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A California insurer shows how health-care reform would work, and help

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The Anthem Blue Cross saga appears to have a happy ending: After criticism from the administration, the insurer has delayed the planned 40 percent rate hike. That will give the company time to reevaluate whether it's worth the blow-back, and I'd guess there's a good chance it never takes effect at all.

But if this is a good outcome, it's a not a good policy. The insured can't depend on someone in the White House's communications shop noticing when an insurer tries to screw its customers. What we need is an actual policy standing between the insured and the grim incentives of their insurers. That's what health-care reform is meant to be, and the Anthem saga is a good example of how it would work.

The Senate bill contains two separate categories of provisions that would stand between the insured and what Anthem attempted in California. The first are consumer protections that could be invoked if an insurer tried to raise rates precipitously. The second are market reforms that make it less likely for an insurer to try, and less calamitous for individuals if the insurer succeeds.

Let's start with the consumer protections. Under health-care reform, the Anthem plan -- which serves high-risk customers in the individual market -- would be in the exchange. If Anthem attempted to jack rates up by 40 percent, a couple of things would happen.

First, Anthem would have to justify the rate increase to the exchange's administrators and post their justification on their Web site. That's essentially what the Obama administration forced Anthem to do last week, and it was enough to derail the hike. Second, Anthem would run smack into Section 1311 of the bill, which gives regulators the power to control access to the exchanges based on whether the plan "is in the interests of qualified individuals and qualified employers in the State." In fact, the bill specifically states that regulators can take "excessive or unjustified premium increases" into account when deciding whether to certify a health-care plan's continued presence in the exchange.

In other words, Anthem's plan could be kicked out entirely for this rate hike. That would probably have to happen to only one health insurer for the rest to take notice that precipitous and inexplicable rate hikes are no longer going to be part of the business model.

But perhaps the more important part of health-care reform is that it would no longer make sense for Anthem to do this sort of thing. The problem is not that insurers are bad so much as that the market rewards bad behavior with profits. In this case, Anthem has an insurance plan with sicker people that is not proving profitable. They're increasing the costs to either drive those people out or force them to pay a lot more.

Under health-care reform, this wouldn't happen. First, insurers can't discriminate based on preexisting conditions any longer, and their ability to discriminate based on age or other factors is substantially reduced. That means that everyone is functionally in the same big pool.

Second, if one insurer or another does end up with an unusually sick customer base, the next move isn't to jack up rates on them. Instead, Section 1341 of the bill outlines the risk adjustment provisions, which basically means that there's a fund that will pay an insurer more if it ends up with sicker customers. The idea is that insuring people who need health care shouldn't be bad business.

Finally, let's say everything fails and the insurer decides to walk from the exchange. In the current situation, the people on Anthem's plan have nowhere to go. They all have preexisting conditions, which means they either won't be offered insurance or can't afford the rates. Under health-care reform, they can go to any other insurer they please: They can't be discriminated against, and they can't be denied coverage. Losing their current insurance may be disruptive, in the same way that having your local grocery store close might be disruptive. But it will no longer be calamitous, or anything close.

Since Scott Brown's election, the conversation over health-care reform has become very, very political, and quite abstract. But the Anthem decision is a good moment for Democrats to return the conversation to the real problems that the real bill will really solve. If health-care passes, no one need fear what Anthem almost did in California ever again. If it fails, then it will simply continue happening, on and on into the future. That's the choice before Congress right now.

Photo credit: AP Photo/Marcio Jose Sanchez.

By Ezra Klein  |  February 15, 2010; 4:08 PM ET
Categories:  Health Reform  
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Comments

thank you to the obama administration, for stopping this rate increase, which would have dramatically impacted the life scenarios for thousands of us out here in california.
and thank you, ezra, and other journalists like yourself, who wrote and spoke about it loudly, so that people not familiar with, or directly affected by the rate increase, would know what was happening here.
many people are breathing alot easier out here this week.

