September 15th, 2009 – Last week President Obama gave a well publicized speech in which he made a number of troubling accusations against the health insurance industry. With my years of health insurance industry experience, I was shocked to the point of disbelief by some of misdeeds that President Obama accused the insurance industry of.
While no company is perfect, when problems have been brought to light I have yet to see an insurer in Colorado fail to live up to their obligations. Still, if insurers do behave badly, consumers have the backing of the Colorado Division of Insurance to keep insurers honest.
Much to my relief, this article from yesterday’s Wall Street Journal shines the light of truth on the accusations brought up in President Obama’s speech.
In his speech to Congress last week, President Barack Obama attempted to sell a reform agenda by demonizing the private health-insurance industry, which many people love to hate. He opened the attack by asserting: “More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won’t pay the full cost of care. It happens every day.”
Clearly, this should never happen to anyone who is in good standing with his insurance company and has abided by the terms of the policy. But the president’s examples of people “dropped” by their insurance companies involve the rescission of policies based on misrepresentation or concealment of information in applications for coverage. Private health insurance cannot function if people buy insurance only after they become seriously ill, or if they knowingly conceal health conditions that might affect their policy.
Traditional practice, governed by decades of common law, statute and regulation is for insurers to rely in underwriting and pricing on the truthfulness of the information provided by applicants about their health, without conducting a costly investigation of each applicant’s health history. Instead, companies engage in a certain degree of ex post auditing—conducting more detailed and costly reviews of a subset of applications following policy issue—including when expensive treatment is sought soon after a policy is issued.
This practice offers substantial cost savings and lower premiums compared to trying to verify every application before issuing a policy, or simply paying all claims, regardless of the accuracy and completeness of the applicant’s disclosure. Some states restrict insurer rescission rights to instances where the misrepresented or concealed information is directly related to the illness that produced the claim. Most states do not.
To highlight abusive practices, Mr. Obama referred to an Illinois man who “lost his coverage in the middle of chemotherapy because his insurer found he hadn’t reported gallstones that he didn’t even know about.” The president continued: “They delayed his treatment, and he died because of it.”
Although the president has used this example previously, his conclusion is contradicted by the transcript of a June 16 hearing on industry practices before the Subcommittee of Oversight and Investigation of the House Committee on Energy and Commerce. The deceased’s sister testified that the insurer reinstated her brother’s coverage following intervention by the Illinois Attorney General’s Office. She testified that her brother received a prescribed stem-cell transplant within the desired three- to four-week “window of opportunity” from “one of the most renowned doctors in the whole world on the specific routine,” that the procedure “was extremely successful,” and that “it extended his life nearly three and a half years.”
The president’s second example was a Texas woman “about to get a double mastectomy when her insurance company canceled her policy because she forgot to declare a case of acne.” He said that “By the time she had her insurance reinstated, her breast cancer more than doubled in size.”
The woman’s testimony at the June 16 hearing confirms that her surgery was delayed several months. It also suggests that the dermatologist’s chart may have described her skin condition as precancerous, that the insurer also took issue with an apparent failure to disclose an earlier problem with an irregular heartbeat, and that she knowingly underreported her weight on the application.
These two cases are presumably among the most egregious identified by Congressional staffers’ analysis of 116,000 pages of documents from three large health insurers, which identified a total of about 20,000 rescissions from millions of policies issued by the insurers over a five-year period. Company representatives testified that less than one half of one percent of policies were rescinded (less than 0.1% for one of the companies).
If existing laws and litigation governing rescission are inadequate, there clearly are a variety of ways that the states or federal government could target abuses without adopting the president’s agenda for federal control of health insurance, or the creation of a government health insurer.
Later in his speech, the president used Alabama to buttress his call for a government insurer to enhance competition in health insurance. He asserted that 90% of the Alabama health-insurance market is controlled by one insurer, and that high market concentration “makes it easier for insurance companies to treat their customers badly—by cherry-picking the healthiest individuals and trying to drop the sickest; by overcharging small businesses who have no leverage; and by jacking up rates.”
In fact, the Birmingham News reported immediately following the speech that the state’s largest health insurer, the nonprofit Blue Cross and Blue Shield of Alabama, has about a 75% market share. A representative of the company indicated that its “profit” averaged only 0.6% of premiums the past decade, and that its administrative expense ratio is 7% of premiums, the fourth lowest among 39 Blue Cross and Blue Shield plans nationwide.
Similarly, a Dec. 31, 2007, report by the Alabama Department of Insurance indicates that the insurer’s ratio of medical-claim costs to premiums for the year was 92%, with an administrative expense ratio (including claims settlement expenses) of 7.5%. Its net income, including investment income, was equivalent to 2% of premiums in that year.
In addition to these consumer friendly numbers, a survey in Consumer Reports this month reported that Blue Cross and Blue Shield of Alabama ranked second nationally in customer satisfaction among 41 preferred provider organization health plans. The insurer’s apparent efficiency may explain its dominance, as opposed to a lack of competition—especially since there are no obvious barriers to entry or expansion in Alabama faced by large national health insurers such as United Healthcare and Aetna.
Responsible reform requires careful analysis of the underlying causes of problems in health insurance and informed debate over the benefits and costs of targeted remedies. The president’s continued demonization of private health insurance in pursuit of his broad agenda of government expansion is inconsistent with that objective.
Mr. Harrington is professor of health-care management and insurance and risk management at the University of Pennsylvania’s Wharton School and an adjunct scholar at the American Enterprise Institute.