PCI week!

PCI is the shorthand for the big annual convention of the Property-Casualty Insurers Association of America. I’ve always thought of it as the U.S. version of the Monte Carlo Rendez-Vous, a big meeting for the U.S. industry’s powerhouses to get together.

I only went to one of these meetings, and it was when the meeting was hosted by PCI’s forerunner, the National Association of Independent Insurers, so things may have changed a bit. There were a lot of high-powered events – I think Colin Powell spoke – but the gathering was mainly so all the players could talk shop dawn to dusk.

In some way, the official events seemed irrelevant. I distinctly remember having nothing to do and thinking the last thing I wanted to do was attend one of those high-powered events. It was an admission of your insignificance, that you were so tiny that you couldn’t command a meeting – kind of like going to a dinner party and only talking with your spouse.

So I don’t know how much credence to put in the theme of this year’s conference, Politics and Private Markets: The Uncertain Path to Prosperity, or in the remarks of David Sampson, CEO of PCI.

Sampson told PCI Reporter “there is so much political engagement in the marketplace right now, and so many policy uncertainties have been generated and inserted into the market, that basically everyone is staying on the sidelines.”

And I’ve heard that, too. I have trouble believing it. But it’s the theme of the conference, so I choose to extend my remarks:

NAIC formally OKs medical loss ratio rules

Via NAIC News Release.

A lot of hand-wringing in the media over today’s vote, but my sense was things were pretty well set up weeks ago.

Now HHS must formally accept.

N. Korean refugees learn insurance fraud in a hurry

N. Korea isn’t the coolest place to be, even among a lot of North Koreans. That drive to emigrate has created a wave of insurance fraud in South Korea, news-insurances.com reports.

Defectors are so willing to get out that they go thousands of dollars in debt to buy their way across the border. Once in South Korea, they find they lack simple coping skills – like knowing how to buy a subway ticket or use a credit card. Usually, they have to attend a government-sponsored survival skills course just to learn how to make their way through a typical day.

So to defray their debt, many refugees play along in an insurance fraud scheme. The refugee buys health insurance, or joins a government program. Then nefarious doctors or hospital workers issue fake certificates of treatment.

The refugee endorses the certificate, collects “reimbursement,” and splits the proceeds with the doctor or hospital. He passes his share to the broker that arranged his entree to the Free World.

Most refugees don’t know this is fraud, and I guess that makes sense if you’re coming from an economy that barely has its nose above the barter system. So refugees get a two-hour session in insurance fraud as part of their government skills survival course.

I guess I should note that the country of North Korea itself has been accused of brazen insurance fraud. AFP had this cheery discourse a year ago:

Insurance fraud “has become one of the North’s largest illicit revenue generators,” [said former State Department official David] Asher. “The exact scale of the fraud is hard to determine… because the insurance industry has been so gullible.”Several insurers, including Germany’s Allianz Global Investors and Lloyd’s of London, disputed claims by Pyongyang over an alleged 2005 helicopter crash into a government-owned warehouse.

According to court documents cited by the [Washington] Post, the companies claimed that North Korea had faked the crash, that a North Korean court’s decision to uphold the claim was rigged and that Pyongyang often used funds from insurance fraud for Kim’s personal use.

Charming, eh?

NAIC OKs medical loss ratio rules

NAIC News Release: MLR Passes. The rules go to the fed for the final verdict.

Model regulation here.

NAIC letter to the feds is here.

Chart of the Day: Health care inflation

Apropos of nothing, I offer up this:

This is the average annual increase in spending on health care per person over 30 years, drawn from data downloaded from the OECD, a consortium of the world’s wealthier nations.

In some ways, this shows how well a country has controlled its health care costs. (There are other forces driving this, notably the aging of the population.)

I look at this and see some good news.

The United States (red bar) isn’t No. 1 in a metric measuring health care spending. Costs in the U.S. have risen an average of 7.8% a year – close to the top, but not No. 1 with a bullet as we rank in most measures of health care profligacy.

And we aren’t that much higher than the 7.0% average (black bar). [Actuaries: Netherlands is the median at 6.9% a year.]

I should acknowledge we are talking about interest rates compounded over 30 years, so a small annual difference builds into a big absolute difference. So the fact that we are just 0.8% above average per year implies a 30% difference over 30 years.

Still, this implies that our system hasn’t grown bloated over the last 30 years. It was bloated to begin with, but the lack of costs controls over three decades meant our system just got crazy expensive.

Second, this tells me that over the long haul, corrections to the system don’t have to do a lot to bring costs back into line. We don’t have to halve the medical inflation rate. Just bringing it down a little more than a point will, over a couple of decades, make an enormous difference.

The bad news goes to people who think we’ll straighten out health care costs overnight. To do so – shrinking to 8% of GDP from 16%  in just a year or two – would devastate the economy, as if we had cut everybody’s paycheck around 9%.

 

Actuarial tidbits: health care

 

More for less

 

A lot of folderol floating about on health care the past couple of weeks. I thought I’d hit it all at once.