Posted by: jkaren | February 15, 2010 4:43 PM | Report abuse

"I'd guess there's a good chance it never takes effect at all."

Really? I'd bet that it goes through as scheduled on 1 May. Wanna place a wager, Ezra?

Posted by: cpurick | February 15, 2010 5:21 PM | Report abuse

I don't think people realize how relatively ordinary Anthem's action is. My wife, who has pre-existing conditions, has had annual increases in her individual health insurance policy of over 20 percent per year for each of the past 3 or 4 years. She is now paying almost $1,000 per month for her own policy, with substantial deductibles. Anthem's actions are not that unusual are are consistent with the fact that the individual insurance market simply does not work for people with pre-existing conditions that make it impossible to get replacement insurance with a different carrier.

Posted by: jcn1 | February 15, 2010 5:22 PM | Report abuse

Same thing here in Michigan. My family coverage went from $800 to $1100 a month. That's 37% and was approved by the state government. I really wish someone would make my company justify their increase.

Posted by: mapp1 | February 15, 2010 5:44 PM | Report abuse

"In other words, Anthem's plan could be kicked out entirely for this rate hike. That would probably have to happen to only one health insurer for the rest to take notice that precipitous and inexplicable rate hikes are no longer going to be part of the business model."

This is a fantasy. There is no way that the government can compel a private, for-profit organization to become a non-profit or to require a private, non-profit to operate in the red. It's bad policy for public programs and not a viable model for private companies.

Liberals need to give up on the idea that the one-sided regulation in the current bills constitutes *reform*.

" If health-care passes, no one need fear what Anthem almost did in California ever again."

How exactly is that to be prevented. In this case, Anthem will either raise rates significantly or cease to cover certain types of conditions -- those are the only two options available to meet its internal return objectives. Nothing the President or Secretary Sibellius can say will change that. And there is nothing in the current bills that would make any difference either...because they are focused on buying more of the same failed model that generated the rate increases.

Posted by: Athena_news | February 15, 2010 6:01 PM | Report abuse

"I don't think people realize how relatively ordinary Anthem's action is."

I agree. As reported a couple of days ago by the Associated Press:

"Steep rate hikes in this sliver of the insurance market — about 13 million Americans, as of 2008 — have popped up sporadically for years. Experts see them becoming increasingly common.

"You're going to see rate increases of 20, 25, 30 percent" for individual health policies in the near term, Sandy Praeger, chairwoman of the health insurance and managed care committee for the National Association of Insurance Commissioners, predicted Friday."

full text here:

http://hosted.ap.org/dynamic/stories/U/US_INSURANCE_RATES_STATES?SITE=CAVIC&SECTION=HOME&TEMPLATE=DEFAULT

Posted by: Patrick_M | February 15, 2010 6:33 PM | Report abuse

Just to add to Ezra's very succinct analysis, Anthem's explanation that they were experiencing significant adverse selection, i.e. their healthier enrollees were dropping out because they couldn't afford or didn't want to pay for health insurance, is actually a plausible explanation. We need to see Anthem's figures, of course.

However, under health reform, this sort of adverse selection would be much less likely to happen. In addition, the insurers would have to submit a lot of claims data to the insurance exchanges, state regulators and HHS, so there would be the tools to monitor their behavior.

Posted by: weiwentg | February 15, 2010 7:05 PM | Report abuse

"We need to see Anthem's figures, of course. "

"We" have no right to see Anthem's figures. Anthem is a private company, not a regulated utlity.

" In addition, the insurers would have to submit a lot of claims data to the insurance exchanges, state regulators and HHS,"

The California Department of Insurance already collects that kind of information from carriers. It has no power whatsoever to set rates for private companies.

It's possible of course that Congress could threaten to direct OPM to drop Anthem as a carrier in California but covered employees might view that as inappropriate government meddling between a situation that had nothing to do with them and businesses of all types would protest.

Posted by: Athena_news | February 15, 2010 7:20 PM | Report abuse

"We" have no right to see Anthem's figures. Anthem is a private company, not a regulated utlity."

