By Rose Hoban
Last week, North Carolina insurance companies got word they only have a year to trim their costs and spend more on patients. That was the response to a request filed in September by the state Department of Insurance, asking the federal government to phase in changes to insurance company profits over the course of three years.
Under the Patient Protection and Affordable Care Act passed in March 2010, insurance companies will be required to spend 80 cents of every dollar earned from premiums on medical care for their subscribers. The other 20 percent of insurance dollars can go to profit, marketing and the overhead required to run a company.
Seventeen states and the island territory Guam have asked for adjustments to the 80 percent requirement.
Insurance commissioner Wayne Goodwin originally requested a slow phase in of the rule, asking for the requirement to be adjusted to 72 percent in 2011, 74 percent in 2012 and 76 percent in 2013, with the final 80 percent rule being implemented in 2014.
What the federal government granted was only 75 percent for 2011 and 80 percent for this year.
“I am pleased that the federal government saw merit in our request and granted this adjustment,” wrote Goodwin in a press release. Goodwin was unavailable for comment late last week.
“The … adjustment helps North Carolina strike an important balance. It holds insurance companies accountable to higher standards and provides rebates for consumers, while preserving stability and consumer choice in our individual health insurance market.”
“Everyone was pretty pleased with the decision from the federal government,” said Department of Insurance spokeswoman Kerry Hall.
Some people were not so pleased with the decision.
“Independent agents… they’re not going to have any commission,” said Jim Kennedy, executive vice president of the Professional Insurance Agents of North Carolina. “They’re not going to be able to earn a living.”
Many people get their health insurance from an employer. But most insurance sold to individuals in the US is sold by independent agents, Kennedy said. The health insurance exchanges called for in the Affordable Care Act will allow consumers to bypass brokers and deal directly with companies.
“That’s where brokers’ money comes from… their commission” Kennedy said. “And the way the fed has set this thing up, you’ll have to buy it from someone the fed says you have to buy it through.”
Some insurers have already been cutting commissions as they adjust to meet the 80 percent rule, said Michael Keough head of the North Carolina high risk pool, Inclusive Health. But for a big insurer like Blue Cross Blue Shield of North Carolina, meeting the 80 percent threshold has not been a problem.
Keough’s organization is not affected by the ruling.
“Blue Cross Blue Shield is the least concerned of anyone in the state about this,” Keough said. “They’re able to realize economies of scale because they’re so large. They have a larger base to spread their fixed costs over.”
Blue Cross Blue Shield of North Carolina covers about 337,000 people, and controls 81 percent of the individual insurance market, according to documents included in the North Carolina request to the federal government.
“We spend more than 80 cents of every dollar on the medical care of individual customers and more than 85 cents for our overall business and we’ll continue to do that,” said Lew Borman, a BCBSNC spokesman.
Keough said the ruling by the federal government may mean smaller insurers will be driven out of North Carolina, giving BCBSNC an even bigger share of the individual market.
About two dozen companies with smaller footprints write policies for individual health plans in North Carolina. Some companies cover as few as several hundred people.
National insurance company Aetna covers about 5,200 people in North Carolina, only a small part of it’s national business. According to Department of Insurance documents, Aetna spent 76.5 percent of its premium dollars on medical care in 2010.
Overall, smaller companies spent an average of only 62.4 percent of their premium dollars on care 2010, according to the Department of Insurance.
Last fall, Aetna notified the Department of Insurance it would be inclined to make larger investments and “other efforts” to sell new business in North Carolina if the federal government allowed the 80 percent rule to phase in over a four year period.
According to Department of Insurance documents, Aetna also said it would reconsider cuts already made to commissions paid to private brokers if there was a four year phase-in.
A spokesman for Aetna said the company declined to comment on the North Carolina ruling.
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The 80% minimum has bad and good implications.
The minimum is bad because it limits the ability of insurers who are underwriting health care cost risk to provide much variance in the expected costs that may have to be paid as actual claims come in. This is a particular economic barrier for carriers with small insured populations, and it is a dramatic competitive advantage for the dominant carrier, BCBSNC who has a much bigger base over which to spread risk. One detriment of the 80% minimum is that it will reduce and eventually eliminate competition in the private insurer market in NC. I don’t know why that is a good thing.
The good thing about the 80% minimum is that it provides significant economic incentive for the insurer who is underwriting the risk to take action to control the actual costs paid under the insured plans. This seems to be leading more to the managed care model. As the dominant underwriter in this State, BCBSNC has become and will to be aggressive in pursuing initiatives to reduce the underlying costs of providing insured health care.
It is an interesting economic dynamic that is developing in insured healthcare. BCBSNC has great incentive to control the actual health care costs for insured individuals. The practices that they force on the medical care industry to control those costs will also save medical costs that are underwritten by government agencies, and self insured entities.
So the model that will prevail will be one of competition between the providers and the insurers around the costs of health care. Under the old model, health care costs operated under the balloon model. As one payer squeezed, the costs got squeeze to another payer. Now all payers have the incentive to resist the costs, and all the pressure is on the healthcare providers to control and even reduce the costs of delivering healthcare.
Since the critical issue are the macroeconomic consequences of escalating healthcare costs, the 80% minimum may be a good thing. The bad part of this is that healthcare service consumers will face fewer and fewer choices, except for the “1%” (okay, that’s me), who will probably be able to get the care they want, even if it means going to Costa Rica for a couple of weeks. That’s not all bad, I guess.
Steve Vanderwoude