The Governor’s revised health care proposal is a substantial improvement over what he originally put forward in January of this year. I’m impressed with the Administration’s willingness to listen to concerns and to try to address them. As I’ll be writing about the proposal a great deal in the next several days I thought it would be appropriate — and easier — to address my four biggest concerns in a separate post (this one). That way I don’t have to recite them in each of these future posts. (Warning: The bill is complex and I haven’t thoroughly digested it yet, so I reserve the right to increase this list later).
Problem #1: The Purchasing Pool.
Having a state-purchasing pool for individuals enrolled in state programs like MediCal and Healthy Families makes sense. A pool for individuals receiving premium subsidies through tax credits doesn’t. Purchasing pools have repeatedly shown themselves unable to bring down the cost of coverage, but they can distort the marketplace. Further, they can become an irresistable magnet for expanding state interference in the market (I personally believe the state’s role in health insurance is to regulate the market, not to participate in it).
If the Governor insists on a pool that goes beyond MediCal and Healthy Families, however, there should be legislative language to thwart the natural tendency of regulators and state agencies to tilt the playing field in the favor of the pool. After all, when the umpire picks up a bat and steps up to the plate, he’s rarely called out on strikes. If there is to be a pool for those receiving premium subsidies it should be voluntary (which it is in the Governor’s plan) and it should have no artificial advantages over the private marketplace. This needs to be made clear in the legislation.
Problem #2: Minimum Coverage
The Governor’s January proposal outlined the minimum coverage individuals would need to obtain. In the October version he instead calls for the Secretary of the Human and Health Services Department to develop the minimum package. The problem is, without knowing what this coverage will look like it’s impossible to determine the impact the reform package will have on individuals’ pocketbooks and the state’s finances. I appreciate the political challenge in defining a minimum package in the legislation itself, but that’s the responsible course and the Governor should take it.
Problem #3: Enforcing the Mandate to Buy
I personally support requiring carriers to accept all applicants for coverage, regardless of their health (something called “guarantee issue”), but only in the context of a mandate for individuals to buy coverage. Otherwise there’s no reason for anyone to get insurance until they’re on their way to the hospital. It’s the equivalent of allowing people to buy auto insurance after their wreck is in the body shop. New York and New Jersey’s health care systems work this way and it’s a major reason why New Yorkers and residents of New Jersey (what are residents of New Jersey called? New Jersians?) pay 350% more for their individual health insurance policies than do Californians.
The Governor’s proposal is a bit vague on how it would enforce the mandate to obtain coverage. It allows late applicants to buy only the minimum benefit package (although, as noted in Problem #2, it fails to define what that is). But as enforcement goes, this is downright weak. The Administration a more robust plan. As I have before, I strongly encourage them to consider the enforcement mechanism outlined in CAHU’s Healthy Solutions health care reform plan.
Problem #4: The 85% Medical Loss Ratio
I understand the motivation behind the Governor requiring carriers to spend 85 percent of the premium they take in on health benefits (in insurance speak this means an 85 percent Medical Loss Ratio or “MLR”). If individuals are going to be required to buy insurance, they should know their money is being used efficiently. An 85 percent MLR would seem to address this concern. Unfortunately, the unintended consequences that could result more than offsets the intended benefit.
First, this proposal may drive up the cost of insurance. Since most administrative expenses are fixed costs, if the 15 percent of premiums left to cover them is insufficient carriers will have two options: eliminate administrative activity or increase premiums. The latter will be the easiest and, in many instances, the most reasonable approach After all administrative costs are not by definition bad. When a problem arises, as they do in any organization, having a customer service rep to talk to is a good thing, although it is also an administrative expense. So if a carrier wants to compete on service, it needs what it needs to cover the cost. Since 15 percent of a $100 per month policy is $15; but on a $200 premium it’s $30, the right thing to do might be to eliminate the less expensive plans.
The second unintended consequence of the 85 percent MLR provision is that it may diminish choice in the individual health insurance market segment, exactly where competition is needed most. After all, if you’re going to require people to buy coverage, you want a robust marketplace where robust competition drives down prices. The Governor’s proposal goes a long way to making the 85 percent Medical Loss Ratio fair by applying it to all of a carrier’s business. Yet the fact remains that administering coverage to individuals costs more than providing coverage to large groups. So carriers with a greater than average share of their business in the individual market will have a tougher time meeting the MLR requirement than its competitors whose business is primarily large group business. And new carriers will first need to develop a strong large group presence in the state before entering the individual market if they are to have any chance of complying with this law. This may inadvertently result in carriers shifting resources to attracting large group business and away from the individual market.
Personally, I don’t think the MLR requirement is necessary (although I see the political benefit of it). If the Governor won’t eliminate this from his plan, he should at least add language which instructs and empowers the regulators who will enforce it to encourage increased competition in the individual market space.
So, these are my four biggest problems with the Governor’s October plan. There’s much in it I support: expanding state programs; premium subsidies through tax credits; the fact it would eventually lead to universal coverage; and the cost containment elements; and wellness provisions to name just five. Maybe I’ll write about these later. For now, I just wanted to go on record with my concerns.
And I’m curious, what are yours?
Note: This blog represents my personal opinions. It is not an official blog of the California Association of Health Underwriters (of which I’m a Vice President) or any other organization. In this case, however, it should be noted that CAHU shares these same four concerns