House Republicans, unable to repeal President Obama's health care reform law outright, have decided to go after it piece by piece. If they are successful, what's likely to remain is the kind of reform the insurance industry dreamed of, but never really thought could be the law of the land.
Although the Republican-controlled House passed legislation to repeal the Affordable Care Act several months ago, the Senate, controlled by Democrats, rejected it. Bills are now being considered in the House that would strip some of the most important consumer protections from the new law. If the bills' sponsors are successful, health insurers would be free to spend as little of our premium dollars on our health care as they want, and they would be able to continue setting lifetime limits on policies and cancel our coverage at the time we need it most -- when we get sick. Other important benefits to consumers would also disappear.
Because of my nearly 20 years of experience as an executive of two large insurance firms, I was asked to provide my perspective on the legislation at a September 15th, 2011 hearing of the House Energy and Commerce Subcommittee on Health.
One of the bills would eliminate a provision of the reform law that requires insurers to spend at least 80 percent of what we pay in premiums on actual medical care. The insurance industry tried, without success, to keep that provision out of the final bill, so they are solidly behind the effort to do away with it.
As I am explaining to the lawmakers, there is a single-minded focus among the big for-profit insurers on being able to show Wall Street and investors two things every three months: that the companies made more money during the most recent three months than during the same period a year earlier, and that the portion of each policyholder's premium devoted to covering medical expenses was less than it was the previous year.
When insurers release their quarterly earnings reports, investors and analysts look for two key figures: earnings per share, which is common to all companies; and the medical loss-ratio (MLR), which is unique to the health insurance industry. The MLR is the ratio between what an insurer actually pays out in claims and what it has left over to cover executive pay, underwriting, lobbying, sales, marketing, public relations, other administrative expenses, and, of course, profits.
Insurers Boost Profits by Cutting Care
A recent study conducted by the accounting firm PricewaterhouseCoopers revealed just how successful insurers have been in meeting Wall Street's MLR expectations. It found that the average MLR in the insurance industry has fallen from approximately 95 percent in 1993 to around 80 percent today. In many cases, it is much lower.
During my years in the industry, I came to know from personal experience that insurers almost always see sharp declines in their stock prices when they disclose that they spent more on medical care than investors expected. I remember vividly when Aetna's stock price fell more than 20 percent on the day it admitted that its first quarter MLR had increased from 77.9% to 79.4%.
If the industry's allies in Congress are not able to get rid of the MLR provision completely, they will try to at least make it even easier for companies to meet the requirement. One bill would exempt insurance agent and broker commissions from the calculation. Another would take that a step further by allowing insurers to exclude all sales commissions, including payments to salaried sales staff, from the formula.
Lobbyists for agents and brokers have joined the insurers in supporting the measures to gut or abolish the MLR provision. They have complained that insurers have been slashing broker commissions in order to comply with the law.
The reality, however, is that insurers had begun taking steps to reduce broker commissions even before the passage of the Affordable Care Act. Further, insurance firms are not being forced by the MLR provision to reduce commissions. There are other administrative expenses, like marketing and PR, that they could cut, but many of them have instead decided to reduce commissions to protect profits. None that I know of have trimmed the salaries of their CEOs and other top executives to meet the MLR requirements. They could, of course, but average executive compensation at the big insurers has gone up instead of down since the law was passed.
Even if legislation to exempt commissions were to be enacted, it would not likely be of much help to agents and brokers. There is no reason to believe that insurers would restore the commission reductions they have already made. Exempting commissions would only help insurers by making it easier for them to comply with the MLR provisions.
Republican-Sponsored Bill Would Gut Consumer Protections
Another bill favored by insurers and sponsored by Republicans is similarly misguided. It would deny the Department of Health and Human Services the ability to enforce insurance reforms in regard to current plans, taking away important consumer protections. Among them: the prohibition on lifetime limits and the ban on rescissions -- a practice that lets insurers take away your coverage mid-year, usually after you've gotten sick.
That bill would also prohibit enforcement of the rule that allows young people to stay on their parents' insurance plans until age 26. This week's Census figures show that this provision has already helped 500,000 young people get insurance. Why would Congress vote to take away their coverage?
Because of the GOP's majority, there is a better-than-even chance that the House will pass these industry-friendly, anti-consumer bills. Our best hope is that the Senate will reject them, just as it did the earlier attempt to repeal the reform law entirely.