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Insurance Industry Already Finding Ways To Game New System

First Posted: 05/31/10 06:12 AM ET Updated: 05/25/11 05:00 PM ET

Health Insurance

The insurance industry's attempt to weasel out of one of the few provisions of the new health care reform law that took effect immediately is a harbinger of what's to come.

In this case, the companies that were balking at covering sick children quickly relented under media, congressional and White House pressure.

But far from being satisfied with a windfall of new customers and massive government subsidies, the nation's insurance companies appear to already be busy devising ways to game the new system. Their goal, as ever: Maximizing profits by paying out as little on actual health care as possible.

And next time they start to weasel, Congress and the White House -- and the media -- may not be paying attention anymore.

"This is what you're going to see as each element in this plan comes up for implementation," said Marcia Angell, a former editor of The New England Journal of Medicine who now teaches at Harvard Medical School. "This insurance industry is going to give up nothing."

In the short run, companies are expected to keep doing what they've been doing, which means, among other things, jacking up their rates. "There's nothing to stop them from raising their premiums, and that's what they're going to do," said Angell, a supporter of "single-payer" health insurance.

The new law's ban on discriminating against adults with preexisting conditions doesn't kick in until 2014.

"In the meantime, they can continue to cherry pick the healthiest customers, while foisting the sick into the new high-risk pool," said Wendell Potter, a former senior health insurance executive at CIGNA who went rogue and became a consumer advocate.

That's only the beginning, though.

"They also will continue to try to shift more and more of the cost of health care from them to the people that are enrolled in their plans," Potter said. That involves moving people currently in managed care, with its relatively modest co-pays, "out of those plans and into high-deductible plans that make people pay thousands of dollars before the company will pay a dime," Potter said.

"Managed care was last decade's silver bullet," he told HuffPost. "The new silver bullet for the insurance industry is the high-deductible plan. More and more people will not get a dime from their insurance companies."

And for people who can't afford to pay the full deductible, that's a lot like not having insurance at all.

What else will the industry do? "The companies will certainly be tightening up internal practices to avoid paying claims," Potter said. "One way to do that is to make it more burdensome on providers and make it more difficult for providers to get the reimbursements that they're due. They already are difficult to work with for a lot of providers."

The more burdensome the paperwork, the more likely a provider is to make a mistake. "And if they make a mistake, the claim is kicked out," Potter said.

In the longer run, companies will still be in a race for more profits. The trick will be coming up with ingenious new ways to avoid covering the sick.

One particularly ripe area of speculation concerns how aggressively and imaginatively the insurance companies will market themselves to attract profitable healthy clients and avoid the sick and the old.

"You can do little things with marketing materials," said John Gorman, chief executive officer of Gorman Health Group, a Washington, D.C.-based managed care consulting firm. "How you set up your Web site" could make a difference, he said; so could "where you put certain drugs on your formulary" -- i.e. which drugs cost how much.

"And the plans will play those games," Gorman said. "You're going to see a lot of marketing materials with rocket bodies on the cover."

Potter agrees: "They'll certainly be offering programs that will appeal to people that are younger and more likely or able to exercise and otherwise lead healthier lifestyles."

Henry Aaron, a senior fellow at the Brookings Institution think tank, told HuffPost he recently overheard a major insurance company executive joking about the prospect of being forced to sell plans to the elderly. "We'll sponsor dances and make our pitch at 11 p.m.," Aaron recalled the executive saying. Another possibility Aaron mentioned, only half joking: putting the company's offices on the second floor -- with no elevator.

But Gorman also noted that "at the end of the day, there really isn't any place to run and hide from these patients anymore," and that companies need to start preparing for an influx of clients who were "pre-existed" or medically underwritten out of the current system: "Very sick people with health and medical needs that have been unaddressed for years."

The new law, Gorman pointed out, does include some modest efforts at "risk adjustment" to level the playing field. The government will apply some sort of formula so that "based on diagnostic codes, the government will either tack on or take away a little money" from insurers, depending on how sick or healthy their clients are.

