Hidden Perspectives on Health Insurance

For the insurance industry, a truly wonderful thing happened in the late 1970s. It was called ‘stagflation’. 

The “stagflation” of the late 1970s/early 1980s was a period of a stagnant recessionary economy plagued with high unemployment and alarmingly high interest rates. It was an unplanned hardship for the country and its working people. But it was a boon for most insurance companies.

When you pay your insurance premium, you are paying in advance. Insurance companies hold that pre-paid money awaiting the submission of claims, which will occur sometime during the coverage period. While holding the premiums awaiting receipt of claims, the premiums are put to work by insurance companies to produce investment income.

During the stagflation period, interest rates were commonly running in the 12% to 18% range. Investment income was very, very good. So good that insurance executives started asking: how can we get more premiums to invest? And that’s how and when all the big P&C carriers turned their sights on the health insurance market.  

At the time, the insurance industry was still divided by lines of insurance. The big companies – Hartford, Insurance Company of North America (INA), Connecticut General, Kemper, Aetna among others -- were in the Property & Casualty (P&C) and/or life insurance markets. P&C carriers had little interest in the health insurance market -- it was dominated by non-profits Blue Cross and Blue Shield. Health insurance premiums were small and had limited profit potential. Too much effort for too small a return.

Blue Cross and Blue Shield plans were initially separate -- Like Medicare Part A and Part B, the Blue Cross side covered the hospitalization expenses and Blue Shield side covered the treating physician expenses. Coverage was triggered by a hospitalization event.  

BC & BS insurance rates used the ‘community rating’ model. The coverage was for hospitalization and the pricing was based on the ‘usual, reasonable and customary’ charges of the hospital(s) serving that community or service area.  BC & BS plans had their own sales people (as opposed to independent agents on the P&C side). This worked well until market dynamics changed and stagflation hit.

One change was the emergence of HMO’s and ‘Wellcare’ in the mid-1970s. Office visits were included in the HMO concept. In response, BC & BS plans had to expand coverage beyond just hospitalization to include office visits. They also had to reckon with these new players fighting for market share. Expansion of coverage pushed BC & BS premiums up a bit.

At the same time, two other market dynamics emerged that changed the BC & BS landscape: 1.) breakthroughs in medical field offered new hope for the infirm but at a much higher cost; and 2.) lobbyists began have success in getting state regulators to mandate certain types of coverage (mental health, chiro, skilled nursing care, e.g.). More mandated coverage again pushed health insurance premiums higher. Squeezed by new competition and increasing costs, BC & BS was running into rough seas. Good news for new players.

And it’s not just that they did indeed dive into this market but, more importantly, how they did so. Remember that BC & BS were non-profits and that their rating model was ‘community rating’. Holding that thought, think about your own home insurance or auto insurance. Does everyone pay the same rate? Of course not -– there are individual risk factors that cause some people to pay more and some to pay less than the ‘average rate’ (which can loosely be compared to ‘community rate’). P & C companies already had vast experience with rating risk factors. They had actuarial departments and computer systems in place to parse the risks. Their sales systems (independent agents) were already in place. And they were richly self-capitalized.

What a bonanza for P&C companies! They could market their policies with rating schedules that favored the younger and healthier, cherry pick the good risks from the BC & BS pool and gain access to ‘the prize’ -- the additional premium to generate investment income. Plus the sicker pool (those with pre-existing conditions or risk factors such as obesity, high BP, etc.) left behind would incur greater financial damage to the market leader and main competitor.

The new players would actually benefit from increasing regulation because as market premiums went up, so did the funds available to generate investment income. And so the health insurance industry was both a primary cause and a primary beneficiary of the system we have today.

So the market changed. As the market expanded with big new players, broader coverage and more regulation was pushed by lobbyists from special interest segments of the medical field. More regs = more coverage = higher premiums. The insurance industry did not mind coverage expansion from mandated benefits -- it would simply be absorbed into the premiums. As a result, over time we have ended up with an affordability crisis and an availability crisis into which big government stepped and made worse.

Every time government gets involved in our lives it takes a slice for itself. Bureaucrats create administrative oversight requirements (more government agencies and workers) and more data requirements to be reported back to these agencies. More overhead. And so big government was both a primary cause and a primary beneficiary of the system we have today.

Despite all the debate in DC and the media about the national healthcare crisis, the status quo serves all players except one -- the public. The Beltway bloviates about affordability but ignores the basic question: Why does healthcare cost so much? Where are the initiatives to lower high healthcare costs?

Not a single healthcare expert has asked this simple question: At the fork in the road to a solution -- where the public could shop at ‘exchanges’ -- why were insurance exchanges created instead of healthcare (medical care) exchanges? 

One reason is that the primary beneficiary of a health insurance system is the healthcare industry delivery system itself, with all its ancillary parts -- doctors, hospitals, Big Pharma, medical equipment, etc. Think about healthcare without any insurance system supporting it: First, patients would shop for care; and second, healthcare providers would have to chase patients for billed but unpaid services. The insurance system is actually a payment guarantee system for healthcare providers.

