Authors: Wendell Potter
It was at that moment that I realized how much was at stake with the industry’s transition from managed care to consumerism. The business model based on managed care had failed, and the only way the insurers could continue to meet shareholders’ expectations was to find a new way to avoid paying for health care. The means now available to them was to shift costs to policyholders.
From that point on, I was skeptical of all claims coming out of my industry about the appropriateness of consumer-driven plans for large segments of the population.
As for that news release, while it didn’t get much media pickup, I knew it would influence reporters’ thinking even if they didn’t write about it. And that was part of the objective: to try to get the media to question the findings of studies like the one from the Commonwealth Fund. Not a single reporter called me with questions about the methodology of the CIGNA study or the apparent discrepancies.
I wasn’t surprised. With cutbacks in newsrooms, there were fewer reporters covering the health insurance industry than in years past, and the ones who were left were often so busy that they had little time to probe. I was frequently amazed at how little media scrutiny there was of the industry and at how much my colleagues and I could get away with in dealing with reporters. More often than not, they were quite willing to settle for what we fed them, even if it was pabulum.
NO SOLUTION FOR PEOPLE WITH
LITTLE SKIN TO SPARE
A few weeks later, I was looking for external studies to bolster the claim being made by the Bush administration and industry executives that the growth of consumer-driven plans would lead to a steady reduction in people without insurance. Instead of finding evidence that it would happen, however, I came across a report written by a highly regarded former financial analyst that completely debunked the notion.
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The author, Roberta Goodman, had covered for-profit health insurance companies for Merrill Lynch before starting her own consulting business. She got right to the point: “Consumer-driven health care cannot resolve the problem of the uninsured.”
Goodman noted that 65 percent of the uninsured had an income below 200 percent of the federal poverty level. Few of these people would be able to afford the premiums of even a low-cost consumer-driven plan, she said, let alone fund an HSA. She also pointed out another fact: A significant number of Americans lack access to coverage because they are “medically uninsurable,” meaning that insurers refuse to sell them coverage at any price because of preexisting conditions. “Their costs would almost inevitably exceed high-deductible plan maximums, so any plan available to them would require extremely high premiums.”
The sickest 10 percent of the population—including many of the medically uninsurable—generate two thirds of health expenditures in any given year, Goodman wrote. If given a choice of plans, these people would undoubtedly steer clear of consumer-driven ones. “While some [of them] might benefit from early intervention, care management and clinical pathways tools … their costs [would] rapidly reach out-of-pocket maximums, and
cost often plays little role in the decisions of those facing critical illness
.” (Emphasis added: Goodman’s point is just common sense. When you’re sick with a critical illness, shopping for a bargain is not a top priority or desire. So much for the theory that big savings can come from people being more prudent “shoppers” of care.)
So, despite the hype from the health insurance industry, consumer-driven plans that shift more of the cost of care to individuals and families are not the silver bullet that will make America’s health care system more efficient and equitable.
Sadly, many consumers who would have been better off remaining in their managed care plans discovered that insurers (and their employers) were starting to raise the premiums of those plans to unaffordable levels or dropping the plans altogether. Consumer-driven plans had become the only option for a growing number of Americans—regardless of their age, health status, or income bracket—by the time health care reform was enacted in March 2010.
FOLLOW YOUR INSURER’S LEAD
To set an example for their corporate customers, a few years ago a number of the big insurers began forcing all of their own employees into high-deductible plans. CIGNA and UnitedHealth Group were among the first to eliminate all other options for their own employees, thus encouraging their corporate customers to do the same—which insurers call “going full replacement.” The new reform law will not stop employers from doing this.
Many health care experts anticipated that this would happen and warned about the likely adverse consequences of consumerism on our society. John Garamendi told reporters in 2005, while serving as California’s insurance commissioner, that consumer-driven coverage would eventually result in a “death spiral” for managed care plans. This would happen, he predicted, as consumer-driven plans cherry-picked the youngest, healthiest, and richest customers while forcing managed care plans to charge more to cover the sickest patients. Garamendi’s crystal ball, sadly, was clear.
