healthcare experiment would already be over.

LifeWise Health Plan of Washington (LifeWise) recently filed an annual rate renewal with the Office of the Insurance Commissioner (OIC), requesting an average rate increase of 22.75% for 2013.” Lifewise is anticipating a $15 million loss this year and the requested increase amount does not include any profit margin for 2013. My guess is that Lifewise will receive some kind of rate increase but not the amount they need to break even. Lifewise is projecting a $70 million loss in 2013 if they do not receive the requested rate increase. The real question is how much of the projected loss will the OIC in Washington State demand LifeWise endure? How long can they lose money before they must be bailed out by taxpayers?

In Conclusion

The entire country now has two glaring examples, Massachusetts and Washington, of what happens when states implement command and control insurance markets. Those insured by a plan in which they do not pay the real cost of the premium (or out of pocket cost) will have no reason to adopt healthier habits nor restraint when seeking care for their worsening conditions. The only outcome is predictable. Claims will outpace premiums until the insurance company will need a bailout and the claims will be paid by all taxpayers in the home state. Or worse, the insurance company will decide to stop losing money and close their doors leaving only one carrier, the Federal Government. Can you hear the Klaxon?