Don't Crush AEtna!

IN my last blog, I mentioned that the constellation of restrictions placed on for-profit health insurance companies by HR 3200 create the risk of imploding the health insurance industry. Not that the industry doesn't need - and deserve - some regulation! Still and all, for these companies to flourish, they must be able to operate in the marketplace. And investors will flee from their stock if they adjudge that these companies will no longer be able to make a profit.

In addition to the restrictions I discussed in my previous blog; namely, setting limits on out-of-pocket responsibilities for policy purchasers, HR 3200 seeks to create other restrictions on the health insurance industry:

1. Individual policies that aren't grandfathered will have to be offered on the Insurance Exchange, which will be sort of a comparison-shopping website or program where all plans can be compared to one another, much like Medicare Advantage plans can now be compared one to another on the Medicare website. This will engender competition among the plans, driving costs down and reducing variation in the benefits offered. But it will also limit an insurance company's ability to restructure pricing for its product. Overall, however, I think this is a good thing, because individual insurance policies currently are all over the place, with regard to price and quality.
2. Exclusion for pre-existing conditions will be prohibited. I mentioned this in my last post. This is a good thing for the consumer. Of course, for the issuer of the policy, it increases risk and provides no method of escape.
3. Guaranteed renewal of coverage - insurance plans will not be able to drop customers because their risk profile intensified. The only legitimate reason for dropping a customer is non-payment of premiums, and even then, the insurance plan has to notify the client of the impending cancellation and offer a grace period to re-activate coverage. Overall, this is a necessary improvement, since this has been one of the most common ways that insurers have shed themselves of expensive clients.
4. Variation of rates based on age of the insured person is allowed, but limited to a 2:1 ratio; that is, the higher rate for an older client cannot exceed twice the lowest rate for a younger customer. Again, this limits the insurer's ability to minimize its vulnerability to risk.
   
5. Insurers must provide coverage for mental health and substance abuse. Traditionally, insurers have reduced benefits for these two elements within their plans, to reduce their expenses for what many people don't even consider an illness in the first place. I believe this "discrimination" against mental health benefits was a reaction to the unrestrained avarice of the mental health/substance abuse facilities of last decade. I think these facilities learned their lesson . . . at least those that didn't go bankrupt in the ensuing response from insurers to the overutilization of the 1980s and 1990s.
6. The federal government will regulate the allowable medical loss ratio. This is perhaps the biggest threat to the insurance industry. If the government sets, in effect, a ceiling on the profits an insurance company can earn, it will drive investors away from the industry. The medical loss ratio is the percentage of revenue that is paid out in medical claims. If the government sets this amount too high, the profit margin will be erased (there is very little risk that the government will set the ratio too low).
7. Coverage for services can only be restricted based on medical necessity. That means that an insurance plan cannot decide to exclude coverage for a particuar medication or treatment that is FDA approved. If a drug is very expensive and the insurance plan doesn't want to cover it, the plan cannot create a bogus exclusion for the drug. It will have to find a way to provide the drug, because it is medically appropriate. The insurance plan is allowed to use the cost-share (copayment, co-insurance) to reduce demand for the drug or treatment. This is a common form of rationing currently used by the private markets. Ironically, many conservatives are worried about rationing of health care by a "government-run" system; yet this law will outlaw rationing based on anything other than medical appropriateness of the treatment.
8. The government will define a minimum set of services that must be covered. Insurance plans won't like this because they won't have the freedom to exclude certain services in their fine print. This is another trick that individual plans, especially, use to get out of paying for health care.
9. Annual and lifetime benefit maximums will be prohibited. This is another dirty trick used often by individual plans; for instance, the man I wrote about in my last blog whose insurance plan limited coverage for chemotherapy to $1000 per day. Or the patients we've seen with Mega Life policies (a division of United Health Care) that have a $25,000 annual cap, which is typically used up in the first two weeks of catastrophic care.
10. Cost sharing (deductibles, copays, coinsurance) will be limited, and altogether prohibited for preventive care. This increases the financial liability for insurance plans; on the other hand, it incentivizes individuals to seek out preventive care, which is always cheaper than treating late stage illness.

Taken together, these ten elements may very well hobble the private insurance industry, perhaps even erasing any profitability. This would be a big mistake, and I would urge the Secretary of Health and Human Services, who is charged ultimately with the regulation of health insurance plans, to protect the viability of the industry. The game will be played at the margins; that is, all of these changes may be implemented, and if they are implemented to the right degree, they may restrain the insurance industry without destroying it.

If these changes are implemented appropriately, the industry will survive, though not as profitably as it currently exists, and the consumer will be able to purchase a fair and reasonable product. Some plans will go out of business: the ones that need to go out of business. Most of these doomed plans are individual and small group plans - the plans that are poorly regulated today. Plans that charge exhorbitant premiums but end up paying out very little in benefits, through a mixture of exclusions, limitations, caveats and fine print. Plans that routinely drop patients when their loss ratio climbs too high, or exclude coverage for pre-existing conditions, or set unfair coverage limits . . . all these plans will go away. And that is as it should be.