Problems with the Governor’s Admin Cap: Part I

There’s elements I like in Governor Arnold Schwarzenegger’s Health Care Proposal. And I admire his political courage in putting forward a comprehensive approach to dealing with the issue.  I’ll have other posts on the “good news.”

This post, however, is the first on what I consider to be one of the more misguided and dangerous proposals: requiring health insurance carriers and HMOs to spend 85% of their premium on medical claims.

The governor inserted this provision as a way to keep health insurance premiums affordable to consumers who would be, under the governor’s plan, required to buy health insurance.

There are too many reasons to oppose this provision than will fit into one post. But Blue Cross of California send out an e-mail today presented one objection I hadn’t thought of.

The e-mail came from Brian Sassi, Blue Cross of California’s president, and stated in part: Administrative costs are largely “fixed costs” that do not vary with premiums. Therefore, products with lower premiums naturally have a higher percentage of revenue attributable to administrative costs. An arbitrary medical loss ratio requirement could result in the inability of health benefits plans to offer some of their lower-priced products. This could have the effect of eliminating the most affordable products in the marketplace ….

Welcome to the wonderful world of unintended consequences. While seeking to keep costs down, the governor’s health plan instead may result in carriers pulling their lowest cost plans, forcing consumers to choose among more expensive options.

Just another reason this cap should be tipped — out of the reform package.

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Obama’s Call for Universal Health Care in Six Years Has Timing About Right

On Thursday, Senator and presidential candidate Barack Obama declared his intention to achieve universal health care coverage in America by 2012, the end of (what he hopes will be) his first term in the White House.  In his speech to Families USA, Senator Obama said “while plans are offered in every campaign season with ‘much fanfare and promise,’ they collapse under the weight of Washington politics, leaving citizens to struggle with the skyrocketing costs.”

So his message is, the Obama Administration will find a way to make universal coverage a reality, but it may take him four years to do it.

I think he’s got the timing right. As noted in my previous post, President George W. Bush’s health care plan is unlikely to overcome a new, Democrat-controlled Congress and the early start of the presidential campaign. A new president — Democrat or Republican — will have an opportunity to actually make something happen. But it will take time and patience. If we’re lucky, the new president will have Senator Obama’s approach to achieving ideals like health insurance for all Americans: to stay focused on the goal, but to be “agnostic in terms of how to achieve those values.”

By being agnostic about the means, a president could actually achieve the desired end. On the other hand, a president could take a “my way or the highway” approach like the Clinton Administration did in the 1990s. The result from that effort: nothing much.

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President Bush Health Insurance Reforms: Going Nowhere

In his State of the Union address last night, President George Bush offered his vision of health insurance reform. Unlike some of the approaches being considered at the state level, the Bush plan doesn’t even pretend to provide universal coverage.  The centerpiece of the president’s proposal is to provide every American with a tax deduction for health insurance premiums and to offset that hit to the budget by taxing American’s who have coverage costing more than the deduction. He would also redirect some Medicaid funds to the states to support experimentation with universal coverage.

The concept has a lot of merit. Why should employers get to deduct health insurance premiums, but not those who purchase individual and family medical plans? And why not fund the deduction with taxes on those who have rich benefits many of whom are high income individuals. The current system, in which employees benefit from employer-paid medical premiums on a tax free basis is grossly unprogressive. The CEO of a company, who no doubt is in the highest tax bracket, gets a nearly 50% subsidy on the value of the premium; the clerks in the same company, who pay little in taxes, receive maybe a 15% subsidy — and maybe none. Where’s the justice in that?

So, while it’s tough for me to admit this (as I am far from being a fan), the president actually put forward some interesting ideas. They would make the system more fair and would bring about 5 million uninsured into the health care coverage system (according to the Administration). But it really doesn’t matter. His proposal is going nowhere.

The president’s proposal is already receiving widespread criticism among the committee chairs in Congress. And I can’t imagine the Democrats handing the Republicans a victory on health care reform when what’s on the table is so distant from the universal coverage they seek.

It would be nice if Congress would simply make health insurance premiums deductible for individuals and family who buy their own medical coverage. That would be a huge boon to the growing number of self-employed in this country. But even that’s a long shot. So while the federal debate will be interesting and is important for framing issues, the reality is, the president’s proposal is going no where.