There is one provision in the new law that could limit insurance company revenue: It concerns the "medical loss ratio". (The industry considers the amount of each premium dollar spent on actual medical care to be a "loss".)

In 1993, 95 cents of the average premium dollar went to health care, Potter said. Now the average is closer to 80 cents, and as low as 75 cents for some major companies. The rest of the money goes to overhead -- and profit.

The new law requires companies to maintain a medical loss ratio of at least 80 to 85 percent.

But there are still ways to game even that limit. One is, paradoxically, to spend more on health care, either by offering more services or driving up costs. Insurance companies typically want to spend less on this stuff, but if the 80 percent slice gets bigger, so can the 20 percent slice. Another way, of course, is to label more and more company expenses as health care.

And Angell told HuffPost that come 2014, despite no longer being allowed to raise rates or deny coverage to adults explicitly based on preexisting conditions, insurance companies will still find a way to discriminate.

One provision she expects them to exploit is the one allowing companies to charge as much as 50 percent more for people who engage in unhealthy behaviors. "With anyone who's chronically ill, you can always find an unhealthy behavior," she said.

"So that's the new preexisting condition."

Angell also pointed out that there's been very little coverage of the fact that insurance companies will still be allowed to charge older people (over age 55) much more than younger people. Three times as much, to be precise.

As a result, people between ages 55 and 65 (when Medicare kicks in) who don't have enough income to pay high premiums will be left with two options: Not buying insurance and being hit with a fine; or paying premiums they can't afford.

"These people are not going to be the annoyance they might be now, because either they're going to pay through the nose -- or they're not going to buy insurance," Angell said.

"This is a bonanza. They get captive customers. They get to charge whatever they want."

The industry is also mobilizing on other fronts.

"The insurance companies have dozens if not hundreds of lawyers and lobbyists scouring this legislation for any possible loopholes they can take advantage of," Potter said. "They absolutely will look for any way they can to circumvent any part of the legislation that they think might make them spend more for medical care than they want to spend," he said.

"One thing in particular is they'll be trying to manipulate how regulations are written." The intent of the regulations is set forth in the law, but not spelled out; that job has been left to the Health and Human Services Department (HHS) and the National Association of Insurance Commissioners (NAIC), Potter said. "The industry will spend an enormous amount of money to try to influence how those regulations are written."

Potter recently attended a NAIC conference. There are 50-plus insurance commissioners. Potter was there as one of 29 consumer representatives. "There were 1700 representatives of the health insurance industry there," Potter said. "They converge on these meetings just as lobbyists converge on Capitol Hill."

And each state legislature has to implement the regulations individually, including establishing their own regulations for the new health-insurance exchanges, where people not covered through their employers would be able to comparison shop for insurance at competitive rates.

"A key question is how the 50 states are going to handle the implementation of the health insurance exchanges, which they are tasked to do," said Henry Aaron of Brookings. "Whether they will and what happens if they don't is, I think, going to be a very interesting thing to see."

Companies won't just be selling insurance on those regulated exchanges, either. And they may try to game that distinction as well.

"I think the worst-case scenario is they keep cheap customers in plans offered outside the exchanges, and leave the exchanges with high-cost customers, making it look like the exchanges are inefficient," Aaron said.

A lot of these dynamics would have been completely different if people had a so-called public option: A government-run insurance plan without the same toxic incentive structure. Then consumers would have had an alternative when private industry rates shoot up and services decline. But there is no such option in the new law.

And without it, the law's goal of reforming the insurance market is much more of a challenge.

"It's asking this industry not to do what it's set up to do," Angell said. "What it's set up to do is to profit."


* Do you work in the insurance industry? How is your company approaching the new law?
*Are you trying to get insurance for a child with a pre-existing condition? How's that going?
E-mail me at froomkin@huffingtonpost.com.

Dan Froomkin is senior Washington correspondent for the Huffington Post. You can bookmark his page; subscribe to RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.

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