During the protracted and largely unproductive 1994 debate on health care reform, Republicans and others of conservative ilk insisted that they opposed the retooling of the health care financing system generally supported by President Clinton and the more liberal members of Congress. Said the conservatives, "All we need is insurance reform. We can all agree to that. If you liberals could just accept insurance reform, most of our problems would be solved."
As H. L. Mencken said, "For every complex problem, there is a solution that is simple, plausible, and wrong."
INSURANCE REFORM LEXICON
* Portability means the ability to take one's insurance coverage from one job to another or to keep it between jobs.
* Guaranteed renewal is the promise that as long as the policy holder pays the premium the insurance coverage will continue.
* Community rating is a pricing structure in which all policy holders pay the same premium no matter how old they are or in what health status.
* Modified Community rating takes the basic community rating format but permits the rates to vary by some amount according to limited defined considerations like age of the policy holder.
* Guaranteed issue is the requirement that insurers offer coverage to anyone who applies for a policy.
* Group insurance is offered by employers or other organizations which give members of the organization the opportunity get insurance through the group.
* Non-group coverage is also known as individual insurance. It is purchased directly from the insurer rather than through an employer. It can cover either one person or a family.
* Self-insurance is insurance offered by a group which takes the risk of coverage upon itself rather than purchase the coverage through an insurer. It is regulated through federal ERISA law rather than through the states.
* Medical underwriting is the process insurers use to determine whether an individual is healthy. If an person has a health problem, the insurer may deny coverage totally, deny coverage for the pre-existing condition, offer coverage at an increased premium, or decide the problem is not serious enough to warrant total or partial denial of coverage.
So what is the problem with insurance reform? Nothing if what you get is really reform. A great deal if you get what insurance companies call reform.
Insurers with some justification worry that if insurance is made too readily accessible, consumers will abuse the system by waiting to apply for insurance until after they become ill. Very correctly, they point out that true insurance involves shared risk. Waiting to become ill before applying for coverage is not sharing the risk; instead it becomes a form of money transfer.
Insurers, however, also attempt to avoid risk by insuring primarily the young and healthy and avoiding groups or individuals who have a higher probability of getting sick. They frequently engage in misleading behaviors which promise consumers and even legislators and regulators something they have no intention of delivering.
This article is the first in a short series which will take the usual list of recommended insurance reforms and show how insurers (and managed care companies) subvert them while claiming to support reform.
One word will appear time and time again when describing how insurers undermine promised reform. That word is segment.
GUARANTEED RENEWAL seems only fair. After all, insurers rail against the idea of consumers waiting to become ill before purchasing insurance. So insurers promise to offer policies which the healthy can purchase and which they may continue to carry for as long as they pay the premium. That seems simple enough until one looks at how insurers segment the policyholders.
Consider durational rating. Here is how durational rating works.
Most consumers understand that insurance is based on spreading risk. They assume that everyone is placed in one big pool. Everyone pays a premium. Some of the members will get sick and some will not. Those who do not get sick are, in effect, paying the bills of those who have medical problems. And those who have not had medical problems know that if they become ill, the premiums paid by the other members will pay for them. That is how insurance is supposed to work.
But insurers know that the longer someone is in an insurance plan, the greater is the liklihood they will become ill - even if they are healthy when they take out insurance. So insurers do not simply keep adding new members to one big pool. Instead they close out entry into existing pools and divide new applicants into new pools. The moment a pool (or more technically, an underwriting group or book of business) is closed, it begins to lose members for a variety of reasons. Some policyholders move to new states where the plan is not approved; some go to work for employers having group plans; some decide they can not afford the plan; and some die.
For whatever reason, the underwriting group shrinks. And there is a progressively lessened risk spread. Of course, spreading of risk is the very principle upon which real insurance is built. And, the lessened spread is occuring over the time the group is beginning to build a claims history.
The combination of more members with medical problems and lessened spreading of risk forces the premiums higher at an escalating pace. Members who continue to be in good health can get equal coverage at less cost in other plans so they drop out leaving just those who would have trouble being re-underwritten in the original plan.
At some point - different insurers have characteristic time frames - the insurer no longer has a viable underwriting group and the plan is closed out.
The National Association of Insurance Commissioners, presumably a consumer watchdog group has responded to this decidedly anti-consumer behavior by fiddling while consumers are burned. In the late 1980's they denied that durational rating even existed. In December 1991, they published a proposed solution. When an underwriting group had dwindled to the point that the group produced less than 200 claims a year, it would be combined with a similar underwriting group with the same company as long as the insurance plan was comparable. Many companies asserted they had no comparable plans. In fact, they could control their products to assure they had no comparable book of business.
That plan sat on the shelf until June of 1994 when another plan was proposed. The new recommendation has also not been acted upon at date of this writing. The June 1994 plan would have prohibited insurers from raising rates in excess of 25% annually. If rates in excess of 25% were justifiable by the experience of the group, that group could be combined with comparable groups. If there were no comparable groups, rates could be approved in excess of 25% in a twelve month period.
So much for consumer protection. There are steps that could be taken which would work. One of the steps which would work is for insurers to stop segmenting applicants into separate underwriting groups. New members would offset those lost for uncontrollable reasons. And because rates would be more stable there would be no reason for healthy individuals to seek coverage elsewhere.
Another plan would be to establish standard comprehensive benefit plans as have been proposed in small group market reform.
Insurers, however, have fought against such reform. They, however, when pushed, generously suggest guaranteed renewability as a major step to "insurance reform". But check you wallets and count your fingers.
Guaranteed renewability has no meaning as long as durational rating is permitted to continue. And durational rating will continue as long as insurers are able to segment their market.
Insurers use segmentation to block other insurance reform. In 1994, an Insurance Expansion Task Force of the Health Care Access and Cost Commission examined the feasibility of expanding insurance reform from small groups to individual coverage.
Maryland Health Care for All, a consumer advocacy group strongly recommended the consolidation of the non-group marketplace along with small groups. The Commission staff rejected the testimony of consumer interests which were bolstered by a study performed by George Washington University. Instead they accepted a study by Milliman and Robertson a well-known actuarial firm.
Trudy Lieberman, Senior Editor for Consumer Reports, writing for the Columbia Journalism Review reveals that the Milliman and Robertson study was financed by the Council for Affordable Health Insurance, a trade association representing health insurers. Five Milliman and Robertson partners are associate members of the Council. Moreover the Golden Rule Insurance Company is a full Council member.
Golden Rule has proposed its own solution for durational rating. They have suggested that insurers be permitted to raise rates more than one time a year in order to reduce consumer sticker shock.
The lesson to be learned from the promise of guaranteed renewability: Words mean nothing out of context. Be certain you understand context or you will be taken to the cleaners.
In the next Commentary on Healthcare, I will describe how insurers subvert other types of insurance reform.