While consumer-driven plans have always featured higher deductibles than traditional managed care plans, insurers initially kept the deductibles at levels ranging from one thousand to three thousand dollars. Once they had attracted or forced millions of people into these plans, however, they began moving aggressively to increase the deductibles—and in many cases raised them to levels far beyond the annual incomes of many workers. While doing this, insurers created the illusion that they were keeping the cost of coverage affordable—but in reality, they were playing a shell game.
My son, Alex, was one of thousands of other southeastern Pennsylvania residents who fell victim to this game. When Alex’s policy came up for renewal at the end of 2009, he was notified by his insurer, Independence Blue Cross, that his monthly premium would increase by just $2.54—but, as is so often true with insurers, the devil was in the details. Alex’s premium would increase by just $2.54, all right, but only if he switched out of his plan with a $500 deductible—which, by the way, was being discontinued—and into the company’s new Personal Choice Value HSA with a $5,000 deductible. If he wished to stay in a “basic” plan similar to the one he had been in, his premium would increase by more than 65 percent.
In its cover letter to Alex and many of its other customers, Independence said that because both the cost and the usage of medical services had been going up, “we found it necessary to change the benefits structure of our Personal Choice plans to keep premiums as affordable as possible.” The letter didn’t mention the 65 percent increase—Alex had to do the math himself to figure that out—or that the increase was many times the rate of medical inflation.
What happened to Independence Blue Cross enrollees also happened to millions of Americans across the country. WellPoint, the largest U.S. health insurer, sent out similar notices to millions of its customers from California to Maine. According to a February 12, 2010, report issued by Maine’s Bureau of Insurance (BOI), about 88 percent of enrollees in individual plans marketed by WellPoint’s Anthem subsidiary in the state had deductibles of five thousand dollars per year or higher—with nearly 37 percent covered by policies with fifteen-thousand-dollar individual deductibles and thirty-thousand-dollar family deductibles.
Think about that and what it really means for a minute. The median household income in Maine was $46,419 in 2008, according to the U.S. Census Bureau. A family with that income would have to spend 65 percent of its total annual earnings on out-of-pocket expenses before its insurance company would pay any medical claims. And that’s for a family earning more than half of the rest of the population. Thousands of families in Maine earn less than $30,000 a year. Imagine the ruinous number of medical bills one family could have before getting one penny of help from their insurance company. And those out-of-pocket expenses are over and above what a family would be paying in premiums. The average premium per person for individual coverage in Maine was $299 a month (approximately $3,600 a year) in 2008, according to the BOI report.
Even with that level of cost shifting from insurer to policyholders, Anthem requested approval from state regulators to raise premiums for individual plans an average of 18.1 percent in 2009. Maine’s superintendent of insurance, Mila Kofman, considered the proposed increase excessive and approved a 10.9 percent increase instead. (Maine is one of the few states that give their insurance commissioner the right to reject or reduce an insurer’s planned rate increases.) Contending that this would not guarantee the company the profit margin it wanted, Anthem sued the state. In an all-too-rare victory for policyholders, the Maine Superior Court affirmed Kofman’s decision on April 21, 2010.
Unfortunately, cost shifting will continue, even with the enactment of reform. In a 2005 news release announcing the results of a survey of employers on the subject, which showed that more than three quarters of all U.S. companies planned to shift costs to their employees, Sandy Lutz, director of research for PricewaterhouseCoopers’s Health Research Institute, said, “Shifting a greater share of spiraling health care costs to employees is a trend that is likely to continue.” She added the caution that “if employers push too far, workers may opt out of coverage altogether.”
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A separate study by benefits-consulting firm Hewitt Associates showed that the average employee contribution to company-provided health insurance increased by more than 143 percent between 2000 and 2005, while average out-of-pocket costs increased by 115 percent.