Anthem is a private company, but it must be licensed and it must undergo regulation. Insurance is regulated in California, as well as in the other states. Californians elect a California Insurance Commissioner, who by law: "licenses, regulates, and examines insurance companies."

Anthem can't keep the books closed from public scrutiny when complaints are filed. The state has both the right and the duty to make certain that Anthem stays within compliance with state regulations that are designed for the protection of consumers.

Posted by: Patrick_M | February 15, 2010 7:38 PM | Report abuse

Thank you so much for this post and for this blog. Why can't the Dems do what you just did so beautifully? I like to think that once reform passes, they'll be out doing this sort of thing, but I haven't seen them do anything close yet.

Posted by: eRobin1 | February 15, 2010 8:09 PM | Report abuse

I miss the old Ezra Klein. No, not the one from years ago. The one from two months ago. The one who understood why rates went up in California.

http://voices.washingtonpost.com/ezra-klein/2009/12/draft_1.html


Maybe its time for another refresher on when adverse selection happens without an individual mandate.

And as far as what Anthem does and doesn't have to do, all they have to do is prove they've met a 70% loss ratio. If anyone believes that in California that's not only not possible but very likely in the individual market they're just not paying attention.

Posted by: visionbrkr | February 15, 2010 8:38 PM | Report abuse

visionbrkr is right. I was suprised Ezra described this as Anthem "screwing" the customer. When the smoke clears, this will be mostly or entirely about a worsening risk pool combined with the standard out of control cost trend.

Anthem will easily meet the 70% MER threshold (as they stated they actually lost money on this line of business in 2009.)

But Ezra (and visionbrkr) are right that this is a good example of the kind of thing how health care reform would have prevented.

Getting people to participate improves the pool, avoiding shocks like this and as well as actuarial death spirals. Subsidies would have helped lower income people to afford high costs. Better regulation at the federal level would improve transparency. Having a minimum 80% (or 85%) medical expense ratio would raise the floor in almost every state (I believe NY also has a 70% floor now). That's just for starters.

Posted by: jdhalv | February 15, 2010 9:02 PM | Report abuse

"But Ezra (and visionbrkr) are right that this is a good example of the kind of thing how health care reform would have prevented. "

How? An individual mandate would create a larger risk pool but the but the concomitant requirement to take all applicants would still result in rate increases. Does anyone really think that a 25% increase would be "more affordable" than the 39% they have proposed?

For the record, Anthem is already spending more than 85% on claims in California. What do we expect them to do if not raise rates? How exactly would the exchanges address the fact that total costs of servicing subscribers require increased premiums?

Greedy insurance executives are not the reason that we spend more than twice as much on healthcare than any other industrialized country. And the regulation in the proposed bills won't reduce the percentage of individual or government spending going to healthcare either.

Posted by: Athena_news | February 15, 2010 9:27 PM | Report abuse

jdhalv,

NY's MLR is required to be 75%. NJ's is 80% and last year costs were over 85%. Athena is right that politically its good for Dems to demonize insurers but the truth lies elsewhere. Regulation of an MLR will be a blip on the radar screen, or as much help as tort reform.


Also I'd like to take further a point Ezra made. Here's a bit of news. Insurers don't want to be in the individual market. THey only do so because they are required to. They don't make any money there and in fact more often than not they lose money (just as Anthem said they did in 2009). The reason is clear to most regarding adverse selection, no individual mandate etc. The other fact is that its more costly to administer individual plans. Insurers must deal with a person by person as opposed to in an employer group setting where the employer has an HR dept that facilitates many of the issues that come up. HR depts don't exist in the individual market. Also many times people are in the individual market because they've lost their jobs either due to the economy or illness.

If we were in an exchange setting and as Ezra said Anthem was removed from the market for what he calls excessive rate increases then what would happen? People would have to change from Anthem to company "X". What if company X doesn't have my hospital I get chemotherapy at as participating? What if my child's pediatrician isn't in the network and I can't or don't want to change? So the government is going to facilitate fixing this for me? I highly doubt it. Its nice to expect insurers to lose money continually but in the real world they can't run defecits like the Federal government and they can't print money like them either.