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Required Reading on Governor Schwarzenegger

Governor Arnold Schwarzenegger doesn’t like to lose. And he rarely does. His most spectacular loss was his package of 2005 initiatives all of which got trounced.

 Governor Arnold Schwarzenegger learns from his mistakes. He took a sharp turn to partisanship. He insulted legislators. He thought he was politically invincible. He wasn’t. And he’s not doing any of those these now.

As agents gear up to oppose parts of Governor Schwarzenegger’s his Health Care Reform Plan, it’s important we understand who we’re up against.  There have been dozens of books written about him, but one which I think should be required reading for agents is “The People’s Machine: Arnold Schwarzenegger and the Rise of Bluckbuster Democracy” by Los Angeles Times reporter Joe Mathews (here’s a link to the book on Amazon).

Actually, reading the entire book isn’t necessary. Chapters Fourteen is the one that matters. It describes how the governor developed and passed sweeping Workers Compensation reforms. What it shows is a master political strategist playing one side against the other, patiently waiting for opportunities and deploying his celebraty with skill and great tactical smarts.

What does this mean for agents as we engage in the health care reform debate? It means we’re up against a formidable governor. There’s good news: he’s pragmatic and results oriented. He’s open to ideas from others. And he’s willing to deal. There’s also bad news:  He’s manipulative. He’s willing to do what it takes to achieve his goal. He cares about results, not who gets pushed around in the process.

For agents to win on the issues we care about, we’re going to have to stay focused on our strategy. We’re going to need to work hard both inside the capital and at the grass roots, where we have unrivaled strength. We’re going to have to raise a loud enough ruckus that the governor and his team have to deal with us.

Now is the time to get ready. And part of our preparations is reading the Mathews book.

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Note to Agents on Health Care Reform: Keep Focused

The Governor’s Health Care Plan contains dozens of elements, many of them controversial. There’s coverage of the children of undocumented workers. There’s taxes — oops, no, he calls them fees or dividends, anything but taxes — on doctors and hospitals. There’s yet another fee for employers who don’t offer coverage to their workers. There’s an individual mandate to purchase coverage and the corresponding requirement that insurers accept all comers, even in the Individual health insurance market. About the only non-controversial element of Governor Schwarzenegger’s proposal is it’s encouragement of a healthier lifestyle.

For agents, however, there’s two provisions which require close scrutiny: the requirement that carriers spend 85% of their premiums on medical costs and the purchasing pool for subsidized (i.e., low income) consumers. While the former guarantees no role for agents in the individual and small group markets, the later only has the potential for doing away with our profession.

I’ll write in more detail on these issues next week, but for now let’s put it this way:
1. If carriers only have 15% of their premium dollars to spend on administrative expenses and profits, they will need to greatly curtail distribution costs. The easiest way to accomplish this is to cut commissions — or do away with them all together and require consumers to directly pay agents a fee.
2. If the government runs any kind of a purchasing pool, it will have a natural tendency to create rules and regulations that favor the purchasing pool. It’s only human nature. Imagine a referee suddenly donning a jersey and joining one of the teams. Does anyone really think that referee could remain impartial? Well, government bureaucrats are as human as referees — they just have better eyesight. (Sorry, a cheap shot. I enjoyed it, but it was cheap).

What concerns me is that agents care about a lot of the other issues on the table, too. For philosophical, political and business reasons, they care about the controversies in Governor Schwarzenegger’s plan. But as they study the plan, I hope agents will apply two measures when determining where to bet their political clout:
1. If the provision becomes law will it harm our profession or our clients?
2. Is changing the provision an absolute necessity for other stakeholders?

If a provision doesn’t harm our profession or our clients, then I’m not sure its appropriate for agents to seek changes to a provision as agents. As Californians, yes, if agents care about an issue they should speak out. Not as agents, but as citizens and voters. If a provision is a high priority of another stakeholder, and that stakeholder’s interests are aligned with agents, there’s nothing wrong with letting the other stakeholder lead the charge. Agents can be supportive, but it’s unlikely to be an issue on which we’ll need to expend great resources. (An exception would be if agents are part of a coalition where our grassroot efforts on what for us is a secondary issue gains us support from others on our first tier issues).

If you apply these measures against the myriad of controversies the Governor’s Health Care Plan raises, to me agents priorities are clear: focus on the administrative cap and the purchasing pool. All of our organizational and individual resources should be devoted to these two items. These are the two most poisonous pills from our perspective. If we don’t make sure they are agent-friendly in whatever eventually becomes law, no one else will.

