Presentation: Health Care and Insurance Legislation: 2007

This speech was presented to the Ventura County Association of Health at their February 23, 2007 Sales Symposium in Oxnard. It covered why health care reform has become a dominant issue and provided an overview and comparison of the major health care proposals put forward by:
– Governor Arnold Schwarzenegger
– The Senate Republicans
– Senate President Pro Tempore Don Perata
– Assembly Speaker Fabian Nunez

This speech also speech also described the then current draft of  CAHU’s Healthy Solutions proposal, the organizations comprehensive health care reform plan.
Health Care and Insurance Legislation: 2007

Presentation: The Individual Market Drum Beat

Presented to the Inland Empire Association of Health Underwriters’ Sales Convention in Ontario on February 1, 2007, this speech described how political momentum for health care reform has been building in intensity since early 2006, what this focus on reform means to health insurance agents, and what they can do to influence the debate.
The Individual Market Drumbeat. IEAHU Presentation – February 1, 2007

Impact of Inflation

Medical costs drive health insurance premiums. That’s pretty obvious to folks when they think about it, but few actually think about — especially pundits and politicians with a point to make. Instead they look at health insurance company profits, administrative costs, etc. and conclude that carriers set the premiums according to some voodoo-driven formula that is completely disconnected from the cost of care.

As a result, when carriers come out with low premium, high out-of-pocket plans they are routinely condemned by, well, pundits and politicians. Then Insurance Commissioner, now Lt. Governor John Garamendi is known to connect high-deductible HSA plans with the fall of Western Civilization.

 So it was kind of fun to come across a nifty tool on the Internet called Tom’s Inflation Calculator that, not surprisingly, calculates the impact of inflation over time. There are several such calculators online, but what makes this one nifty is that it has the option to calculate the impact of U.S. Wage Inflation and, most significantly, U.S. Medical Cost Inflation.

This leads to some interesting results. Remember back in, say, 1980, when it wasn’t uncommon to have a health plan with a $250 deductible and $1,000 co-insurance? There were richer plans and a lot were sold with higher deductibles. Want to know what the equivalent $1,200 out-of-pocket would be in 2007?

  • Based on Retail Price Inflation:    $3,312
  • Based on Wage Inflation:            $3,212
  • Based on Medical Cost Inflation:  $5,960 

There’s a few conclusions you can make from this. One is that an HSA with a $3,500 annual out-of-pocket maximum doesn’t seem like such a bad deal after all. Another is that if the pundits and politicians really want to bring down the cost of health care, they need to deal with the cost of medical care. Of course, that’s a lot harder. So while I’m betting many of you will check out Tom’s inflation calculator, I’m willing to bet not many of them will.

Problems with the Governor’s Admin Cap: Part II

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.