There are a lot of interesting bits in the paper released this week by healthcare policy wonk Jacob Hacker—he of the government-run health plan proposal favored by President Obama for the uninsured and small business. Hacker had a lot to say in defense of his proposal in the face of competing plans and potential compromises. I’ll get into all that in another post. I just wanted to highlight here one interesting and often overlooked point: Rising premiums mean rising profits for health plans.
Hacker writes: “Private insurers can often save more by selecting healthy people than by bargaining with providers, and in some highly concentrated insurance markets, private insurers are effectively acting as oligopolies, keeping premiums high rather than driving hard bargains….Private plans are passing on rising costs to subscribers while increasing their profitability.”
I wrote about how we got to this point in an opinion piece back in September 2007, pointing out that little being proposed by the health insurance industry at the time would dramatically alter premium and cost increases that had settled into a fairly predictable 6-8% range: “Not health savings accounts, not retail health clinics, not wellness or disease management programs. Nor is it clear that managed care plans really want to see a substantial moderation in premium trends—despite their rhetoric—with hefty rate hikes closely tied to the kind of strong profit growth health plans have enjoyed in recent years.”
One of my favorite quotes from Upton Sinclair is appropriate here: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
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I am a proponent of the private industry being the primary force in “fixing” the healthcare industry. I dont have all of the answers but I do have a questions for you. How do you know that insurance companies are raising premiums on subscribers to get rich as opposed to the opposite? I just read an article about a major carrier in Hawaii that raised rates over 12%. They had to do so just to break even as they pay out about 95% of every dollar to the actual cost of healthcare. They were even taking a pay decrease. What eveidence and actual numbers to you have that the carriers are raising rates purely to keep profits high? Basic eceonomics seems to apply well here. If they continue to raise rates especially if they do not have to then they will push out their prescribers who can no longer afford the cost in effect lowering their revenues for profit.
Matthew,
Thanks for the comments and questions. What I’m referring to is a kind-of built-in profit growth generator health plans enjoy relative to premiums. An overly simplified example might be as follows: Let’s say you’re a health plan and your medical costs are rising 8% annually. So you raise premiums 8% annually. It would seem that all you’re doing is keeping pace. But actually profits will also rise 8%, all else being equal. Of course, it doesn’t work quite so neatly in the real world. There are lots of variables, including changes in membership (as you point out), investment income/loss, and most importantly whether costs get ahead of premiums. But the basic principle holds.
One of the factors in determining profitability, or not, resides in the requirement of having a state mandated minimum reserve (risk) pool, for catastrophes, in order to perform business in these states. Although the state mandates “minimums”, it does not dictate any monies above minimum. As long as the pool minimums are defined, what prevents “hiding” excess cash and profits into these risk pools to justify premium increases to the state’s insurance commission?