The latest headlines read: “Senator Harry Reid may have finally found a compromise solution that will attract the required 60 votes to move forward with a Senate health care bill!” But the details of this "compromise" tell a different story. The final issue in getting health care reform passed seems to be--yet again--the idea of a public option. And Senator Reid’s mission to fully secure 60 votes may not be over just yet…
If you've been paying attention to the news, you know that Senator Reid has been caught in a pickle. While there doesn’t appear to be enough votes in favor of a public option, dropping the public option altogether could mean the loss of the more liberal democrats such that Senator Reid would again be short of the required votes. It seems like a lose/lose situation, doesn't it? Recently, however, we have received word that a compromise has finally been reached—a compromise that may be able to clear the 60 vote hurdle! So what exactly is this compromise all about, and how exactly will it work? If we examine the actual provisions in the compromise, you will see that the so-called “compromise” may not indicate such a happy medium after all.
The compromise contains several new ideas or provisions to the Senate bill:
1) The public option is dropped. Well, sort of. The new language will drop the idea of a government-run insurance company (the public option) in favor of creating a national plan administered by the Office of Personnel Management (OPM) much like the program offered to federal employees. The plan would allow private insurance companies to be offered to a larger pool individuals and employer groups who either have difficulty finding or affording coverage otherwise. This is an important catch, however, because the public option could still be triggered either state-by-state or nationally if the insurance companies decide not to participate in this national plan.
If you've been paying attention to the news, you know that Senator Reid has been caught in a pickle. While there doesn’t appear to be enough votes in favor of a public option, dropping the public option altogether could mean the loss of the more liberal democrats such that Senator Reid would again be short of the required votes. It seems like a lose/lose situation, doesn't it? Recently, however, we have received word that a compromise has finally been reached—a compromise that may be able to clear the 60 vote hurdle! So what exactly is this compromise all about, and how exactly will it work? If we examine the actual provisions in the compromise, you will see that the so-called “compromise” may not indicate such a happy medium after all.
The compromise contains several new ideas or provisions to the Senate bill:
1) The public option is dropped. Well, sort of. The new language will drop the idea of a government-run insurance company (the public option) in favor of creating a national plan administered by the Office of Personnel Management (OPM) much like the program offered to federal employees. The plan would allow private insurance companies to be offered to a larger pool individuals and employer groups who either have difficulty finding or affording coverage otherwise. This is an important catch, however, because the public option could still be triggered either state-by-state or nationally if the insurance companies decide not to participate in this national plan.
2) There is a new mandate which would require most people to purchase coverage. This is a big change from the previous discussions that only provided a financial penalty for failing to purchase coverage.
3) The new compromise also creates provisions that would allow people to "purchase" Medicare coverage starting at age 55.
4) Finally, the new language requires that all insurance companies spend at least 90% of premium dollars on medical expenses rather than on administrative costs and profits.
*This last piece could turn out to be one of the most critical sections in the bill, but surprisingly, it has been largely overlooked by the media.
*This last piece could turn out to be one of the most critical sections in the bill, but surprisingly, it has been largely overlooked by the media.
This appears to be a reasonable compromise, right? No public option, expanded coverage, and a limit to the profits that the evil insurance companies can make. What’s not to love? Actually, there is plenty not to love. On the surface, it seems like a great deal. But here’s the problem: In order to fully understand what is wrong with this compromise, you must have an understanding of how the health care and insurance industries work. You see, it’s not the actions of the bill that scare me—it’s the reactions to the bill. Newton has taught us that every action has an equal and opposite reaction. Let’s examine the possible reactions to this bill.
What would be the result of a bill with these provisions passing and becoming law? First, the providers of care in many states could see a reduction in their revenue as more and more people who are between the ages of 55 and 65 buy into the Medicare plans. Why? Because in most states, the private insurance industry compensates physicians and hospitals at rates much higher than Medicare. So for every patient who switches from CIGNA, United or BCBS to Medicare, it means that essentially, their doctors will be treating them for significantly less money. How bad this will become depends largely on how many people make the switch to Medicare and how much it would cost them to make that switch. But this isn’t even the biggest problem.
The real problem is what this bill would do to the insurance companies and how they would react. Right about now you are probably scratching your head and asking yourself, “How can a former managed care executive who now works to help physicians negotiate against insurance companies really be concerned about what happens to his former employers? Has he crossed back over to the dark side?” Well…yes and no. Please hear me out.
First, I have a big problem with any law that requires an insurance company to pay out a defined percentage of revenue to cover the cost of claims. As an economist, my concern with this proposal is governmental intrusion in a free market system. Governmental intrusion ultimately limits the amount of profit that any business or individual can make. It’s no different than the government saying that you can only make a 10% return on your 401K or that you can’t sell a house for more than 10% profit over what you paid for it. Limiting insurance companies to a very small profit margin at the same time you are still asking them to take the big risk that they may lose money just seems un-American to me. After all, how much fun would Vegas be if you still had to gamble with your own money, but you knew upfront that you could never win big?
My second concern is the reaction that insurance companies will have to this provision. In 2007, it was reported that private insurance companies spent 12.4% of premium revenue on administration and profit. That 12.4% was made up of 9.1% for administration and 3.3% for profit. Now, let’s project forward. With the passage of a bill like the one being discussed in the Senate, insurance companies would have to pay out at least 90% of the premiums for medical care, leaving a maximum of 10% for both administration and profit. I say “maximum” because if they don’t project expenses correctly, they could easily lose money by paying out more than 90% of premium on medical care. For the sake of argument, let’s say they hit it just right and are left with 10% to cover administration costs. Since administration currently runs 9.1%, that leaves only 0.9% for profit.
