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PRIVATE PROFITS, COST SHIFTING AND THE NEED FOR A PUBLIC PLAN OPTION
 

One common objection used to undermine a public plan option in health care reform is the idea of "cost shifting."  Opponents of a public plan say that this supposed cost shifting is one of the problems with Medicare, our nation's current public health care option.  They say that Medicare underpays health care providers, with the result that private insurers end up subsidizing those same health care providers because Medicare has underpaid them.[1]  The argument claims that a public plan would not be "fair" to private health insurers; that private health insurers could not compete with a public plan because they would be, in effect, subsidizing the public plan, or that a public plan would result in a health care reform package that is too expensive.

 

The truth, however, is that a public plan is needed to provide more and better competition and lower overall health care costs.  This is particularly true given the increasing consolidation of the insurance market resulting in fewer and fewer private health insurers.

 

Private health insurance companies are some of the most profitable corporations in the nation. According to insurance industry filings with the federal Securities and Exchange Commission, profits for the 10 largest publicly traded health insurance companies rose 428% from 2000 to 2007, from $2.4 billion to $12.9 billion. As examples, Aetna's profits increased by 1,342% during this 2000-2007 period; Wellpoint's profits increased by 1,380%[2]; Humana's by 827%; and UnitedHealth Group's by 532%[3].

 

If it were true that Medicare's proven cost effectiveness is subsidized by private health insurers through cost-shifting, it certainly does not seem to be affecting the huge profitability of those private insurers. And it surely is not affecting the compensation of their chief executive officers.  In fact, in 2007, the CEOs of these 10 companies collected combined compensation of $118.6 million, roughly $11.9 million each. This is 468 times more than the $25,434 that the average American earned!

 

The fact is that a large proportion of Medicare spending goes directly to private insurance plans under the completely private portions of Medicare - the Medicare Advantage and Medicare Prescription Drug programs. According to the Kaiser Family Foundation, 34% of Medicare payments are made to private insurance companies for the private portions of Medicare. Moreover, 77% of the costs of the private Medicare Prescription Drug program are paid out of general government revenues (not out of the Medicare tax which employees pay).

 

In fact, the first year after private Medicare Advantage was introduced (with subsidies way over and above the actual cost to traditional Medicare to treat a Medicare beneficiary) the solvency projection of Medicare dropped by eight years. [4] Clearly, substantial cost shifting from private insurers TO Medicare is occurring; not the other way around. The cost of private Medicare is contributing to the federal deficit because a high proportion of it is paid for out of general revenues, not the Medicare trust fund.  Meanwhile, private health insurance companies' profits, paid in large part by taxpayers, are increasing astronomically.

 

Perhaps even more shocking, while opponents of a public plan argue that Medicare shifts costs to private insurance companies, the fact is that private insurers shift health care costs to the very people whom they are supposed to be serving. They do this by covering fewer sick people, most often by denying coverage for pre-existing conditions, cancelling insurance or raising premiums to unpayable levels when plan-holders become sick.  Further, private insurers shift costs by increasing premiums and cost sharing, such as deductibles and co-insurance, for those they do continue to insure.

 

Recently, Wendell Potter, a former health insurance industry executive with CIGNA (which had a net income in 2007 of $1.115 billion) testified before the U.S. Senate's Committee on Commerce, Science and Transportation.[5] Here is some of what he had to say:

 

"In the 15 years since insurance companies killed the Clinton [health reform] plan, the industry has consolidated to the point that it is now dominated by a cartel of large for-profit insurers….To help meet Wall Street's relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick. Insurers have several ways to cull the sick. One is policy rescission.[6] They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as a justification to cancel the policy… Dumping a small number of enrollees can have a big effect on the bottom line. Ten percent of the population accounts for two-thirds of all health care spending."

 

"They also dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that an employer has to cut benefits, shop for another carrier, or stop offering coverage altogether - leaving workers uninsured. This practice is known as purging….[T]he number of small businesses offering coverage to their employees has fallen from 61 percent to 38 percent since 1993, according to the National Small Business Association. Once an insurer purges a business, there are often no other viable choices in the health insurance market because of rampant industry consolidation."

 

The consolidation of private health insurers is no small matter when it comes to controlling the escalating costs of health care in the United States. According to a 2009 report of the American Medical Association, "the country's largest health insurers have continued to pursue aggressive acquisition strategies. The largest insurer, WellPoint (formed from the merger of Anthem, Inc and WellPoint Health Networks) has acquired 11 health insurers since 2000. The second largest health insurer, UnitedHealth Group, has also acquired 11 health insurers since 2000.[7] [8] A 2003 study found that the market concentration of private health insurance companies in 34 states was high enough that, when the measure used by the U.S. Department of Justice and the federal Trade Commission was applied to these concentrations, all 34 states were deemed "highly concentrated" and therefore of anti-trust concern.[9] In 2007, more than half of the health insurance markets in at least 39 states were controlled by two carriers.[10]

 

And yet, despite this extraordinary consolidation, insurers aren't leveraging better values for their customers:

 

