Published on
The Huffington Post

Insurance Industry Already Finding Ways to Game New System

Dan Froomkin

"This is what you're going to see as each element in this plan comes up for implementation. This insurance industry is going to give up nothing." -- Dr. Marcia Angell, a senior lecturer at Harvard University and former editor of The New England Journal of Medicine.

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

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

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

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

"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

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

"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."

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