What would you say if someone asked you to invest in a start-up business? They told you that the business carries significant risk and that you could lose money. They also told you that the business was highly regulated. Finally, they let you know that if everything goes well, you could make a maximum return on your investment of a whopping 0.9%! At the end of a sales pitch like that, you would probably be wondering what kind of illegal substance this person was abusing. Who in their right mind would go into a business with such significant risk, major regulation, and no potential for profit? No one! And that includes the current insurance companies who are in that business.
The other thing you need to understand is that this provision would only apply to plans that are fully-insured and it would not apply to employers and plans that are self-insured. In 2009, 57% of all of the people covered by employer-based health insurance were under a self-insured plan. When you look at the size of the employer, the numbers are even more dramatic. Over 80% of all people working for firms with more than 1,000 employees are covered under a self-insured policy, and only 15% of people working for small business with less than 200 employees are covered by a self-insured plan.
So if health care reform takes the profit out of insurance, the most likely reaction is for the insurance companies to stop offering that product. This would mean that companies like CIGNA, Aetna, and United would give up their insurance licenses in each state, and they would eventually stop offering fully-insured products. Instead, they would focus on the self-insured market where they can still make their profit and where they don’t carry any of the risk. This would also mean that small employer groups who are not large enough to be self-funded would see a significant reduction in the number of companies that are willing to sell them insurance.
But that’s not all! The new federal plan that is being proposed would be fully-insured. You see? Since none of the large insurance companies would be selling fully-insured products any longer, the trigger for a public option would automatically kick in. Voila! It’s the backdoor way of enacting the public option and the first step toward the final goal of single payer. Amazing how one provision could trigger such a reaction isn’t it?
No matter how you look at it, the bottom line is this: If this version of health care reform passes, it could mean less choice and less competition for small businesses who need it most, and it could be the first step down a very slippery slope that eventually leads to the government takeover of the American health care system.
What would be the result of a bill with these provisions passing and becoming law? First, the providers of care in many states could see a reduction in their revenue as more and more people who are between the ages of 55 and 65 buy into the Medicare plans. Why? Because in most states, the private insurance industry compensates physicians and hospitals at rates much higher than Medicare. So for every patient who switches from CIGNA, United or BCBS to Medicare, it means that essentially, their doctors will be treating them for significantly less money. How bad this will become depends largely on how many people make the switch to Medicare and how much it would cost them to make that switch. But this isn’t even the biggest problem.
The real problem is what this bill would do to the insurance companies and how they would react. Right about now you are probably scratching your head and asking yourself, “How can a former managed care executive who now works to help physicians negotiate against insurance companies really be concerned about what happens to his former employers? Has he crossed back over to the dark side?” Well…yes and no. Please hear me out.
First, I have a big problem with any law that requires an insurance company to pay out a defined percentage of revenue to cover the cost of claims. As an economist, my concern with this proposal is governmental intrusion in a free market system. Governmental intrusion ultimately limits the amount of profit that any business or individual can make. It’s no different than the government saying that you can only make a 10% return on your 401K or that you can’t sell a house for more than 10% profit over what you paid for it. Limiting insurance companies to a very small profit margin at the same time you are still asking them to take the big risk that they may lose money just seems un-American to me. After all, how much fun would Vegas be if you still had to gamble with your own money, but you knew upfront that you could never win big?
My second concern is the reaction that insurance companies will have to this provision. In 2007, it was reported that private insurance companies spent 12.4% of premium revenue on administration and profit. That 12.4% was made up of 9.1% for administration and 3.3% for profit. Now, let’s project forward. With the passage of a bill like the one being discussed in the Senate, insurance companies would have to pay out at least 90% of the premiums for medical care, leaving a maximum of 10% for both administration and profit. I say “maximum” because if they don’t project expenses correctly, they could easily lose money by paying out more than 90% of premium on medical care. For the sake of argument, let’s say they hit it just right and are left with 10% to cover administration costs. Since administration currently runs 9.1%, that leaves only 0.9% for profit.
What would you say if someone asked you to invest in a start-up business? They told you that the business carries significant risk and that you could lose money. They also told you that the business was highly regulated. Finally, they let you know that if everything goes well, you could make a maximum return on your investment of a whopping 0.9%! At the end of a sales pitch like that, you would probably be wondering what kind of illegal substance this person was abusing. Who in their right mind would go into a business with such significant risk, major regulation, and no potential for profit? No one! And that includes the current insurance companies who are in that business.
The other thing you need to understand is that this provision would only apply to plans that are fully-insured and it would not apply to employers and plans that are self-insured. In 2009, 57% of all of the people covered by employer-based health insurance were under a self-insured plan. When you look at the size of the employer, the numbers are even more dramatic. Over 80% of all people working for firms with more than 1,000 employees are covered under a self-insured policy, and only 15% of people working for small business with less than 200 employees are covered by a self-insured plan.
So if health care reform takes the profit out of insurance, the most likely reaction is for the insurance companies to stop offering that product. This would mean that companies like CIGNA, Aetna, and United would give up their insurance licenses in each state, and they would eventually stop offering fully-insured products. Instead, they would focus on the self-insured market where they can still make their profit and where they don’t carry any of the risk. This would also mean that small employer groups who are not large enough to be self-funded would see a significant reduction in the number of companies that are willing to sell them insurance.
But that’s not all! The new federal plan that is being proposed would be fully-insured. You see? Since none of the large insurance companies would be selling fully-insured products any longer, the trigger for a public option would automatically kick in. Voila! It’s the backdoor way of enacting the public option and the first step toward the final goal of single payer. Amazing how one provision could trigger such a reaction isn’t it?
No matter how you look at it, the bottom line is this: If this version of health care reform passes, it could mean less choice and less competition for small businesses who need it most, and it could be the first step down a very slippery slope that eventually leads to the government takeover of the American health care system.
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