Major Health Insurance Cost Development: Insurers Willing to Cease Health-Based Price Discrimination

A concession by a major health insurance trade group seems to be good news on the road to implementing badly-needed healthcare reforms and controlling health insurance costs. And that’s good news for employers — and everyone else.

Health Insurance Cost for Individuals and Health-Based Premium Discrimination

Major health insurance industry spokespersons have finally expressed a willingness to stop pricing individual health insurance based on health history and condition (i.e., discriminating against those with the greatest need for insurance) “if Congress adopted a comprehensive plan that provided coverage to all Americans.”

This position reportedly surprised lawmakers, and it could make it easier to pass some version of healthcare reform legislation “because it narrows the issues on which insurers are ready to fight the Democrats.”

Insurers said they were still staunchly opposed to creation of a new government-run health insurance plan, which, under many Democratic proposals, would compete directly with private insurers.

In effect, insurers said they were willing to discard an element of their longstanding business model, under which insurance policies are priced, in part, on the basis of a person’s medical condition or history, leading to large health insurance cost disparities among individuals.

In the past, insurers have warned that if they could not consider a person’s health in setting premiums, the rates charged to young, healthy people would soar, making coverage unaffordable.

But Karen M. Ignagni, president of America’s Health Insurance Plans, a major trade group, told lawmakers on Tuesday [March 24, 2009] that insurers were exploring ideas to prevent such increases by spreading the risks and health insurance costs across a larger population of both healthy and unhealthy people.

Context of this Health Insurance Cost Development

Premium regulation in the individual insurance market is a matter of state law, so it varies considerably. Generally, there is considerable room for pricing discrimination based on health history.

According the the Times: “Premiums for a person with a history of serious illness are often 50 percent higher than premiums for younger, healthier people — if the sick people can get coverage at all … .”

Shortly after President Obama was elected on a platform including major healthcare reform, the insurance industry signaled willingness to give up the right to deny coverage entirely based on health history, if all Americans were required to have coverage. But this stated concession did not extend to premium discrimination.

The new position was stated in a letter to Congress from America’s Health Insurance Plans:

[I]f Congress enacted an enforceable requirement for everyone to carry health insurance, “we could guarantee issue of coverage with no pre-existing condition exclusions and phase out the practice of varying premiums based on health status in the individual market.”

However, the letter also said insurers wanted to retain the right to charge different premiums based on age, place of residence, and family size.

Note that America’s Health Insurance Plans was formed through the merger of the Health Insurance Association of America (HIAA) and the American Association of Health Plans (AAHP). HIAA ran the heavily criticized “Harry and Louise” advertisements that helped kill President Clinton’s health care reform efforts in the early 1990s.

So Is This a Step in the Right Direction for Healthcare Reform — Towards Reduced Individual Health Insurance Cost and Increased Availability?

One thing’s for sure: It’s truly a sign of the times that the health insurance industry is finally putting this sacred cow on the chopping block. Apparently, carving up and cherry-picking the insured population, instead of spreading risk broadly, has long been a key to profitability in the industry.

Individualized health-based underwriting of individual health insurance policies has also had a number of effects that were helpful not only to insurers, but also to corporate America — as long as employers saw employee health benefits as a desirable perk to attract good employees, rather than the costly, undesirable millstone around their neck that it has become over the last 10-20 years.

These beneficial effects for larger employers of premium discrimination — and outright policy denial in some cases — in the individual health insurance market included:

• Attracting some employees who otherwise might prefer self-employment or small-business employment, but whose health histories made obtaining individual or small-group coverage problematic, costly, or even impossible.
• Deterring employees from departing to start small entreprenurial ventures, because the post-departure health insurance cost could present challenges (though less so since COBRA).
• Providing health insurance cost advantages to the largest employers, which are able to buy in volume and spread risk across a large population.

These benefits of employer-provided health insurance now pale in comparison to its escalating cost. Significant elements of corporate America are ready to get out of the healthcare business entirely.