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SELLING THE ILLUSION OF COVERAGE
Yet another scheme to shift costs to consumers and away from insurers and employers is to enroll them in limited-benefit plans. The big insurers have spent millions of dollars acquiring companies that specialize in these plans, often providing such skimpy coverage that some insurance brokers refuse to sell them.
CIGNA markets a limited-benefit plan to midsized employers with high employee turnover, such as chain restaurants, under the brand Starbridge Select. Not only are the benefits very limited, but the underwriting criteria would also appear to guarantee an impressive profit margin. Under the plan, the average age of an employer’s workers cannot be higher than forty, and no more than 65 percent of employees can be female. (Insurers have long charged women more than men simply because they can have babies—and, consequently, maternity-related medical expenses—and are susceptible to breast cancer.) And get this: To qualify, employers must have a 70 percent or higher annual employee-turnover rate—which means that most employees won’t stay on the job long enough to use their benefits. Employees also get no coverage for care related to any preexisting conditions they might need during their first six months of enrollment. Plus employees have to pay the entire premium—employers are not allowed to provide any subsidies. While a relatively small number of employers meet all these criteria, there are enough to make it very worthwhile to market the Starbridge Select plan.
There are so many restrictions built into limited-benefit contracts that there is always reduced risk to insurers, who appear only too happy to sell these policies to people who don’t realize they could be ill served. Insurance companies are selling the often inadequate policies, which in some cases amount to no more than fake insurance, to keep from losing these people’s business altogether. An indication of just how lucrative limited-benefit plans are is that Aetna and CIGNA were two of the biggest sponsors of the first Limited Medical & Voluntary Benefits Conference, held in October 2009 in Los Angeles.
Limited-benefit plans, coupled with high deductibles, represent the ultimate in cost shifting and are among the fastest-growing health insurance products. They’re the future that insurers had in mind as they fought bitterly against reform that could jeopardize their profits. The reform bill will put a cap on the amount that an individual or family will have to pay in out-of-pocket expenses, but it will not be low enough to keep many people from having to file for bankruptcy and losing their home if they get seriously sick or injured.
KEEP SHAREHOLDERS HAPPY—AND RICH
By jacking up premiums and shifting more and more cost to their policyholders, insurers are able to manipulate an obscure ratio that is especially important to their shareholders: the medical-loss ratio (MLR). It is telling that insurers consider the amount of money paid out in medical claims to be a loss. (Some companies now call it by other names, such as the “benefit ratio,” which may sound more palatable.) When an insurer lowers its MLR, it is spending less on medical care and more on overhead.
Most for-profit companies provide quarterly accountings to their investors of how well they have performed financially during the preceding three months. Shareholders of health insurance companies look for changes in two measures: earnings per share, a standard measure of profitability at all publicly traded companies, and the MLR, unique to health insurers and always reported as a percentage. An MLR of 90 percent, for example, means the insurer spent 90 cents of every premium dollar on medical care.
If an insurer reports that its MLR was lower during the preceding quarter than during the same quarter a year earlier, it means the company spent less on medical care—and therefore had more money left over to cover sales, marketing, underwriting, other administrative expenses, and, most important, profits. Such a report is considered very good news by investors and analysts—who want the MLR to decline every quarter. This, in turn, pressures insurers to be vigilant in finding ways to cut their spending on medical care, and this vigilance has paid off: Since 1993, the average MLR in America has dropped from 95 percent to around 80 percent.
One of my responsibilities at CIGNA was to handle the communication of these financial updates to the media, so I knew just how important it was for insurers not to disappoint investors with a rising MLR. Even very profitable insurers can see sharp declines in their stock prices after admitting that they have failed to trim medical expenses as much as investors expected. Aetna’s stock price once fell more than 20 percent in a single day after executives disclosed that the company had spent slightly more on medical claims during the most recent quarter than in a previous period. The “sell alarm” was sounded when the company’s first-quarter MLR increased to 79.4 percent from 77.9 percent the previous year.