Health Insurers: Comply Or Die!

This is the time of year when private sector companies allocate benefits for the next calendar year, and with that has come the first evidence of the true impact of Obamacare. Primary attention will be given to the nationwide epidemic of insurance premium hikes, and the incredulity from politicians as to why it’s happening, and their equally incredulous response to a situation they themselves created.

I heard the first reports on the radio just yesterday, including one baffling account from an “Insurance agent who could not understand why his company’s premiums were going up by 25%.” That agent is an absolute moron, and he’s not alone.

One of the stipulations of Obamacare is a requirement that 85% of revenues (80% for “small businesses”) be spent on benefit payouts. In the industry this is called the “Medical Loss Ratio (MLR).” 85% is about the high-water mark for the industry, with the average about 10-15 points lower. This arbitrary requirement was installed to appease the extremist single-payer crowd. You might ask, “Well how does this affect single-payer?” Included in the law is creation of a review agency to identify private insurance companies who are increasing premiums, at which point the government has given itself the authority to essentially put that company out of business. Do that often enough and the private insurance industry will collapse and voila! Single-Payer.

Here’s how it works. Let’s say your insurance company currently has revenues of $150 million. In the insurance biz this makes you a small fry, but you’re doing your best to grow your customer base and expand your business while delivering for your employees and shareholders. Of that $150 million, you currently spend $100 million on benefit payouts, $40 million on the costs of doing business, and you’ve managed a profit of $10 million. That sounds like a lot, but it’s only 6.67% of total revenues, which is about the industry average or maybe a little higher. Unfortunately your MLR is at the lower end of the industry average at 66.67%, and now Obama and his anti-capitalist progressives are gunning to put your greedy butt out of business. The message is simple: Comply or die.

But you’ve got big problems. The costs of doing business are what they are. You need a building and an IT infrastructure and an Internet presence and Marketing and claims processors and agents and administrative staff and Legal then you also need a small army of accountants and another building full of people whose job it is just to make sure you’re business complies with all those government regulations, new and existing, at all levels from Federal to Municipal. You may be able to make a few cuts to payroll and find some savings in IT by outsourcing everything that isn’t already outsourced, but the reality is that, as a small insurance company, your customer base is not large enough to balance those bare minimum fixed costs of doing business and achieve an 85% MLR.

Luckily, you’ve been a good taxpayer and friend of the community, and have been liberal with campaign contributions – which also add to your costs – so you can call your Congressman and be deemed small enough to hit the 80% MLR slot. Ok, but you still have a long way to go to meet the Federal standard and stay in business.

As a small company, you have relied on ingenuity in your product offerings to maximize profits. You currently offer a wide array of services in the region of preventative care, such as encouraging customers to exercise and eat healthy, including incentives such as discounted memberships to fitness clubs and details about local CSA’s and recommending healthy lifestyle choices, etc., and you’re also working directly with physicians to help your customers make well-informed choices about care. As a result you’ve managed to keep premiums relatively low, but now because of the Federal MLR mandate you need to make some difficult choices.

Now keep in mind that benefit payout is largely beyond your control, but you have a solid algorithm for predicting total payout costs annually based on customer base and several well-understood industry specific variables. The bottom line: unless you take on more customers and higher risk, the $100 million will not significantly change.

So you’re stuck with two choices: find a way to reduce non-benefit costs or sell the company. You decide to try to make it work. So the first thing you do is eliminate all the services for preventative care, which allows you to scale back your IT presence and fire several hundred people who comprised your Preventative Care division, including dozens of on staff nurses, nurse practitioners, and those expensive consulting fees charged by physicians and other health-care industry types. You freeze all pay – no raises for the foreseeable future. You also sacrifice the future for the present, and eliminate half your Marketing team. You fire an entire tier of middle-management and reorganize the corporate reports structure. You have transformed into a flatter but less versatile company with the single objective of filling claims and surviving into the next fiscal year.

Congratulations! You’ve saved the company. You had to fire a third of your workforce and discontinue all value-added services, and as a result your customer base is less healthy overall, but you’ve met the federal mandate. Obamacare works!

But wait, now that your customer base is less healthy your seeing more claims, and your benefit payout spikes to $125 million. You had cash on hand to cover this event, but you need to plan for it for next year, and since you’re operating at a razor thin profit margin as it is, the only option is to increase premiums.

This time you can’t escape – you need to raise premiums by at least 20%, but that will inversely affect MLR because a hike in premiums is revenue! You decide to do it anyway, but 6 months later the Federal auditors deliver their papers and you are forced out of business.

Companies that cannot reduce costs must raise premiums while taking on additional risk. It is a fine line and a game in which the deck is intentionally stacked against the industry. The government wants insurance companies to fail. That’s the whole point. If insurance companies are forced to raise premiums, Democrats can score cheap political points by vilifying the private sector while taking steps toward Single-payer! Obama and Democrats have purposefully created a system to destroy American companies and cause the loss of millions more jobs, just so they can then implement a system under which they control every aspect of your health and lifestyle.

You think this won’t happen? Wake up, America, it’s happening already!