As the healthcare segment grew, it became an increasingly important source of campaign contributions. In the 2016 election cycle in round numbers at least $500 million from healthcare and health insurance interests went into campaign coffers. A growing healthcare segment of our economy is a growing source of campaign contributions. An example of the quid pro quo was the ACA’s “risk corridors”. At the public’s expense, participating insurance companies were protected by government against financial losses. Insurance companies -- experts at managing risk -- pulled a fast one in managing their own risk by transferring it to big government (and more specifically, taxpayers).

Before the Obama administration got involved in social engineering the healthcare sector, the law of the land was the McCarran-Ferguson Act of 1945, which granted anti-trust exemptions for insurance companies to market across state lines. Insurance was regulated by the states -- not the federal government. 50 states, 50 independent laboratories to see what works and what doesn’t. The opportunity for the states to learn from one another -- best management practices.  

Under McCarran, special interest lobbyists had to ply their trade in 50 different jurisdictions. The ACA was a boon for health insurance lobbying. It could now be centralized in one place, the center of the influence universe -- the Beltway.  Don’t think for a minute that this was lost on Washington. Bringing more big money to their doorstep was not an unwelcome outcome. If you want to know why Washington hasn’t addressed the real issue -- the cost of medical care -- the answer is staring you right in the face. In the hearts of politicians, self-interest comes first, special interests come second and the people’s interest lags far behind.

There is no downward pressure on healthcare pricing because there’s no competition among healthcare providers. There are no initiatives to address the extortion of the public in the pricing of healthcare services or products, no initiatives to address the pricing disparities between those with and without insurance, no initiatives to address the costly overlap of services (MRI, CT, etc.). Only government subsidies -- tax money as if it grows on trees.

Even the media ignores the real economic story. All the heated rhetoric, all the partisan bickering, all the reasoned debate omit one important issue: what government provides must be paid for through taxation. Which mechanism uses capital more efficiently -- government or free market capitalism? “Single-Payer’ is politispeak for ‘Government Insurance’. In the meantime, the burden gets heavier and heavier on everyday people.  

It’s not a stretch to conclude that government involvement in the free market of healthcare ‘insurance’ is a massive scam perpetrated on the people by politicians and big money interests.

A.J. Hutson is a former Blue Cross & Blue Shield of Wisconsin insurance executive, retired Assistant City Manager (Cocoa Beach). Past President of Brevard County City/County Managers Association and Past President of Brevard County Public Personnel & Risk Management Association.

For the insurance industry, a truly wonderful thing happened in the late 1970s. It was called ‘stagflation’. 

The “stagflation” of the late 1970s/early 1980s was a period of a stagnant recessionary economy plagued with high unemployment and alarmingly high interest rates. It was an unplanned hardship for the country and its working people. But it was a boon for most insurance companies.

When you pay your insurance premium, you are paying in advance. Insurance companies hold that pre-paid money awaiting the submission of claims, which will occur sometime during the coverage period. While holding the premiums awaiting receipt of claims, the premiums are put to work by insurance companies to produce investment income.

During the stagflation period, interest rates were commonly running in the 12% to 18% range. Investment income was very, very good. So good that insurance executives started asking: how can we get more premiums to invest? And that’s how and when all the big P&C carriers turned their sights on the health insurance market.  

At the time, the insurance industry was still divided by lines of insurance. The big companies – Hartford, Insurance Company of North America (INA), Connecticut General, Kemper, Aetna among others -- were in the Property & Casualty (P&C) and/or life insurance markets. P&C carriers had little interest in the health insurance market -- it was dominated by non-profits Blue Cross and Blue Shield. Health insurance premiums were small and had limited profit potential. Too much effort for too small a return.

Blue Cross and Blue Shield plans were initially separate -- Like Medicare Part A and Part B, the Blue Cross side covered the hospitalization expenses and Blue Shield side covered the treating physician expenses. Coverage was triggered by a hospitalization event.  

BC & BS insurance rates used the ‘community rating’ model. The coverage was for hospitalization and the pricing was based on the ‘usual, reasonable and customary’ charges of the hospital(s) serving that community or service area.  BC & BS plans had their own sales people (as opposed to independent agents on the P&C side). This worked well until market dynamics changed and stagflation hit.

One change was the emergence of HMO’s and ‘Wellcare’ in the mid-1970s. Office visits were included in the HMO concept. In response, BC & BS plans had to expand coverage beyond just hospitalization to include office visits. They also had to reckon with these new players fighting for market share. Expansion of coverage pushed BC & BS premiums up a bit.

At the same time, two other market dynamics emerged that changed the BC & BS landscape: 1.) breakthroughs in medical field offered new hope for the infirm but at a much higher cost; and 2.) lobbyists began have success in getting state regulators to mandate certain types of coverage (mental health, chiro, skilled nursing care, e.g.). More mandated coverage again pushed health insurance premiums higher. Squeezed by new competition and increasing costs, BC & BS was running into rough seas. Good news for new players.