It will be a challenge for agents to keep focused on just two issues when there’s so many elements to the health care proposal. But history indicates this is the right course. I led the California Association of Health Underwriters’ efforts during the debate over small group health insurance reforms — what became AB 1672 — in the early 1990s. Then, too, there were lots of issues on the table. CAHU focused solely on those issues which met the two-pronged criteria outlined above (although, to be fair, we didn’t articulate the criteria quite this way back then). Because of our laser-like focus on a few, critical issues, we were able to not only preserve a role for agents in the final legislation, but make what became law better than it would have been otherwise.

It’s important not to get too caught up in the strategies of past battles when facing new challenges. When it comes to focusing agents’ political power on a few issues, however, I personally believe history has a great deal to teach us.

What do you think?

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Governor Schwarzenegger’s Health Care Reform Proposal and the Fate of Agents

Governor Arnold Schwarzenegger kicked off California’s health care reform debate today with a call to provide health coverage for all Californians. The Governors Health Care Proposal has three essential elements:

  • Prevention, health promotion, and wellness
  • Coverage for all Californians
  • Affordability and cost containment

Schwarzenegger’s proposal is more mainstream than the health care reform proposals put forward by the Clinton Administration in the early-90’s. Schwarzenegger’s plan increases the state’s oversight and engagement in health care, but doesn’t go nearly as far in this direction as Clinton sought.

Ironically, the governor’s proposal does contain elements of SB 2, the legislation requiring employers of a certain size to purchase coverage for their employees or pay a tax. SB 2 was signed into law by Governor Gray Davis during the buildup to his recall, but was later overturned by California voters in a 2004 Referendum.

The Governor and his team clearly kept a close eye on the politics of their reform plan as it took shape. For nearly every stakeholder (insurers, physicians, hospitals, consumers) there’s a “gain” to offset their share of the “pain.” Unfortunately for the target audience of this blog, the stakeholder which seems to incur the most pain with the least gain are insurance agents. 

The reason is that the Schwarzenegger health care reform proposal calls for insurers and HMOs to spend 85 percent of every premium dollar they receive on patient care. Yes, every Californian will need to purchase health coverage and every carrier will need to accept all comers. Schwarzenegger’s team estimates this would bring 1.3 million Californians into the private market with 410,000 of them buying employer-sponsored coverage and 890,000 purchasing individual coverage. This is a nice and substantial boost to any agents’ potential client base.

But let’s face it, if carriers only have 15 percent of the premium dollar to spend on all administrative and marketing expenses there isn’t going to be a lot set aside for distribution costs. Many carriers will continue to try to work with agents, but they’ll be forced to pay lower commissions or low, fixed fees. And some will simply bring all sales in-house. Considering that currently, the income from any particular sale averages only a bit more than a typical agent’s phone bill, this isn’t good news.

Let me be clear, I’m not suggesting agents give up on this market segment – far from it. The proposal just came out today. Maybe I’m missing something important. And there’s still a lot of questions to be answered. Just two examples:

  1. Does the 85 percent patient care target apply to each health plan, each market segment, or to all medical plans offered by a carrier to all of their customers? and
  2. Can a portion of agent commissions be attributed to claims by classifying it as a service fee?

Also, there’s a lot of debate yet to come. There will be changes to the governor’s proposal. Advocates on the left and the right have strong opinions and meaningful leverage. The governor has defined the starting point of this debate, not the finishing line. And this will be marathon, not a sprint. For those who read my 2007 predictions, I’m pretty confident we’re at least two years away from anything definitive emerging from Sacramento. And then there’ll be the initiatives and the law suites and the 2008 campaign and … well you get the idea.

What I am suggesting is that agents get involved – very involved – in the reform debate. The California Association of Health Underwriters provided substantial input to the governor’s advisors as they developed the plan. CAHU is well positioned to influence the final outcome as the proposals morph into legislation. If you’re not a member of CAHU, I strongly urge you to join – today. You can even join online (please tell them I sent you). Not since the debate over small group health reform (AB 1672) has a strong agent voice been more important.

