In a previous post I wrote about how Governor Schwarzenegger’s proposal to require health insurance carriers and HMOs to spend 85% of the premium dollars on medical costs could result in fewer low cost health plans. But that’s not the only reason this proposal makes little sense. Here’s some more:
1. It reduces competition. How can a new carrier enter the California marketplace? The start-up costs of a new health plan greatly exceed the medical claims it will incur until it has built up a critical mass of enrollment. The carrier needs a staff, equipment, office space, and marketing material before the first policy is sold, let alone the first claim is paid. The administrative cost cap means there will be no new players.
2. It hurts California-only and regional health plans. Some costs need to be incurred whether a health care coverage plan doing business in one state or 50. The number of lawyers, programmers, human resource personnel and the like isn’t correlated to the number of states a carrier operates in. Same with certain equipment and even office space. National carriers can allocate a lot of these costs out-of-state. More local and regional carriers won’t have that luxury. BONUS PROBLEM: And this assumes only “true” costs are more widely allocated by national carriers. How is the state going to assure that the national players don’t allocate some state-specific costs improperly? Enforcement would be a nightmare.
3. It will be extremely difficult to regulate. What period of time will be used? How do you treat HMOs and insurance carriers the same? Many HMOs treat 100% of what they pay medical groups as going to medical care. This ignores the fact that those medical groups spend a significant percentage of this revenue on administrative matters. Insurance carriers don’t have that accounting flexibility – hardly a level playing field. And what period of time does the medical loss ratio have to be at or above 85%? How will the impact of a terrorist attack or a SARS-like outbreak — or the lack of these — be taken into account?
4. It eliminates health insurance agents. Granted, some folks would not see this as a great loss. But the reality is a good agent adds significant value to the products they sell. They help consumers sort through the lingo and acronyms and guide them to the health care coverage which best fits their unique needs. After the sale, a professional agent will be their clients’ advocate in solving problems and their help desk answering questions. With agent compensation lumped in with other administrative costs, there will be little if any dollars available to compensate agents. The result, they’ll find something else to do to feed their families. The result: consumers will be left to their own devices or forced to rely on the kindness of carrier or government bureaucrats.
5. The cap doesn’t control medical costs. The biggest component of health insurance premiums is the anticipated cost of medical care. Insurance premiums will rise so long as medical costs rise. With an aging population, new technologies, and increasing expectations of what insurance should cover, those costs are going to continue to rise faster than “typical” inflation. Capping administrative costs doesn’t come close to addressing this reality.
6. The market is better at controlling excesses. Does it really matter to a consumer whether their insurer what percentage of their premium dollars the carrier is spending on medical claims? The key is whether there are other health plans offering similar benefits at a lower premium. Given two carriers offering the same medical coverage, consumers will gravitate to the lower cost plan – regardless of the medical loss ratio. If one of those carriers can gain an advantage by eliminating administrative costs, they’ll do it. Yet, if one carrier can offer lower premiums, even if they spend a lower percentage on medical claims, they will win in the market – and consumers will be better off for their victory.
These are just six more reasons why the governor should drop this provision from his reform package. If you have others, please post them.