Wednesday, March 17, 2010

Anthem's 39% rate increase explained

Much has been said about the ‘exorbitant’ 39% rate increase that Wellpoint had after declaring high profits. This blog will attempt to address both of these items. First off, why are there rate increases anyway ? To illustrate, sometimes it helps to put things in perspective.

Imagine you have a business. Unless you’re a non-profit company, at the end of the year, you’d like to reward the people that invested money with you (stockholders). That’s how America works…we have companies that people invest in with the expectation that they will make more money than they have put in. One of the favorite targets of Democratic health-reformers is “obscene insurance company profits”. In 2009, as of the third quarter, health insurance company profits ranked #86th, with an average rate of return of 3.3%. Heck, I can get more with a 5-yr CD at the bank-guaranteed ! 4th quarter numbers are in and it dropped further to #88 (which was actually inflated due to a one-time sale of a pharmaceutical arm of an insurance company-without that, they would have ranked #92). “But it still amounts to a boatload of money for the insurance company” is what I usually hear. Again, a bit of perspective is in order. If ALL of the profits could magically be put back into the health care system, what effect would that have ? The answer will surprise you…because health care costs are one-sixth of our total economy, eliminating ALL insurance company profits would fund our nation’s healthcare system for another 36-48 hours . Which brings us to the subject of Wellpoint’s 39% increase.

While insurance companies are a business unto themselves, they are not the drivers of health care costs. On the contrary, they are the financiers of our health care costs. The simplest way to grasp this is by buying a house. If you buy a house, most people can’t afford to pay cash up front-so they go to a mortgage company for the money, and then pay the mortgage company back a little at a time, for a fee (interest rate) and according to their conditions. If you default on the payments, they can take your house. The cost of the house is made up of all the people that worked on it, the materials and so forth. In addition to labor (doctors, nurses, hospital staff, etc.) and materials (drugs, bandages, wheelchairs, medical facilities, etc), there are many cost items specific to health care, but I’ll only outline two. The first is technology and the example I’ll give is straight out of today’s (3/17/10) USA Today—“The cost of cancer treatment is 'skyrocketing'… a new analysis shows. From 1990 to 2008, spending on cancer care soared to more than $90 billion from $27 billion. The increase was driven by the rising costs of sophisticated new drugs, robotic surgeries and radiation techniques, as well as the growing number of patients who are eligible to take them. Many older, frailer patients -- who might not have been considered strong enough to weather traditional surgery -- now have the option to have less invasive operations or more tightly focused radiation treatments, the analysis says". Today’s Seattle Times/Bloomberg reports that "The rising cost of cancer research and care, … helped reduce death rates by 16 percent over 40 years”. Medical advances cost money. Innovation comes from the private sector, not the government. I’ll agree that the reason is selfish- the lure of a big payday. The alternative is just to not try to advance medicine and/or ration it. The second item I’ll address is called “cost-shifting”. Many people have heard of it, but they may not understand it. Let’s say that your company produces a product and you charge $1.00 per item. Every year you see the regular inflation, so you add that in, so next year your price is $1.03 and so on. Now imagine that another inflationary factor is thrown in…in this case medical inflation or the cost of medical research and development…at around 12%. Now in order to continue reaping your 3.3% profit so you can continue to attract investors (and keep the ones you have) you need to raise your price to $1.15, and so on. It doesn’t stop there. Imagine if the government came to you and said, “we like your product, but we are only going to give you 70 cents.” They are the government, so you have no choice. You can’t negotiate with them. So you need to raise your costs for everyone else. That is what Medicare and Medicaid do. It gets worse. In 1986 a law was passed that said if someone doesn’t have the money to purchase your product but needs it, you have to GIVE it to them and try to collect on the costs later. If it’s more than a few thousand dollars, the person usually can declare bankruptcy and you’re still out the money. No house to repossess there. So, you have to raise your price for everyone else to cover for that. It’s gotten so bad that employers and consumers are paying $90 BILLION extra just because of the under-payment from Medicare and Medicaid, not including flat-out uncompensated care.

In fact, since 1970, the cost of treating a Medicare beneficiary has risen 8.8% a year. In today’s Las Vegas Sun, testimony was given that the $37 rate per 15-minute unit (for medical providers) hasn't been increased since being set in 1980, yet the cost of doing business has risen. And now it is going down to $21" with the proposed Medicare reimbursement cut. Is it any wonder that doctor’s don’t want to treat Medicare patients ? These are just a few of the reasons not to let the government run our health care…they undercut prices with no negotiation, stifle innovation and can’t manage the programs they have now (Medicare will be broke in less than 10 years and Social Security is holding onto $2.5 TRILLION in IOU’s from the government who raided it to pay for other programs).

All of these costs are added to the health care we use, which is financed by the health insurance companies. Is it any wonder we are seeing rate increases ? Speaking of rate increases, that 39% increase ? It was for a demographic (group of people) in a particular age-group only on an obsolete plan. Insurance companies spread the risk over a large group of people, but most don’t spread it over everyone they have insured as that would be a bit unfair to the young healthy people (an example is New York state, where they spread it out over everyone—the premium is in excess of $600 a month). Instead, they group people together by age and gender, usually in 5-year age groups (called ‘bands’). So, there is one rate for males, say 50-54 and another for females, say 25-29. A word about females is in order here. We hear a lot about ‘discrimination’, with women paying more than their similarly aged-male companions. Again, it’s a cost issue-women can get pregnant, which is more expense and which needs to be financed. Even policies without maternity are required by law to cover complications of pregnancy which can be upwards of $1 million or more. Women also have more internal parts that need periodic checking than men. Lastly, they are more health-conscious, which means they go to the doctor more often. All this adds up to more money out than in. So, the insurance company adjusts for that. What happened with Wellpoint’s increase was two-fold. The demographic that accounted for that increase was unhealthier than expected. Also, the benefit plan that they were on was outdated, meaning that the benefits were based upon cost expectations that are no longer valid and the benefits became exceedingly rich compared with other companies’ plans. Now, when you raise rates on insurance companies plans, people typically will choose to go to another less-comprehensive (and less expensive) plan. That is, as long as the premium on the better plan is higher than the anticipated benefits. Those that are facing $100,000+ cancer treatments will gladly pay a higher premium if it means they still get their treatment for $10 instead of going to another plan that requires them to pay the first $1000 and then 20%. This leads to something called ‘adverse selection’, ultimately leading to what is known in the insurance industry as a ‘death spiral’---the amount of money coming in eventually becomes far less than the money that is going out for treatments and it can’t support itself. However, unlike the government, they can’t issue IOU’s.

I would urge our Congressmen to vote for the Senate bill if it addressed the real problems faced by health care- out of control spiraling costs- but it doesn't. All it does is put artificial restrictions and requirements on the financing mechanisms of our health care. And that is a recipe for disaster.

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