Do Health Insurers Deserve the Latest Public Hit?

by Dan Diamond, California Healthline Contributing Editor

The federal health reform law arguably wouldn’t have passed Congress if not for health insurers — a dubious and accidental achievement, in the eyes of many payers.

Anthem Blue Cross’ early 2010 decision to hike rates by as much as 39% provided the political cover for some House Democrats to back the reform bill, which at the time was idling in Congress. Seizing the moment, the legislation’s supporters bashed insurers’ behavior and argued that reforms would slow premium hikes while ending the industry’s worst practices, like rescinding coverage from sick patients.

Recent weeks are starting to echo last spring.

A year into the federal overhaul, health insurance premiums are still rising and small businesses have been disproportionately hit, the New York Times notes. In California, Anthem Blue Cross has again announced a rate hike, effective May 1, which means that some policyholders will face a cumulative rise in premiums of more than 40% in less than a year. Blue Shield of California also plans to raise rates by as much as 59%, prompting anger and public protests last week.

Insurers say that soaring health care costs have forced them to raise their rates. But patient advocates blame another culprit: Wall Street.

Point: Health Insurers’ Profits Must Be Reined In

Consumer watchdog Health Care for America Now released a report last week that found the nation’s five largest health insurers had collectively profited by $11.7 billion in 2010. According to the HCAN analysis, the five companies’ profits increased by 51% between 2008 and 2010, with the group citing “Wall Street-driven trends,” like spending less on medical care and collecting more in premiums. The “companies’ financial success is the result of a business model that avoids risk and provides less care,” said Ethan Rome, HCAN’s executive director. The group cites the report as evidence for maintaining the health law.

Others say that focusing on profit margins ignores a statistic that further illustrates insurers’ financial strength: return on equity. The companies are required to carry significant capital in order to cover potential payouts, which tends to tamp down year-to-year profits as insurers stockpile considerable assets. Moreover, “insurance companies rarely ever lose money … they just lay off their staff and start denying claims,” one commenter wrote on economist Tyler Cowen’s financial blog. “That’s what has people upset, not the relative profit margin but rather the consistent profits.”

Counterpoint: Health Insurers Are Less Profitable Than Many Assume

However, some argue that private insurers are being unfairly demonized — again — and their financial success is being dramatically overblown.

Forbes blogger Avik Roy contends that “health insurance is one of the least profitable industries in America.” According to Roy, publicly traded health insurers averaged a “measly 4%” profit margin in 2010, compared with profit margins of 20% for cigarette manufacturers, 13% for soft-drink manufacturers. “If health insurers are profit-hoarding devils, so is the rest of the private economy,” Roy concludes.

Meanwhile, a Government Accountability Office report released last week found the federal government made about $48 billion in improper payments to traditional Medicare fee-for-service plans in 2010. Noting that Medicare fraud represented nearly $4 to every $1 in top insurers’ profits, Jeffrey Anderson of the Weekly Standard concludes that “private insurers may never manage to make nearly as much money as government-run health care programs manage to lose.”

Further, some argue that health providers — and not payers — have more pricing power in the nation’s health care system and deserve greater responsibility for spiraling health costs. Trying to tamp down rising premiums in his state, New Hampshire Gov. John Lynch (D) recently called for a moratorium on new hospital construction, arguing that hospitals are using “excess cash” for “advertising, trying to attract market share from each other, buying physician and laboratory practices across the state, and then increasing overhead charges to patients.”

Looking Ahead: Premium Hikes Promise Continued Scrutiny

The dust-up over insurer profits is setting the table for the next big fight: how the federal health reform law will oversee payers and guard against unnecessary rate hikes.

CMS has laid out its proposal on which information insurers will have to disclose to consumers about excessive premium rate increases. However, Consumer Watchdog warns that many health insurers could keep their reasons for hiking rates a secret under the current plan.

Citing local payers’ planned rate hikes, a San Francisco Chronicle editorial argues that the California Legislature should approve a bill (AB 52) to give the insurance commissioner the power to reject some premium increases. According to the editorial, “Californians deserve to have reasonable prices for health care. These increases are not.”

Meanwhile, insurers are pushing back on other aspects of the reform law, such as requirements to spend a certain amount of premium dollars on patient care. Former Cigna executive Wendell Potter contends that if insurance industry leaders “get what they’re lobbying for, the [medical-loss ratio] requirement will essentially be meaningless, and consumers will probably never see a dime of the promised rebates.”

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