HCR links and an interview
Here’s a roundup of HCR articles you might want to read: this, this, this, and this.
Plus, here’s part of a transcript from the Rush Limbaugh show, sent me by a reader. I’m reproducing a fair amount of it here for your perusal:
CALLER: Okay. For time immemorial, both state and federal regulation — and also just the industry standard — has been a 65-35 percentage arrangement: 65 in claims payment and 35 for administration and claims expense. Withholding that you store for, you know, a major catastrophe or something.
HOST: This is to pay your claims?
CALLER: No, 65% is to pay the claims. Thirty-five percent is for everything else.
HOST: That means 35% is salaries, administration costs, and the offices, all the paperwork, that kind of thing?
CALLER: It’s that as well as, you know, we are required to keep a certain amount of cash on hand as a percentage of our claims exposure to pay claims. . . .
HOST: Now, I just want to make sure I understand here. State and federal regulations set those percentages?
CALLER: State and federal regulations, yes.
HOST: So if you wanted to have 85% set aside for claims, you couldn’t. You had to go at 65%?
CALLER: Exactly.
HOST: If you wanted 30% set aside for claims and the rest were administration, you couldn’t do it. It had to be 65%.
CALLER: That’s illegal, yes. It has to be 65-35, and there’s a couple of percentage either way, but generally when an insurance company falls outside of those guidelines, they are considered financially unstable.
HOST: Well, who audits you all to make sure you are within the ratio?
CALLER: We’re audited by the state insurance departments, primarily. There are some plans that are audited both state and federally, and then you have your private auditors who will come in as part of the stock market and that kind of thing. So we’re audited often.
. . .
CALLER: . . . So what Obama just did an hour and a half ago is make every insurance company in the country financially unstable. Remember, the 15% that we are left has not only to pay salaries, maintenance, upkeep of buildings; it also has to pay the 40% increased taxes that we’ve got. I mean, there’s just no way. You can’t do it.HOST: Well, you’re getting a little bit ahead of me here. What did Obama sign that changes this 65-35 split? In what way did Obama now sign you into permanent instability?
CALLER: The provision in the Senate bill requires that all insurance companies pay 85% of premiums collected every year in claims.
HOST: So the 65 is now 85?
CALLER: Exactly. It doesn’t matter how much we increase the premium, it won’t matter.
. . .
HOST: . . . You originally thought that your industry would survive. You’re speaking industry or just your particular company?
CALLER: I would say 99% of all insurance companies, health insurance companies in the country.
HOST: Okay. So you originally thought you might have three to five years to stay in business under Obama. Now you said it’s two to three. Why?
CALLER: Because of the 85-15. Plus the additional expenses were going to incur. Additionally, the mandates, what people don’t understand when CMS (which is the Centers for Medicaid and Medicare) push a mandate down on insurance companies, we have to pay to complement those mandates. We don’t know how many of those are in this monstrosity. So we can have our mandate budget doubled, our taxes already up 40% or whatever it is, and our cash flow immediately cut.
HOST: Well, how can you know in advance of paying any claims? Because they’ve now shifted to 65% that you have to set aside for claims to 85%. How in the world can anybody know in advance of paying claims that it’s going to amount to 85%?
CALLER: Well —
HOST: Of course 65%? It seems to be like this is a ridiculous dictate made by people that have no clue how your business works.
CALLER: Well, they don’t have a clue. But the way that that amount of money is calculated is you look at the past year, past five years, past ten years, and you see what your claims expense have been those years. Then based on your enrollment and your demographics you project forward into what you expect to be paying in the future, in the next year and the next five years. So you can do that. It’s not precise to a dollar, but you usually get pretty close. What he’s done is by saying, for example, the preventative services now —
HOST: Those are free. Those are, quote, unquote, “free.”
CALLER: Yeah, exactly.
HOST: What the hell is a preventative service covered by an insurance company anyway?
CALLER: Well, that would be your colonoscopies, your mammograms, your yearly physicals, your lab work.
HOST: Oh, so those are free now! So if I want to go get a colonoscopy today and I have an insurance policy, I’m not going to pay for it?