Posted by: visionbrkr | February 15, 2010 10:37 PM | Report abuse

So let's get this straight:
Times are tough, and healthier individuals looking to save money are increasingly allowing their health insurance policies to lapse.

That doesn't sound like an easy decision.

And so we believe the solution to this spiral is to make it illegal to decide? And we're gonna back that up by throwing money at the people who'd like to leave so their insurance remains "affordable" after counting their welfare payments?

Because we think that revenue stream won't dry up during tough times?

Posted by: cpurick | February 15, 2010 11:48 PM | Report abuse

The health insurance companies are pricing themselves out of the market, with their constant push for more and more profits. That is the real problem in many areas of our health care non-system: the push for more and more profits.

That is the main problem with our particular capitalistic system: the need to constantly grow rather than be happy with sustainability. It's like a cancer growing on everything, uncontrollable growth.

Posted by: splashy8 | February 16, 2010 6:40 AM | Report abuse

I'm sorry, but sometimes you have to call a spade a spade, and much of this post is just complete, unmitigated bullsh*t.

"After criticism from the administration, the insurer has delayed the planned 40 percent rate hike."

It was not a 40 percent rate hike. It was a 25 percent rate hike, with some people getting 25%. A very small percentage of people got a maximum of 39 percent. Stop trying to play up the populist anger by distorting the facts.

"when an insurer tries to screw its customers"

How was Anthem "screwing" its customers? By raising the premiums in an actuarially sound manner? By charging a sufficient premium to ensure they'd have enough money to pay claims? If you're going to claim that they have "screwed" their customers, you need to provide some evidence that the rate increase was not justified by underlying experience. Good luck with that.

"First, Anthem would have to justify the rate increase to the exchange's administrators and post their justification on their Web site."

They have justified it, and the state of Indiana hired an independent firm to analyze the rates and found they were justified and actuarially sound. You can pretend that Anthem did something wrong here, but the facts are not on your side. I guess that's why you're pounding the table.

"In fact, the bill specifically states that regulators can take "excessive or unjustified premium increases" into account when deciding whether to certify a health-care plan's continued presence in the exchange.
In other words, Anthem's plan could be kicked out entirely for this rate hike."

No, they couldn't be kicked out, because the rate increase is justified. Anthem lost money in the California market last year. They experienced a great deal of anti-selection that left them with a much less healthy block of policyholders. You can blame our broken health care system for that, but you can't blame Anthem. Many times in the past you've acknowledged that insurers are not the problem, yet time and again you fall back into this populist posturing. It is beneath you.

"Anthem has an insurance plan with sicker people that is not proving profitable. They're increasing the costs to either drive those people out or force them to pay a lot more."

No, they are increasing premiums to stop losing money. Would you prefer a solvent or an insolvent insurer?

"Second, if one insurer or another does end up with an unusually sick customer base, the next move isn't to jack up rates on them. Instead, Section 1341 of the bill outlines the risk adjustment provisions, which basically means that there's a fund that will pay an insurer more if it ends up with sicker customers."

Do those funds grow on the magic risk-adjustment tree? No, it has to come from somewhere, so you're just rearranging the deck chairs.

Posted by: ab13 | February 16, 2010 10:43 AM | Report abuse

comment box interpreted my greater/less than signs as tags, sentence should read

"It was a 25 percent rate hike, with some people getting greater than 25%, some people getting less than 25%"

Posted by: ab13 | February 16, 2010 10:44 AM | Report abuse

ab13,

but if they say that some people's rates didn't go up 40% (or 39%) then it wouldn't have as much political kick. This doesn't even mention the fact that the administration when pushing this idea of Anthem screwing the consumer mentioned the parent company's profits last year. You're cherry picking one of the worst demographic groups (individuals in CA) and then comparing it to the entire company's profits (including $2 Billion from the sale of a subsidiary). Why not just totally falsify your info and list all insurers profits last year if you're going to make stuff up.

