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Is The Health Insurance Industry Dying?

Written by Stephen Hyde - HydeOnHealthCare.com

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As part of his last-ditch effort to revive the Senate's undead health reform bill, President Obama has proposed a federal board to veto health insurance premiums it finds "unreasonable and unjustified." In case you're wondering, all 50 states already do this, albeit with the countervailing requirement that premiums must also be "adequate" to assure insurance carrier solvency-a key requirement the President ignores.

His proposal is the obvious result of his Administration's high dudgeon over Wellpoint's 39% individual premium hikes in California (where it has lost millions). The argument is that such increases are unconscionable from an industry that earned "$12 billion in profits last year." Please note the inapt comparison of percentages with dollars, a diversionary, demagogic tactic often used to enrage the innumerate while failing to note Wellpoint's 2009 operating profit margin of 4.8% or the entire industry's hopelessly pedestrian 2.2%. Even more absurd was one congresswoman's snarky suggestion that the real reason for the increases was to maintain WellPoint CEO Angela Braly's $9 million annual compensation-equal to twenty-eight cents per member per year. The cause of premium increases is not profits or executive compensation. To paraphrase President Clinton, "It's rising medical costs, stupid!"

But there's a much deeper problem inside the insurance industry. Obscured by its record profits is the stark reality that it's stuck with an unsustainable business model. If it doesn't fundamentally change, it's going to die.

The problem began a decade ago with the widespread collapse of managed care and the abandonment of utilization and cost controls that had so effectively moderated costs during the previous two decades. It has continued as merger-driven concentrations of hospitals and single-specialty medical groups have created market-dominant powerhouses able to dictate their own reimbursement rates-like the California hospitals now demanding 40% increases from WellPoint (220% in one case).

Ultimately, though, the fatal blow will come from the insurers' own slavish dedication to employer-based group insurance. Having long since lost the large employers to self-insurance, they're now stuck with a rapidly shrinking small-employer market and an individual market that too often loses money and gets headlines for "unjustifiable" premium hikes and for denying or dropping coverage for the sick. And the small employers that still offer insurance are rushing to high-deductible plans with lower premiums and, thus, lower profits because of insurer's cost-plus pricing models.

To cope, many insurers have merged to increase their own market power and economies of scale, but that strategy is rapidly playing out. Currently, 24 states now have only two insurers controlling 70% of the market (last year it was 18). On another front, carriers have begun experimenting with pay-for-performance arrangements to encourage doctors and hospitals to improve medical quality and lower costs. The problem is that they're rewarding provider efforts rather than patient outcomes, effectively reprising the old saw, "The operation was a success, but the patient died."

Health insurers have commoditized themselves into a low-margin, increasing-cost, price-constrained, shrinking-market business model almost devoid of real innovation. And virtually everything in Mr. Obama's "health reform" proposal will make their lives worse: higher regulatory costs, unrealistic premium restraints, increased benefit mandates, and serious adverse selection. Any carrier that participates in the government's insurance exchange will likely do so only as a politically motivated loss-leader to forestall imposition of the dread public option as a camel's-nose-in-the-tent precursor to single-payer.

The Administration's poll-driven demonization of the industry is beating a dying horse-perhaps with an intent to accelerate its demise, although they're probably neither that smart nor that stupid. While the industry's strategic decline is mostly a consequence of its own actions and innovational lassitude, all is not hopeless. Herewith, a few policy recommendations for the industry to get its act together to help lead us out of the mess that is the American health care financing and delivery system.

1.    Return to provider accountability with risk-sharing and locally based health plans. Capitation became a dirty word when you abused and misused it last decade. Do it right this time.

2.    Reinstitute medical prices by rationalizing the dysfunctional provider billing-and-collection system to signal real consumer prices and to cut transaction costs by three or four hundred billion dollars per year.

3.    Engage consumer markets as the only way to get quality up and costs down. Help consumers demand and use providers with the best quality and lowest prices to flush out waste that now consumes half of every medical dollar. Push for tax equity with super-HSAs.

4.   Institute adjusted community rating based on natural demographic risk classes unrelated to individual health status, along with financial incentives for individuals to control their own preventable health risk factors that lead to 75% of all medical spending.

5.    Sell insurance, not prepayment for normal consumer purchases. Simultaneously knock a big chunk out of premiums and create a vibrant consumer market for primary and preventive care by convincing, cajoling, and pressuring state legislators to limit required minimum insurance benefits to care that is both medically necessary and otherwise unaffordable to consumers.

6.    Abandon employer insurance. It's a market-failure-created artifact that is leading you to ruin. Push for a rational, universally-available, voluntary, non-adversely-selected, defined-contribution, individual insurance market to cut out employer middlemen and to conjoin your interests with those of your consumers to achieve high-quality, low-cost medical care on a sustainably affordable basis.

Insurers, it's time to get out front as innovative change-agents and stop milking a cash cow that's heading for the slaughterhouse.

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