And it’s not just that they did indeed dive into this market but, more importantly, how they did so. Remember that BC & BS were non-profits and that their rating model was ‘community rating’. Holding that thought, think about your own home insurance or auto insurance. Does everyone pay the same rate? Of course not -– there are individual risk factors that cause some people to pay more and some to pay less than the ‘average rate’ (which can loosely be compared to ‘community rate’). P & C companies already had vast experience with rating risk factors. They had actuarial departments and computer systems in place to parse the risks. Their sales systems (independent agents) were already in place. And they were richly self-capitalized.

What a bonanza for P&C companies! They could market their policies with rating schedules that favored the younger and healthier, cherry pick the good risks from the BC & BS pool and gain access to ‘the prize’ -- the additional premium to generate investment income. Plus the sicker pool (those with pre-existing conditions or risk factors such as obesity, high BP, etc.) left behind would incur greater financial damage to the market leader and main competitor.

The new players would actually benefit from increasing regulation because as market premiums went up, so did the funds available to generate investment income. And so the health insurance industry was both a primary cause and a primary beneficiary of the system we have today.

So the market changed. As the market expanded with big new players, broader coverage and more regulation was pushed by lobbyists from special interest segments of the medical field. More regs = more coverage = higher premiums. The insurance industry did not mind coverage expansion from mandated benefits -- it would simply be absorbed into the premiums. As a result, over time we have ended up with an affordability crisis and an availability crisis into which big government stepped and made worse.

Every time government gets involved in our lives it takes a slice for itself. Bureaucrats create administrative oversight requirements (more government agencies and workers) and more data requirements to be reported back to these agencies. More overhead. And so big government was both a primary cause and a primary beneficiary of the system we have today.

Despite all the debate in DC and the media about the national healthcare crisis, the status quo serves all players except one -- the public. The Beltway bloviates about affordability but ignores the basic question: Why does healthcare cost so much? Where are the initiatives to lower high healthcare costs?

Not a single healthcare expert has asked this simple question: At the fork in the road to a solution -- where the public could shop at ‘exchanges’ -- why were insurance exchanges created instead of healthcare (medical care) exchanges? 

One reason is that the primary beneficiary of a health insurance system is the healthcare industry delivery system itself, with all its ancillary parts -- doctors, hospitals, Big Pharma, medical equipment, etc. Think about healthcare without any insurance system supporting it: First, patients would shop for care; and second, healthcare providers would have to chase patients for billed but unpaid services. The insurance system is actually a payment guarantee system for healthcare providers.

As the healthcare segment grew, it became an increasingly important source of campaign contributions. In the 2016 election cycle in round numbers at least $500 million from healthcare and health insurance interests went into campaign coffers. A growing healthcare segment of our economy is a growing source of campaign contributions. An example of the quid pro quo was the ACA’s “risk corridors”. At the public’s expense, participating insurance companies were protected by government against financial losses. Insurance companies -- experts at managing risk -- pulled a fast one in managing their own risk by transferring it to big government (and more specifically, taxpayers).

Before the Obama administration got involved in social engineering the healthcare sector, the law of the land was the McCarran-Ferguson Act of 1945, which granted anti-trust exemptions for insurance companies to market across state lines. Insurance was regulated by the states -- not the federal government. 50 states, 50 independent laboratories to see what works and what doesn’t. The opportunity for the states to learn from one another -- best management practices.  

Under McCarran, special interest lobbyists had to ply their trade in 50 different jurisdictions. The ACA was a boon for health insurance lobbying. It could now be centralized in one place, the center of the influence universe -- the Beltway.  Don’t think for a minute that this was lost on Washington. Bringing more big money to their doorstep was not an unwelcome outcome. If you want to know why Washington hasn’t addressed the real issue -- the cost of medical care -- the answer is staring you right in the face. In the hearts of politicians, self-interest comes first, special interests come second and the people’s interest lags far behind.

There is no downward pressure on healthcare pricing because there’s no competition among healthcare providers. There are no initiatives to address the extortion of the public in the pricing of healthcare services or products, no initiatives to address the pricing disparities between those with and without insurance, no initiatives to address the costly overlap of services (MRI, CT, etc.). Only government subsidies -- tax money as if it grows on trees.

Even the media ignores the real economic story. All the heated rhetoric, all the partisan bickering, all the reasoned debate omit one important issue: what government provides must be paid for through taxation. Which mechanism uses capital more efficiently -- government or free market capitalism? “Single-Payer’ is politispeak for ‘Government Insurance’. In the meantime, the burden gets heavier and heavier on everyday people.  

It’s not a stretch to conclude that government involvement in the free market of healthcare ‘insurance’ is a massive scam perpetrated on the people by politicians and big money interests.

A.J. Hutson is a former Blue Cross & Blue Shield of Wisconsin insurance executive, retired Assistant City Manager (Cocoa Beach). Past President of Brevard County City/County Managers Association and Past President of Brevard County Public Personnel & Risk Management Association.

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