By MICHAEL TURPIN

Powers once assumed are never relinquished, just as bureaucracies, once created, never die.

Charley Reese

As we ponder the 100 day count down to the Presidential Elections, the rhetoric and ranting swirling around the best solution for our nation’s healthcare crisis, is hitting decibel levels not heard since the passage of the Affordable Care Act.  As with any major entitlement legislation, there are commendable elements, inefficiencies, and a host of unintended consequences. The current administration’s obsession with repeal while the ranks of uninsured people grow, begs the question, “what is the blue-print for expanding coverage and reducing waste, fraud and abuse while increasing transparency, quality and overall public health.  Answer: There is no plan and if there was, it would fall well short of achieving many of these objectives given the deeply entrenched stakeholder who actually do not benefit if the cost of healthcare declines.  It a classic NIMBY response: “I’m all for reform as long as I maintain my role and revenue in whatever solution is proposed.”. 

The Affordable Care Act is a solid foundation to build a 2.0 version of a solution to solve for the uninsured and to act as a catalyst for market reforms that will either reshape the misaligned incentives and embedded inequities in our current system or it will lead to voters demanding the expansion the role of Medicare and Medicaid.  70M adults and children are covered under Medicaid – including those who benefited by the passage of the ACA.  Approximately 55M are covered under Medicare resulting in 125M covered under some form of state or federal aid. 155M receive coverage through employers. 

Its estimated by the Economic Policy Institute that 29.8M individuals who received coverage as a result of ACA expansion would lose coverage if no legislation replaced it.  Add in the severe economic dislocation arising from Covid-19 that could result in an additional 14M unemployed and you could see a worst case of uninsured swell from a current 27M to as high as 70M according to Policy Advice, a non-profit industry watch dog.

So how can you change the current market to drive reforms without a legislated intervention?  It starts by enforcing laws already in place and challenging regulators to do their jobs – ensuring that we minimize waste, fraud and abuse.  As of 2020, the average annual cost of family health coverage has eclipsed the cost of a mid-sized economy car. We must tackle the affordability problem by reducing the number of intermediaries who extract profits from the delivery system but do not play properly in the sand box of regulation that is often poorly monitored. We must demand transparency and deconstruct expensive bureaucracies only inflate the cost of care without improving it. It’s impossible to moderate the cost of healthcare without reducing the size of the pie and those feeding on it.

Healthcare At A Tipping Point?

 While Congress remains deeply divided on how to moderate healthcare, states are drowning in red ink arising from their own healthcare and retiree obligations.  Revenues feeding tax coffers are down while those qualifying for state administered Medicaid are up.  Many states have large unfunded retiree and Medicaid obligations that could impact their ability to finance public projects and rates above high yield debt. Absent any Federal relief for states, Covid-19 will only deepen the crisis as businesses and wealthy individuals relocate to more business friendly states characterized by lower operating costs and higher marginal tax breaks.  The average cost of healthcare varies by region and can be influenced by how well departments of insurance (DOI) and Insurance Commissioners govern those covering workers and citizens in that state.  States remain the good place to experiment with public/private partnerships and delivery models that moderate the cost of healthcare. It impacts everyone – hospitals, employers, insurers, pharma, the uninsured and underinsured. The future of many communities is inexorably tied to how we manage these costs and the money being drained out of the system only to be put into the hands of organizations that do not share a social or political obligation to remediate the barren landscape left in their wake. We can start by helping small business and individuals afford to buy coverage.  The simple act of freeing up billions of retained profits hiding inside non-profit insurers is a start.   

No Uniform Regulation for Managing Profits Retained by Non-Profit Insurers

State insurance commissioners and Departments of Insurance do not operate under uniform rules regarding the governance of for profit and not for profit (NFP) health insurers such as Blue Cross/ Blue Shield (BCBS) and Kaiser.  Rules vary regarding rate reviews, consumer complaints and the formulas that apply to insurers to determine adequacy of reserves and DOIs disagree if and when consumers and employers may be eligible for rebates and/or lower rates. The confederacy of NFP insurance plans and their excessive retained surpluses is an important part of a multi-pronged plan to drive affordability through more effective management of all stakeholders. It gets political very fast which contributes to the inertia that delays course corrections.