While a critical first step, joining CAHU is only the beginning. Health insurance agents need to get personally involved in the upcoming health care reform debate. We provide a key perspective. We know first hand what works in today’s system and what’s broken. We also need to explain – clearly and forcefully – what we add to the system. After all, if decision makers don’t understand and value our role in the system, why should they make any effort to preserve that role?Personal involvement in the debate means following political and legislative developments (CAHU can help here and so will this blog). It means educating legislators, clients and the media. It means writing letters to Sacramento and to your local paper. It means volunteering, or recruiting someone from CAHU, to speak to organizations in your community on the health care reform issue.

As independent agents we have a unique and critical perspective on health care coverage reform. The Governor has placed this issue front-and-center. Change is coming. For the sake of our clients and our profession, it’s up to us to make sure it’s change for the better.

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The LA Times and the Failure to Understand Risk

The Los Angeles Times ran an article December 31st headlined, “Healthy? Insurers don’t buy it”.  The article features the plight of Scott Svonkin, who chairs the Los Angeles County Commission on Insurance. An active 40-year old who describes himself as being in great health, he was denied individual health insurance coverage by Blue Cross of California, Blue Shield of California and PacifiCare. Svonkin has a history of asthma, but he says it’s now under control.

The article describes a real and serious problem: some people cannot buy individual medical insurance from non-government health insurers at any price. These insurers review their medical history and decline to accept them for coverage. I’ll write more on the “uninsurables” in another post, but what amazed me about the article is that the reporter, Lisa Girion, who normally does a thorough job, completely missed a key point concerning the nature of health insurance.

So I wrote a Letter to the Editor to the Times. I don’t expect to see it published there, but, hey, I have a blog. So here it is:

“Concerning, Healthy? Insurers don’t buy it — December 31, 2006
The “uninsurable” problem your article describes is real. But your use of Scott Svonkin’s situation doesn’t make the case well. He says he’s “healthy as a horse.” Yet he’s taking medication retailing for $1,200 a year. Maybe there’s another standard used for measuring the health of horses, but most people would say someone who has $1,200 in medical costs — before they get the flu or sprain an ankle — is in less than perfect health. Mr. Svonkin says insurers “are missing the whole point about assuming some risk.” But in his case there was no risk — only the certainty of a $1,200 bill. It’s the equivalent of someone shopping for home insurance announcing they’re scheduled to burn down their garage next month. I doubt if there’d be many takers.”

The article successfully points out a serious problems with today’s system. It also unintentionally highlights the critical need to define the role of health insurance. Is it  insurance which is meant to protect against risk? Or is it a financing tool for paying known costs. The LA Times article, unfortunately, blurred the distinction doing a disservice to its readers and the public debate on health insurance reform.

That’s my opinion. What’s yours?

2007 Predictions

Having started this blog on January 2nd, it’s almost mandatory to post a list of predictions for the coming year.  So here it goes:

1. More Major Carriers Will Enter the California Individual Health Insurance Marketplace
Expect to see Humana, Golden Rule and maybe even CIGNA making serious efforts to capture a share of the market while current players increase their investments here. Why? The individual and family insurance market segment is too large a prize for serious national and regional carriers to ignore — even those who think of themselves as “big market” carriers. Nationally over 17 million Americans under the age of 65 purchase their own coverage. Another 12 million of the uninsured can, according to academics,  afford coverage. That’s a lot of potential membership — and premium. Too much of each for carriers hungry for growth to ignore.

2. Carriers Will Experiment With New Distribution Strategies
Reaching this market can be a challenge. Most agents focus on group sales and distribution costs are expensive. Meanwhile, carriers are worried about the aging agency population. The “old days” of having life carriers recruit new agents, train them, and then watch as they migrated to selling health insurance are pretty much gone. So in 2007 watch for a leading carrier to introduce a captive sales force. (And no, I don’t have any idea which one). Some of the insurers already have captive phone-based agents and some already deploy captive field agents outside of California. All of them are nervous about agents’ reaction to a move like this. But one of them is likely to seek an “edge” and take the risk. They’ll try to shift attention to Kaiser distribution strategy, which is very reliant on direct sales, but I’m not sure this will help them. 

3. A Carrier Will Try to Introduce Per Member Compensation
Distribution costs are an expense carriers watch very carefully. Because commissions are based on a percentage of the premium, agents receive a raise with every rate increase. A flat per member (or contract) fee, on the other hand, is an appealing alternative. Some carriers have introduced this in other states, but only Kaiser has been able to make it stick here, primarily because their distribution focus is on direct sales. The risks of this approach is high, but the lure of gaining a cost advantage on the competition is likely to be too much for one of the carriers (again, I don’t know which one).  

