Monday, November 30, 2009

There Are Four Health Insurance Renewal Cycles and Two Elections Between Now and 2014—Could be Sort of Like a “Death By a Thousand Cuts” for the Dems

The Congressional Budget Office (CBO) issued a report today saying that if the Reid bill becomes law the price of non group policies would be about 10 percent to 13 percent higher in 2016 than it would be under current law. The CBO projects that small group and large group premiums would be about the same in 2016 as they would have been anyway as the benefits of the bill would offset some of its new costs.

But what is likely to happen to health insurance rates in 2010, 2011, 2012, and 2013 before any of the bill's benefits occur for both the insurance markets and consumers?

I would suggest Democrats not overlook the potential for political fallout in those years.

By delaying the start of most health insurance reform benefits—including insurance subsidies and underwriting reforms—until January 1, 2014 the Reid health care bill creates a real risk of unintended political consequences for the Democrats.

Or, maybe I should have said almost certain consequences that Reid may not have thought of.

On the front end, figuring out he could bring his bill in for under a trillion dollars by collecting ten years of taxes and only providing six years of the most costly benefits sounded good. May not sound so good as the years to 2014 begin to seem like an agonizingly long time.

Over two national election cycles in fact.

Having run a health insurance operation let me suggest I can give you some insight into how a health plan manager is going to have to look at this.

Even before any health care bill, annual health insurance rate increases are back in the 8% to 10% range—and often more for small businesses and individuals. That kind of rate increase has been the norm over the past ten years and, particularly with health care providers facing cuts and under-reimbursement from government plans because of the pending legislation, there is no reason to see that abating.

To that 8% to 10% baseline, you can add a number of reasons to expect even higher health insurance rate increases each year on the way to 2014:
  • All of the new taxes and fees the bill creates that begin in 2010. Most notably, the $6.7 billion annual tax on health insurance premiums and the 40% excise tax on “Cadillac health plans expected to hit almost 20% of consumers in group health plans right away. The $6.7 billion tax alone is likely to increase the baseline health insurance trend rate of 8% to 10% by an additional 1.5%. Additional taxes on medical devices and drugs will also just get added to those products’ costs and will eventually be passed through to consumers in the form of higher insurance premiums and out-of-pocket costs.
  • The $6.7 billion premium tax, as well as the 40% “Cadillac,” tax are scheduled to begin on January 1, 2010. While insurance companies are sure to eventually pass these annual taxes on to their customers they will most often not be able to do so upfront because most health insurance contracts renew early in the calendar year. Posting here a few weeks ago, Wall Street analyst Carl McDonald of Oppenheimer and Company had this to say about the dilemma health insurers will face in 2010 because they are responsible for a tax they will not yet be able to pass on:
“Take Blue Cross Blue Shield of Rhode Island. The company seems pretty well capitalized at the end of 2008, with a risk based capital level of almost 745%, well above the Blue Cross industry average of 700%. However, on a dollar basis, the excess capital held by the Blue amounts to only about $205 million relative to the minimum capital allowed by the Blue Cross Blue Shield Association. In 2008, the Blue generated about $1.76 billion in premiums, or about 0.35% of the total estimated revenue for the industry. That implies that the Blue in Rhode Island would be responsible for paying about $23.5 million of the $6.7 billion tax. With this legislation, over 10% of the excess capital of the Rhode Island Blue would be wiped away.

“And that's for a plan that's extremely well capitalized relative to the rest of the industry. Coventry just bought a plan in Kansas this week called Preferred Health Systems. If we look at the larger of the two subsidiaries that was bought, called Preferred Plus of Kansas, it had a risk based capital ratio of 320% at the end of 2008, as it held about $11.6 million of excess capital at the end of the year above the minimum 200% RBC ratio requirement. With $285 million in revenue, Preferred would be responsible for 0.06% of the $6.7 billion tax, or almost $4 million. So the legislation would eliminate about a third of the excess capital of the plan, and reduce its RBC ratio to 280%.

“So while paying the tax in 2010 probably wouldn't put many smaller plans out of business, it would create some capital issues that would have to be rectified through higher premium rates in the ensuing years in order to build the capital base back up, which would likely result in further market share gains by the larger plans in the market, resulting in less competition, a direct contradiction to one of the goals of the legislation. So, add more on to the underlying health care trend rate so these health insurers can restore the capital they lost having to absorb taxes they could not pass on.”
  • The Democratic health care bills also make huge cuts to the Medicare Advantage products—$118 billion in the Senate bill of which $34 billion is reduced through 2014. Medicare Advantage is very profitable for the insurers. Particularly the publicly traded plans will need to prove to their investors that they can maintain their overall margins in the post health care legislation world. Those lost Medicare Advantage margins will have to be replaced by compensating from their mainstream business—another reason why health insurance trend will have even more reason to be higher than the baseline.
  • The proposed 2014 underwriting reforms are controversial. While the CBO downplays their impact, it is generally believed in the health insurance industry that there will be increased anti-selection as some consumers wait until they are sick to buy coverage. That means no insurance executive is going to want to go into 2014 under-reserved, short on capital, or with thin pricing margins—every reason to get those rates up as high as the market allows before the new rules take effect. Another reason to increase health insurance trend yet again above the underlying base of 8% to 10%.
  • Beginning in 2014, under the legislation there will be a three-year $25 billion reinsurance assessment health insurers will be responsible for collecting from all customers and paying to the government. This assessment is designed to cushion the impact of millions of consumers being able to buy health insurance policies without having to face pre-existing condition and medical underwriting. Any prudent health plan manager will begin to put the money away for that monster hit sooner rather than later. Another reason for health insurance rate increases to be higher than the baseline in the years leading up to 2014.
What I am outlining here is not some draconian plot to just pump health insurance rates up. The fact is that every health plan manager—publicly traded or not-for-profit—has a fiduciary responsibility to keep their health plan in the black and meeting insurance department minimum capital requirements—not to mention shareholder expectations.

The Reid bill—as well as the House bill—treats the insurance industry like a piggy bank with one revenue cut, tax, assessment, or mandate directed at them after another. As I have said before, insurance companies don’t pay premium taxes—they pass them along. As the McDonald comments attest, insurers will have no choice but to pass all of this along, they simply do not have the margins to absorb any of it.

So, when the day is done, come the 2010, 2011, 2012, 2013, and 2014 health insurance renewal cycles there will be lots of bad news passed on to health insurance customers in the form of new assessments and taxes—not to mention as much risk margin as can be loaded in to offset the expected anti-selection under the new underwriting rules.

Some politicians might see this as a reason to “control prices.” But the fact is that these are just the consequences of these bills that someone is going to have to pay.

For the Democrats, waiting until 2014 to point to any real gains from their health insurance bill, it just might begin to seem like a “death by a thousand cuts” as every bit if this just gets passed on—year after year.

But for right now, they’ve got themselves a health care bill well under $1 trillion!

We may need to remind them of that in November 2010 and November 2012 and November 2014.

Talk about a potential for a political hangover.
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