As a former regional CEO of a for profit health plan, I witnessed how under-resourced departments of insurance were in assessing us and our methods of setting premiums and reserves. We lobbied heavily for the freedom to set our own rates ( known as file and use ) and submit them after their introduction to the insurance market versus a more political and over regulated process of “prior approval” requiring DOI commissioners to give their approval before instituting annual rate increases.  In “file and use” states the regulator merely rubber-stamped proposed rates under a more laissez faire approach of oversight.  In prior approval states, the fights were often bitter and public as insurers – often sitting on large profit margins argued for increasing rates.

Insurers dislike the bureaucracy of the rate approval process which often required extensive lead times and as a result, delayed calibrating rates in real time to shifts in healthcare consumption or legislation that may increase liabilities from issues such as a pandemic or a state benefit mandates. Consumer advocates and legislative watch dog groups rebutted those concerns pointing to excessive profits and a history where, left to their own self-policing, health insurers would leaven additional margin into rates instead of dipping into accumulated excess reserves to subsidize lower premiums. The practice of running down these reserves often had an additional beneficial market impact: as NFP Blues ran down reserves by reducing increases and quoting more competitive rates for new business, for profit insurers would face an uncomfortable dilemma – drop their rates to retain customers or lose members to non profits who had an advantage of not being accountable to shareholders.  This buy-down process might last one or two renewal cycles until reserves returned to lower levels.  However it would positively help all insured customers.  Sadly, an unintended consequence of the passage of ACA was the preoccupation of insurance commissioners with the viability of their insurance exchanges and the contention from many non profit plans that reserves must be allowed to increase to ensure the financial stability of these new risk pools.  Insurance commissioners bought the argument and proceeded to watch non profit insurers increase their surpluses  (Risk Based Capital ) and request large increases in premiums for exchange based insurance citing uncertainty and the fact that since for profit insurers were choosing not to participate in state insurance pools, the non profits were the market of last resort.  There would be no choice if these plans were insolvent.  The reality is the lion’s share of this market was already with NFP plans and they stood to write more as for profit insurers exited the ACA markets. The result took pressure of for profit insurers to reduce rates, allowed NFP Blues to continue to amass reserves and relaxed the prior approval process to allow premiums to in some cases, double in a sort period of time, making coverage unaffordable for anyone who did not receive subsidies from the Federal government to buy insurance.  The new uninsured was the middle class – making too much money to qualify for subsidies but not enough to afford $25,000 a year for family health coverage. Mandated benefits in these ACA plans only inflated premium with coverages once considered discretionary like maternity coverage now being embedded as mandatory.  A couple with no kids past the age of having children was still required to buy a policy with maternity coverage embedded and charged for.  Thus, the anger from people who were told, “ if they liked their benefits plans, they could keep them.’ Minimum benefit requirements eliminated this as a possibility and increased costs.

How Much and Whose Money Is It?  

Evaluating NFP health plans – most notably Blue Cross / Blue Shield plans – requires strong actuarial resources within / or available to the DOIs to determine ensure the financial stability of the pricing.  Reserve surpluses or Risk Based Capital ( RBC ) are been seen as the canary in the coal mine for the state of insurance market pricing and insurer solvency.  300% or 3X the estimated required reserves has historically been considered an adequate surplus to protect NFP plans.  Companies like Kaiser, and NFP Blues usually maintain the highest share of a state’s individual and small group markets. In some markets they enjoy a regional monopoly. As goes the NFP’s pricing, so goes the rest of the insurance market.  

In the past decade, healthcare costs including prescription drug costs have dramatically increased along with the premiums charged by NFP plans to cover these costs.  Instead of reserves falling under the pressure of rising costs, NFP plan surpluses have grown dramatically and are drawing attention from consumer groups who want to see these reserves returned to the policyholders who generated those excess reserves by being overcharged for premium in excess of claims. At this point the politics gets a little fuzzy as to whether the politics of red and blue state affiliation determines the energy an Insurance Commissioner may expend to police pricing.  

Over the last decade, the risks that many NFPs insisted justified for relaxing RBC reserving rules never materialized. We did not see a rapid deterioration of RBC reserves. Many question whether these firms should continue to receive a for profit exemption when you look at their current war chests of retained capital. In 2016, HCSC, the parent plan for the NFP Blues plans in Texas and Illinois, received approval to increase rates for individuals in their ACA pool by 20% while the company’s RBC surplus grew to a staggering $9.9B.  At the same time, their CEO received a $10M bonus. The plans covers 15.5M members who have seen higher increases and little to any RBS refunded beyond mandatory rebates dictated by the ACA.