• McDonald’s went through the media spin cycle because it wanted an exemption from the minimum 85% loss ratio requirement for its health plan. Their employees can buy something called mini-med, which is a policy with so-low-they’re-silly ($2K) limits. These policies exist mainly so Mickey D’s can tell applicants that their job comes with benefits beyond that of wearing a paper cap ringed with arches. Above, I cop the graph Kevin Drum built based on numbers that The Incidental Economist ran. The red bar is how much McDonald’s employees pay for coverage today. The other five bars are how much they would pay for coverage under Obamacare, the difference being the current limit is $2,000 while under Obamacare, benefits will be limitless. NY Times makes the same point.
• To show no one is picking on McDonald’s, USA Today notes that 29 other companies, including Jack-in-the-Box, have similar plans and seek similar exemptions.
• More worry that consolidation of hospitals drives up health care costs. I’ll keep saying Obamacare boils down to hospitals vs. insurers until someone listens.
• Group health cost to rise 8.8% next year, most since ’05. And federal employees’ premiums will climb 7.3%. Oddly, when coverage expands, prices do, too.
• Obamacare sez you can’t discriminate against kids when rating. To avoid adverse selection, some health insurers are refusing to insure kids at all. I can see the concern, but wonder how much those companies are thinking about reputation risk, viz.: Congressman: “Why won’t you insure this child?” Health CEO: “He gets sick too much?” Gone viral, will that help business or hurt it – especially since the company will be forced to write that same risk in 2014.
• Another alternative is to dump the business altogether.
• A lot of people think the solution is to dump the current “solution.” Their day in court approaches, but there’s been an early defeat.

Health care reform: Careful whom you bash

BusinessWeek chronicles CT AG Richard Blumenthal’s election season bashing of health insurers rate hikes.

“The public has a right to expect a thorough examination of all proposed rate increases that go far beyond the pale, such as those requested by Aetna and Anthem,” said Blumenthal.

[Insurance Commissioner Thomas] Sullivan said in a Sept. 22 letter to Blumenthal that the Insurance Department held the line on a rate request from Anthem last fall. The agency pared a rate request by between 39 percent and 58 percent from what had been requested, he said.

BTW, Blumenthal is running for Senator. Could you tell?

In more thoughtful analysis, the Incidental Economist examines how market power – either from hospitals or insurers – can drive costs. Quoting oregonlive.com:

Hospitals with the most clout command payments two to three times higher than the lowest-priced hospitals. And hospital costs overall continue to soar.

Meanwhile, insurers with market power are better for consumers, but worse for hospitals and doctors:

According to theory, consumers get the best deal when the health insurer has considerable market power (monopsony or market share concentrated in very few insurers) and when the insurer is a nonprofit entity (as would be the co-ops recently proposed by Senator Kent Conrad). Nevertheless, a monopsony insurer reduces producer surplus (and therefore overall welfare) by extracting prices from providers below those of a competitive market.

So here’s the deal: When hospitals are powerful, prices rise. When insurers are powerful, prices are held in check. Quiz time:

1. If you want to hold prices in check, do you bash hospitals or insurers?
2. If you cravenly seek votes, do you bash hospitals or insurers?

Medical loss ratio – finish line approaches

An NAIC subpanel lays the groundwork for approval of health care reform’s medical loss ratio requirement, The Hill reports. Issues that remain:

– Aggregation: The draft regulation calls for the medical loss ratio to be calculated for each company by state. The large-group health plans want to be able to aggregate nationwide, Webb said;

– Taxes: The draft calls for deducting most taxes from premiums when calculating the ratio, but Democratic committee chairmen in Congress have requested a more restrictive definition that would lead to a higher effective ratio;

– Fluctuations: Commissioners want to allow adjustments over several years for smaller health plans, to avoid penalizing them if they have a bad year with unusually large pay-outs.

To interject:

Aggregation: Companies like aggregation because its easier and results in smaller fines. Regulators dislike aggregation because a company could conceivably get away with posting a low loss ratio every year in a state (especially a small one) and never pay a fine. And the extra revenue makes them happy, too.

Taxes: I think the Hill blogger has it backwards. A more restrictive definition would leave more tax dollars in premium, which is the denominator of a loss ratio. A bigger denominator lowers the loss ratio. So a more restrictive definition would lead to a lower effective loss ratio.

Fluctuation: They’re talking about credibility here and multi-year calculations. (I think the reporter has it backwards again. A company with an exceptionally bad year isn’t penalized. The bad year raises its loss ratio, meaning it won’t be fined for having a low loss ratio.)

Finally,

A larger panel is scheduled to vote Oct. 14, and if the definitions are accepted the regulation could come before the NAIC’s executive/plenary session at the Fall National Meeting in Orlando for final approval on Oct. 21.

Just to add: I’m pretty sure feds have to approve what NAIC OKs, so there’s another step after Oct. 21.

Hospitals vs. insurers – the coming health-care war

The Incidental Economist considers who will be more powerful as Obamacare takes hold – insurance companies or hospitals.

In many states, one of the two is an oligopoly – an industry dominated by a few small players. In negotiations, the industry with the oligopoly has the advantage. It can pit the many players against each other to get a favorable price.

Harder to see what will happen when both industries are oligopolies – which could happen as insurance products standardize and the hospital industry continues to consolidate. Will they compete hard and drive rates lower? Will they collude?

Harder still to consider the impact of a rate regulator on the dynamic. The federal government drives Medicare reimbursements, which are important to hospitals, and state governments – emboldened by federal mandates and enriched by federal grants – will monitor insurance rates.

Medical loss ratio – winners and losers

After all the squabbling about medical loss requirements under Obamacare, a Kaiser Health News editorial says there were no winners or losers:

Many consumers will never see a rebate under the proposed rules. But the goal of the MLR requirement is not to generate rebates but to drive insurers to spend less money on bureaucracy and more on health care. Consumers benefit if efficiently-run small insurers stay in the market and if a variety of types of plans remain available.

Recall Obamacare mandates that insurers post an 80% loss ratio on individual business and 85% on group business, and the whole debate was over how you define premium and how you define loss. I’ll just point out that most health insurers ran at a loss ratio above 80% before Obamacare. So the stakes were fairly low.

That said, insurers are glad there’s a credibility adjustment that gives them a bit of a cushion if random variation gives them a favorable loss ratio. And agents are sad that commissions are considered part of premium, because that limits their upside.