I can't wait for May 1st when the administration has egg on their face for this.

Posted by: visionbrkr | February 16, 2010 11:16 AM | Report abuse

There is an underlying problem here: some people believe they have a right to insurer's services. It's one thing to say that citizens of an advanced society should have a minimum level of medical and financial security (which I agree with) and something altogether different to maintain that private organizations have an inherent obligation to provide that security for the country.

Anthem says that covering single subscribers is too costly; that the payout on medical services is too high relative to the income from premiums. No government agency has the power to force them to loose money on a line of business. Unless or until the laws are changed, government agencies cannot compel them to be non-profit either. People need to get realistic about the problem versus symptoms.

As Uwe Reinhardt wrote the other day, people do not need insurance, they need health care. Insurance is just a means to make that care affordable. It is not the only means to do that (many other countries use other models) and "affordable" insurance doesn't equate to affordable care. Anthem etal, could opt to control premiums by increasing out-of-pocket expenses but that wouldn't make the net cost of treatment any more affordable for patients.

People who blame insurance companies for the mess are barking up the wrong tree and the current bills reflect that mistake. Our problem is not that insurance rates are so expensive that many people cannot afford insurance. Our problem is that treatment in this country costs so much that it is impossible to use private insurance as a method to make care affordable.

Even if health insurance became a non-profit line of business, premiums would still have to cover the cost of care. And even if we converted to a single-payer model (which I do not personally support), we would still have to confront the actual cost of care. That is the "unaffordable" element of the situation.

Posted by: Athena_news | February 16, 2010 12:58 PM | Report abuse

Athena,

exactly. Its like I tell clients that get an explanation of benefit and ask me where to send the check. I say it doesn't go to me or to the insurance company. It goes to the doctors. They're the ones that bill for services, they're the ones that will send you to collections and potentially ruin your credit if you don't want them what you want (all the while never telling you what your expense or cost exposure will be).

imagine if we bought everything like we buy healthcare? Scary indeed.

Posted by: visionbrkr | February 16, 2010 1:05 PM | Report abuse

sorry should be "if you don't pay them what they want"

Posted by: visionbrkr | February 16, 2010 1:07 PM | Report abuse

Ezra one question to you, how viable do you think it would be for doctors and hospitals to have the govt regulate the cost of their sevices, if the govt paid half or something similar of education costs to be a doctor? also would something like this make a huge dent in future costs of care? or any dent at all?

I remember hearing about something like this a while back and always wondered if that would be a compromise position. any doctors on here are wellcome to offer their ideas on this also.

Posted by: edgepark12 | February 16, 2010 2:01 PM | Report abuse

Athena, Ezra knows all of that, but for some reason he still launches these occasional nonsensical attacks on the insurance industry. For the life of me I cannot figure out why, because he has shown in the past that he understands these issues. In this case he's basically lambasting a gas station for raising prices when the price of oil goes up. The cynic in me would say he does it to pander to his more liberal readers. I try not to assume bad faith when there is another reasonable explanation, but I'm struggling to come up with one.

Posted by: ab13 | February 16, 2010 2:06 PM | Report abuse

Ezra - This was a weak effort on your part. Your use of the term "screw its customers" betrays a complete lack of analysis. You might ask yourself why Anthem decided to raise rates by as much as they did. Believe it or not, the raison d'etre of for profit companies is not to "screw their customers".

I know that you often try to cheer lead for HC reform but this one is ridiculous.

Posted by: MBP2 | February 16, 2010 2:58 PM | Report abuse

15 minutes into the below linked speech by Secretary Sebelius she understands the adverse selection that happened in CA yet she politicizes the issue in all her attacks on Anthem.

http://www.cspan.org/Watch/Media/2010/02/08/Health/A/29332/Academy+Health+National+Health+Policy+Conference.aspx

Posted by: visionbrkr | February 17, 2010 8:49 AM | Report abuse

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