The war chest of retained surpluses has attracted the attention of consumer and employer groups and in the case of NJ, a former governor who tried to legislate a $300M asset transfer from Horizon Blue Cross to the state to underwrite rising costs in Medicaid and other underfunded state health initiatives. Critics doubted that money would cover any healthcare budget shortfalls and that any money should go to the policy holders who overpaid premium to create the surplus.  

Other states have begun to expand regulator authority to review rates and reserves as well as hardship requests to increase premiums above targeted trends of mid-single digits. Yet, the roster of undeployed RBC continues to increase.  In Michigan, Blue Cross increased reserves to $4.25B while the CEO of the non-profit took home $20M in remuneration.  In Minnesota, a state that historically required all medical insurers to operate as NFP enterprises, saw their risk based capital grow across HMOs and PPOs with RBC ranging from 5X-7X required levels.

The crisis of healthcare affordability is now being magnified and called into question by the inconsistent and poor regulatory oversight over certain NFP plans with NFP Blues resting on billions of overfunded reserves that could be used now to reduce premiums and at the same time, pressure for profit insurers to reduce their premiums or risk losing market share. In the end, the American taxpayer foots the bill for the inflated premiums subsidy eligible Americans buying in exchanges. As the uninsured grow, the pressure on the Federal budget will only increase while non profit plans continue to stash away reserves and increase rates. 

Covid-19 Will Only Make It Worse

In 2020, Covid-19 is actually leading to historically lower cost for elective and preventive services due partially to quarantine and public fear of being treated or seen at health facilities.  Lower claims will translate into very low loss ratios ( part of which may be returned in early 2021 in the form of ACA mandated rebates ). The low loss ratios will drive higher retained surpluses for non-profits. At this same time, for profit insurers are now jumping into the ACA exchanges as they feel pricing is high enough to meet their shareholder expectations for a return on capital.  When the sharks start showing up in the feeding grounds, it’s a target rich environment. They also don’t believe NFP competitors will start using reserves to drive down prices and drive them from these new markets.  If regulators don’t intervene, we have no reason to believe insurers won’t contribute to increase premiums and increase surpluses.

In 2021 underwriting must reflect the need to draw down reserves and stabilize premiums.  Last week, Washington State proposed legislation to evaluate RBC for any plans filed in the state and stated as as goal to use these to ensure stability and affordability for consumers and small businesses.  Some would go further and require any for-profit insurer must offer an exchange based plan of they want to sell commercial products in that state. 

An article published by the ConsumerUnion.org pushed back on those arguing for a continuation of laissez faire regulation of RBC non-profit reserves. “This issue is salient with respect to non-profit BCBS plans because many non-profit plans are chartered as ”charitable and benevolent” organizations with a mission to provide affordable healthcare…As non-profits, the “profits” eg capital plus surplus must be used for the benefit of their members or the community at-large…Evidence suggests that they do not use these large stores of capital to moderate premiums.”

Some non-profits credit stock market appreciation for their surge in RBC surpluses.  It doesn’t add up especially since the nature of investments made by these plans tend to be more conservative. Ironically, many non profit Blues lag their for profit competitors in investing in more contemporary systems, consumer portals, and a variety of medical management capabilities so they can better engage members.  One cold argue the RBC should be used to improve operations or given as a dividend back to policy holders if you are a mutual company.

Most industry insiders feel both for profit and non-profit insurers have lost the arms race of unit cost ( discounts ) leverage as they confront large, influential health systems. Consolidation, it seems, has not resulted in lower healthcare costs for consumers.  It’s helped the stock price of for-profits but left the non-profits sitting on surpluses and not putting them to work to reduce costs or consumption.

Change must happen and Insurance Commissioners should follow the lead of states like Washington as they seek to repatriate the profits from non-profits back to their customers.  This could spark a price war which brings premiums down and actually accomplishes the competition that has been promised during a period of intense consolidation   The NAIC can convene all insurance commissioners and commit to a narrower corridor for risk capital surpluses. 

We can free up billions of dollars trapped inside a poorly regulated and inconsistent system where even those firms who purport to be on a philanthropic mission to drive affordable care continue to levy larger increases on those who can least afford it. 

Kind of makes you feel sick, doesn’t it?

Next Up: The Rise ( and Fall ) of Pharmaceutical Benefits Managers

Michael Turpin is frequent speaker, writer and practicing benefits consultant across a 37 year career that spanned assignments in the US and in Europe.