"Dominant insurers do not seem to use their market power to drive hard bargains with providers, for at least four reasons. First, they believe…that they cannot attract enrollees without flagship hospitals. As a consequence, large and expensive teaching hospitals have little incentive to negotiate with insurers and lower prices. Second, small insurers do not aggressively compete over price…..[S]maller insurers do not seem to compete on premiums to gain market share but rather seem to follow the pricing of the dominant insurer. Competition in insurance markets is often about getting the lower risk enrollees as opposed to competing on price and the efficient delivery of care. Third, the market is affected by lack of clear information to effectively shop for plans based on benefits, price and quality. Without active competition, the dominant insurers have no need to bargain aggressively with providers. Finally, the consolidation of hospital systems that has occurred in recent years has also limited insurers' ability to negotiate with hospitals for lower rates."[11]

 

Thus, the health insurance market functions irrationally. Consolidation of the insurance market has resulted in the absence of adequate competition which would, under normal circumstances, be expected to drive down costs. Even if smaller insurers could compete on price, they do not because the name of the game for health insurers is to maximize profits by "lowering their risks", which means not insuring the less healthy, or increasing cost sharing and otherwise shifting risk to insured persons. Shopping for a health insurance plan is difficult, because of the absence of standardized plans which would make comparison shopping easier. As a result, careful consumers cannot drive down prices either.

 

A broad and vibrant public plan would provide a solution to all of these problems. It would provide competition to private insurers in already overly concentrated markets. With sufficient enrollment, enrollment that is not limited as envisioned under some current proposals, it would have sufficient market share to negotiate forcefully with providers to drive down costs, and open up competition in markets for other smaller private insurers.

 

By offering a standard basic plan, and requiring that private insurers do the same, a public plan option would help consumers make more informed choices about choosing health insurance, and would allow consumers to rationally choose health insurance based on quality and price.  Finally, a public plan – not guided by the profit motive, but able to contain costs and have lower administrative overhead than private health plans - would provide the option of health insurance to all, regardless of a person's health status and desirability in terms of "risk."

 

Health reform without a public plan will result in escalating costs, insufficient decreases in the number of uninsured persons, and a continuation of vast profits for health insurance companies, at the expense of the health of all the American people. The time for a public plan has come, and that time is now.

 

 


[1] This notion is asserted by a study commissioned in part by America's Health Insurance Plans, the lobbying organization of commercial health insurers, as well as by the Blue Cross Blue Shield Association. Fox and Pickering, "Payment Level Comparison of Medicare, Medicaid, and Commercial Payers," December 2008. Available at http://www.ahip.org/content/default.aspx?docid=25216.

[2] See, www.sec.gov; see, also, fn 4, infra.

[3] As a further example, according to the American Medical Association, United HealthCare's net income in 2008 was reportedly $3 billion. See, http://www.ama-assn.org/amednews/2009/08/03/bisa0803.htm.

[4] Kaiser Family Foundation, Medicare Fact Sheet, "Medicare Spending and Financing," May, 2009. Available at http://www.kff.org/medicare/upload/7305-04-2.pdf.

[5] Testimony of Wendell Potter, U.S. Senate, Committee on Commerce, Science and Transportation, June 24, 2009. Available at  www.commerce.senate.gov/public/_files/PotterTestimonyConsumerHealthInsurance.pdf.

[6] The Los Angeles Times reports that employee evaluations by Blue Cross of California included an assessment of rescission activity. "Wellpoint's Blue Cross of California subsidiary and two other insurers saved more than $300 million in medical claims by cancelling more than 20,000 sick policyholders over a five-year period". Similarly, the Times reported "Health Net, Inc. paid bonuses to employees based in part on their involvement in rescinding policyholders. According to internal corporate documents disclosed through litigation, health Net saved $35 million over six years by rescinding policyholders". Girion, "Blue Cross Praised Employees Who Dropped Sick Policyholders, Lawmaker Says", Los Angeles Times, June 17, 2009. Available at  http://articles.latimes.com/2009/jun/17/business/fi-rescind17

[7] These figures predate United HealthCare's purchase of HealthNet in the northeast United States, announced in July, 2009, which will result in further concentration of markets. See, http://www.ama-assn.org/amednews/2009/08/03/bisa0803.htm

[9] Holahan, J and Blumberg, L, "Can A Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?" Urban Institute, (2008). Available at: www.healthpolicycenter.org

[10] Center for American Progress, "Most American Insurance Markets Limited to Few Providers", June 16, 2009. Available at www.americanprogress.org/issues/2009/06/health_competition_map.html.  Example (from 2007) 80% Iowa's private health insurance market was controlled by two companies (one of which, Wellmark, controlled 71% of the Iowa's market); 85% of Montana's private health insurance market was controlled by two companies (one of which, Blue Cross/Blue Shield of Montana controlled 75% of Montana's market); 88% of Maine's market was controlled by two companies (WellPoint controlled 78% of Maine's market); 81% of Arkansas' market was controlled by two companies (Blue Cross/Blue Shield of Arkansas controlled 75% of Arkansas' market); and 66% of Connecticut's market was controlled by two companies (Anthem controlled 55% of the Connecticut market). 

[11] Holahan, J and Blumberg, L, "Can A Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?" Urban Institute, (2008), at p. 3. Available at: www.healthpolicycenter.org

 
 


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