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The facts are that just about every expert in the industry has stated that the recent health care reform package will significant drive premiums upward. There are several driving factors, mandated benefits, new compliance mandates, taxes, guarantee issue, and many others.

However the one force that will unintentionally drive premiums upward is the so called mandatory loss ratio or mandatory medical spending requirement. The mandatory loss ratio regulation is complicated but briefly it mandates that insurance have somewhere around an 85% loss ratio. On its face sounds like a good idea to limit the profits that insurance companies make, however, look further. If an insurance company is currently operating with an 80% loss ratio and therefore 20% goes toward administration cost (workers’ salaries, systems, administration, profit to shareholders) then simply passing regulation that mandates an 85% loss ratio will not necessarily make these administration cost go away or reduce them. Unless of course the insurance companies drastically change their services or become incredibly more efficient. I propose that instead that the affect of the new law will have an unintended consequence to clear the way to drive premiums upward by approximately 33% over the next few years.

Why? Consider that if every $1 in insurance premiums 80 cents goes toward medical care and 20 cents toward administration cost. With the new law insurers will be mandated to spend 85 cents on medical expenses for every $1 in insurance premium. This will drive insurance companies to increase premiums to $1.33 so that the mandated 15% will produce enough revenue to cover their original 20 cents of administrative costs. ( $1.33 x 15% = 20 cents). Remember that 20 cents was our original administrative costs but our total premium had to increase to $1.33 to accommodate the new law. Winners: The insurance industry maintains their revenue to cover their administration and profit, the medical providers receive an enormous windfall from a 41% increase in medical spending (changed from 80 cents to $1.13 to accommodate the mandated spending requirement). Losers: Employers and employees by much higher insurance premiums, and self-pay individuals paying much higher prices due to the economic pressures for an increase in demand for higher priced medical services.

Will it work exactly the way I describe above? No of course not. But is it one additional perverse governmental pressure that will send medical spending and premiums in the wrong direction? YES! You want someone in the market place driving medical spending downward. Someone that is trying to hold spending increases down. To date, the only significant force doing this has been the insurance companies, albeit, not very well. But like paying medical providers for units of medical care, where we just get more units of care, not better health outcomes, mandating spending limits of 85% is a bad idea.

Like paying for units of care, mandating upward medical spending limits will only drive medical costs and health care premiums higher.

There is ample information out there on health care reform, however most have their own agendas or present their own perspective respective to their very own silo. The Henry J. Kaiser Family Foundation does the best job of providing a quick high level time line on health care reform. Use the + and – to open and close relevant subject matter respective to your interests.

No one minimizes the plight of the uninsured, however our current health care financing mechanism needs reforming and not an enormous effort to expand a social/entitlement program that we cannot afford. Our Federal Government has not proven any sort of excellence in health care delivery or its financing. To the contrary, many of the actions the Federal Government has taken in the last several decades have only worked to break the system. Albeit, not their intent perhaps; however, it is the outcome never the less. More people are uninsured today as a perverse outcome of the Government’s Medicaid, Medicare, and mandated benefits. For example:

• Prior to 1963, 51% Americans over the age of 65 had private insurance. Today, the Federal Government provides Medicare to virtually all Americans over the age of 65 and therefore has completely taken over the 65+ market successfully!!……or has it? Most of our loved 65+ seniors pay their premiums for their Medicare Part B, Part D, Supplement, and additional out of pocket costs at the point of sale. Many seniors even with Medicare pay $10k to 12k per year in premiums and out of pocket costs that Medicare does not cover. So what has Medicare done exactly since 1963 but act as a third party payer driving bad economic incentives to health care providers and vendors; and driving up the price. Look at the data.

• I met with Senator Warner office and the Senator’s position was not for the House’s version of the Public Option. If true, I applaud him for his position. The Federal government should provide no service that the private sector can provide. However, the Senate version of the insurance exchange is reported by many experts to be nothing but a place holder for a public option. (see Heritage Foundation article)  The exchange risk pool if it develops will turn bad, if you do not completely appreciate this please speak to any insurance agent or underwriter that has been in the business for more than two years and she or he can explain it to you. Simply working with our risks, one cannot subsidize one option and tax another and not expect adverse selection. Or, expect that this is fair competition in a robust market place.

• Not convinced yet? Look at the recent happenings with Hospice Care. Medicare several years ago and along with many States began paying for Hospice Care. A service that was almost exclusively provided by either family members or provided for by free not-for-profit regional Hospice centers. Yes, free!!!! These Hospice Care groups had community fund raisers, thrift stores, and community donations. Today, you have regional Hospice Care Centers venturing into other Regions competing for business against other Hospice Care groups for paid services provided by these mandated benefit and from Medicare. Services that were once free.
• Not convinced yet? Speak with any ER physician and they will tell you that the abusers of the emergency room and health care services are those with Medicaid and Medicare. And not those with private health insurance or private payers.
• $1.1 Billion in the Economic Stimulus Package to study the effectiveness of drugs and medical devices. Please do not tell me that it was the little old blue haired ladies arguing about death panels that pushed the good Senators and other Congressmen to remove or prohibit costs from any of the funded analysis. Most know that it was the medical vendors, mainly the pharmaceuticals, that lobbied aggressively to have costs removed.

How bad can the health care rework bill be and still have legislators vote “yes”? I have met with Senators Warner and Webb and they acknowledge the many problems and short comings and still they insist on pushing it through? Is it really just a party line thing for them? No logic, no reasoning, no prudence.

As a final note: Accountable Care Organizations, ACO’s, are directionally a start, but the bill contains more than just ACO language. Prospectively paid financing models, namely capitation, can drive health care away from producing units and instead push it towards quality, necessary care, and a much lower cost model. In addition, using a globally capitated model could revive Primary Care. There is no good reason why Government Programs like FEP, Medicare, and Medicaid are not prospectively paid and are not capitation models. The large population that is on FEP, Medicare, Medicaid, etc. if on capitation could drive positive prescribing behaviors by our physicians; thereby reducing the units of care it produces. The residual benefits to the private sector would be tremendous. We must drastically change the way we pay our medical providers. Nothing else will work to help bend the curve of increasing health care costs.