4. Kaiser Will Seek to Work Closer With Agents in the Individual Market
Kaiser has a mission: to deliver excellent health care to its members at the lowest possible cost. This has meant keeping distribution costs to the bare minimum. Which has meant focusing on direct sales and offering agents only token compensation for bringing them clients. However, their experience in the small group market has shown they can do both — keep costs low while paying a competitive commission. There are several Kaiser executives who have worked successfully with agents, for example, Tom Carter and a recent recruit, Mitch Ross, formerly of Blue Shield. They understand the value of agents. And with new entrants to the individual market (see prediction #1), now is the time to reach out to agents. It won’t be easy for them to come up with a workable formula. But they’re smart and they’re motivated. This could be the year.

5. No Major State Health Care Reform in 2007
This is a cheap prediction. While health care reform is at the top of everyone’s agenda in Sacramento, the issue is too big and complicated, there are too many stakeholders involved with too many diverse perspectives, and there are too many other pressing issues demanding attention for the Governor and Legislature to work things out in one year. But watch out for 2008.

6. Mandates Become Viable
Health care reform that doesn’t bring down the number of full-time uninsureds won’t be viewed as meaningful reform. Yet too many Californians choose to avoid buying coverage (until after they have a need for it, of course). To get more dollars into the system, expect a mandate to be a big part of the health care reform debate. Personally, I can support this, but what terrifies me are how lawmakers and regulators handle the implications of this approach. Consider: if the government requires people to buy insurance then carriers must be required to accept all comers. And acceptable minimum coverage needs to be defined. Someone in Sacramento will call for regulation of the cost of this coverage. Which means they’ll want to regulate loss-ratios and distribution costs, too. It’s a slippery slope which, if not handled correctly, could have dire, unintended consequences for consumers, health insurers and health insurance agents.

7. More Musical Chairs in Carrier Organizations
We’ve seen a lot of changes lately at a lot of carriers. Expect more. With new carriers entering the market the demand for strong leaders with a proven track record and strong relations with agents will dramatically increase. And there’s a lot of good talent available. I haven’t talked to her lately, but I bet Lisa Rubino’s phone is ringing. 

8. Online Sales Will Continue to Grow
eHealth, Inc.’s recent IPO demonstrated Wall Street’s belief in the future of online sales, at least in the Individual and Small Group markets. Personally, I’m making a strong bet on this distribution channel (just visit www.InsuranceNeighborhood.com to see what I mean). But it’s the increasing number of independent agents moving online that points to growth in online sales. Thousands of agents in California alone have the ability to sell medical plans online. And consumers are buying online at increasing rates. They like the ability to quickly compare rates and benefits from a variety of carriers and to shop anonymously and to do all this at all hours of the day and night. Of course, I believe they also want to have a local expert available to them to help assure they find the right plan. That’s at the heart of the Insurance Neighborhood approach. My prediction: consumers will want the best of both worlds. Which argues well for not only my company, but for every local agent who sets up a robust sales site, too.

So here they are, nothing profound or too whacky. Some of them quite obvious. The list could be a lot longer, too, but, eight will do. A year from now I’ll dust these off. If they all turn out to be true, expect to see a self-congatulatory posting on this blog. If they turn out wrong, well, hopefully I’ll have figured out how to delete postings by then.

In the meantime, I’d be happy to post your predictions. Just send them my way.

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What This Blog Is About

Welcome to the Alan Katz Health Insurance Blog. My goal here is simply to provide a place to talk about what’s going on with health insurance and Insurance Neighborhood. And maybe a few other topics that appeal to me. 

The comments I’ll be posting here reflect my own perspective and opinions, so please don’t blame my current or former companies or colleagues. If you post a comment, I’m assuming they’ll  reflect your perspective and opinions, so I’ll do my best not to blame your current or former companies or colleagues.  Hopefully, over time, our combined comments will help make this blog a destination to hear the latest news, rumors and gossip concering health insurance.

Particularly, about California health insurance. And, to put an even finer point on it, Individual and Family health insurance (with a signifcant touch of Small Group thrown in for flavor). No doubt there’ll be comments posted here which go well beyond this relatively narrow scope, but, at least initially, that’s where the focus will be.

So please feel free to participate. Link your blog to this one. Post comments. Tell your friends. That sort of thing. Let’s see what happens.