That’s not as troubling to the health insurers as these other developments, which are challenging their very raison d’etre:

• “Socialized medicine” and single-payer healthcare reform models look good to a near-majority (49%) of Americans, according to a recent poll.
• The growing support for cutting the insurance companies out of the loop entirely by single-payer health care reform includes some physicians. Physicians for a National Health Program is a non-profit organization of 16,000 physicians, medical students and health professionals who support single-payer national health insurance.
• The U.S. Department of Health & Human Services now has a healthcare reform website, HealthReform.gov, supporting “Health Care for All Americans” as government policy, summarizing 3,276 group reports from local meetings about how to reform healthcare in America that were organized by the Presidential Transition Team, and soliciting citizen questions and ideas.
• Over one-quarter (27%) of the local meeting groups discussed the merits of a single-payer system, and a majority of them supported this idea, finding it a necessary step for healthcare reform.
• One of President Obama’s health reform care proposals is “offering a federal, Medicare-like insurance plan to anyone, at any age,” against which private health insurance could compete.
• The “liberal media” are not allowing themselves to be scared off by the label “socialized medicine.” For example, the Washington Post published this a year ago: “If socialized medicine means doing what our public-insurance programs and other nations’ health systems do to control costs, expand coverage and improve the quality of care, it’s high time for a little socialization.“

What the Health Insurers Fear, and How They Must Remake Themselves to Survive

Of course, the insurers fear single-payer, because in its pure form it wipes out their entire industry.

And the insurers fear a competing government plan because they know they won’t be competitive. That’s not because of government subsidies, but because private health insurance administration is more bloated, inefficient, and strewn with excess paperwork and administrative costs than the worst caricature of a government bureaucracy — and because there’s big chunks of shareholder profit and executive overcompensation in the private plans.

And the insurers fear this scenario: If everyone has the opportunity to buy individual health insurance on the same terms, without regard to health status, as the insurers now propose, many employers may well decide they’d just as soon offload their entire health insurance cost on employees (they’ve been doing this incrementally for years), using some or all of the savings to fatten paychecks. The employees would use that money to buy individual coverage. From that point forward, employers’ labor cost increases would be in wages and salaries, where they would not be subject to health insurance cost increases always vastly outpacing inflation.

What benefit would there then be to keeping the private health insurance industry afloat, instead of going to a strictly single-payer system?

The insurance companies thus have to prove that they can serve as something more than costly middlemen that push a ton of paper, interfere in doctor-patient relationships, and make high profits from the provision of medical care, which increasing numbers of Americans view as a public good — as most of the rest of the world does.

An impossible mission for the insurers? Maybe not. The tried and true appeal to market capitalism — though wearing thin in these days of capitalist-excess-gone-bust — could provide a rationale. Yes, market competition, but not competition to see who can best avoid providing coverage to sick people. Instead, it should be competition to improve policyholder health through lifestyle changes, medical compliance, preventive medicine, and the like.

Having multiple competing players could encourage innovation in this direction. The profit motive may even play a useful role in this regard. What the heck, this is still America!

Finally, I used strong language in referring to price “discrimination.” I think that’s exactly what it is when someone can’t help it that they have a health problem, but is denied coverage or has their premium jacked up because of it. I do not consider it discrimination to use financial incentives to encourage wellness, making healthcare more expensive for those, such as smokers, whose health problems are of their own making.

Resources

• Workforce Management: Business Group Seeks an End to Employer-Based Health Coverage
• Commonwealth Fund: The Path to a High Performance U.S. Health System — A 2020 Vision and the Policies to Pave the Way
• NYTimes.com: Insurers Ease Stance on Pre-Existing Conditions –
• NYTimes.com: A Health Plan for All and the Concerns It Raises
• NYTimes Economix Blog: Defining “Health Care Reform” (Princeton University economics professor Uwe E. Reinhardt)
• Washington Post: Socialized Medicine: Let’s Try a Dose. We’re Bound to Feel Better.
• American Health Care Reform.org
• HealthReform.gov