Menu Close


Sebelius postures at the insurance industry

Originally posted on 09.10.2010, transferred posting.
HHS Secretary Kathleen Sebelius recently wrote a letter to the insurance industry where she clearly stated, “There will be zero tolerance for this type of misinformation and unjustified rate increases,” Her statement(s) come following the messages that many insurance companies are sending to their policyholders trying to explain their higher than usual premium increases.

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.

Health Care Reform Declared Unconstitutional: Uncertainty promotes insecurity

Yesterday’s ruling by Florida’s Federal District Court (Judge Roger Vinson) has ruled the health care reform law (a.k.a. P.P.A.C.A.) unconstitutional. The lawsuit brought to the courts by 26 states will not be taken lightly.  This is a serious challenge to health care reform at all levels. Why? Due to the lack of severability in PPACA, the White House, Congress, federal agencies and cabinets, and all the states now are uncertain about the future of PPACA.  The literally thousands of informational workshops and health care seminars conducted around the country about  the future of health care may all have all been in vain, including thousands of man-hours devoted to creating interim regulation by the HHS and IRS.  Everyone on both sides of the issue are insecure about the future.  Those enthusiastically in opposition to PPACA may find their supporting base content to believe that PPACA is a dead issue.  Those engaged in the implementation of health care reform will find it difficult to be passionate about their authority that came from PPACA,   in the possibility that it will go away. 

Provider groups spending millions of dollars to create Accountable Care Organizations and similar investments from new opportunities created by PPACA are now in jeopardy. As are federal and state governments that are spending millions to implement and regulate PPACA. 

On page 75 of Judge Vinson’s ruling, he stated that, “since it must be presumed that federal officers will adhere to the law as declared by the court” he presumes that the federal government and White Hose cabinet agencies will cease in the implementation of health care reform as there is a standing precedence that government officials are enjoined from engaging in activities declared unconstitutional by the court. However, Judge Vinson stop short in ordering that continued implementation of PPACA cease.

 However, White House Senior Officials say that the implementation of health care will be business as usual.

 It is unconscionable to think that our leaders will let this constitutional debate continue for another 2 years in the Supreme Court , as many are speculating.  The thought that our political leaders will allow governments to continue to spend millions of tax payer dollars knowing that the constitutionality of PPACA is in serious question would be irresponsible.

 No one doubts that the insurance mechanism will work better with everyone in it and each paying their fair share. However, the constitutional issue of mandating people to engage in commerce against their will needs to be resolved immediately and without delay.

Health care reform timeline

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.

Health Care Reform Confusion

There is some confusion going on with the new health care reform bill (law). There were provision in the Bill that the President signed but then were taken out 2 days later with the reconciliation package. One such issue is regarding the Construction Industry mandate. The Merkley provision singled out the construction industry by mandating employers with 5 or more employees or a payroll greater than $250k were required to comply with the same mandate other industry but at the 50 employee bench mark. Clearly not fair to the construction industry.The Merkley Provision was law for a few days until it was effectively erased the moment President Obama signed the reconciliation bill. The unions were the ones push the Merkely Provision, and now they are not too happy with its removal.

No logic, no reasoning, no prudence.

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.