CALLER: Exactly.
HOST: But you will.
CALLER: Well, we will. We’ll pay out the nose for it.
HOST: (laughing) Well…
CALLER: I know, bad analogy. I’m sorry.
HOST: It is Christmas!
CALLER: But, Sir —
HOST: Well, no, I don’t look at a colonoscopy as Christmas. Don’t misunderstand. . . . But it is Christmas in the sense that I’m not paying for it. I don’t know how you can stay in business even two to three years with this kind of thing happening to you this year alone.
CALLER: I don’t think we will and that’s why I am seriously considering leaving this industry. I’m updating my resume. You know, people who I work with — even people who voted for Obama and thought he was the greatest thing since sliced bread — are shell-shocked.
HOST: That just frustrates the hell out of me. Anybody with a brain has no reason to be shell-shocked about who this guy is, but it is what it is.
. . .
CALLER: And you know how many people are going to die in the interim, Sir? I say that in all sincerity, because come January 1st you’re going to see 200, 300% increases in premiums and people are going to drop their coverage. So you’ve got the woman who isn’t going to go get the mammogram or the man who’s not going to get the prostate exam.HOST: Wait a minute!
CALLER: People are going to die.
HOST: I thought the mammogram was free.
CALLER: Not when you drop the coverage because you can’t afford three times the premium. Remember, the premiums are going up because of the government, and jobs are being lost because of the government. If you can’t pay it, you can’t pay it. So people are going to drop it. They’re going to drop their insurance before they drop their mortgage.
HOST: They’re going to be clamoring to the government to fix the mean-spirited insurance companies for raising the prices so high and that’s where Obama’s going to step in and say, “You know what? We have no choice here but than to do it ourselves,” and then you get dumped on again first and foremost with Obama portraying the government as the savior. . . .
One part of this interview I’m not at all sure about (I’m not in the insurance business! Don’t blame me!) is that 200%-300% premium hike. Ordinarily, as far as I know, all premium raises have to be approved by the insurance commissions in the respective states. I assume HCR doesn’t change that for now, although I confess I have not read the entirety of the bill. But as long as a company can justify a rate hike, it’s approved. So I suppose if their profits fell and they were in the red deeply enough, they could indeed justify such hikes. Any experts out there who can explain?
Rush Limbaugh! I never in my life listened to Limbaugh, knew anything about or followed him….
…until Obama and his Admin began railing against him. I went to his website and checked him out and I’ve been visiting it regularly ever since.
Yes, the mechanism in that part is unclear to me, too. Didn’t he said that no matter how high the premiums’ rate the insurance companies have to maintain 85/15 ratio anyway? So it doesn’t matter for them that much if they raise the premiums – they’ll have to pay 85% of them in claims. No?
I think I got it.
Let’s say an insurance company currently has $1 million in premiums coming in. According to this, $650,000 is set aside for claims and they can use the remaining $350,000 for their other costs (salaries, offices, etc). Under this plan, the amount set aside for claims jumps to $850,000, which would leave them with $150,000 for their costs.
To maintain that $350,000 level, they would have to increase premiums to $2,333,333.33. Either that or they start shutting things down.
Thanks, Ryan. Makes sense.
And of course if they raise premiums that much, who’s going to want to get their insurance from them?
Or they could some how have such an increase in business that they don’t have to raise the cost and they more than double their business. Of course then they would have to expand the business to maintain the larger customer base. Suddenly the $350,000 in that example isn’t enough to run the company… and the viscious cycle continues.
For months now Rush has been saying the health bill is designed to put the health insurance industry out of business. By adding to their claims (preexisting conditions, preventive tests, 26 year old children, …) and freezing premiums, you bankrupt them. Then the left claims single payer is the only way out. He figures two or three years should do it.
The vicious cycle won’t continue. If I recall correctly, the Health Insurance exchanges will control the policy’s premiums that private insurance companies can set.
When insurance companies try to raise their rates to cover the increased costs, they will be denied that relief. Hell, Dems were complaining about a 39% increase. No way are the health exchange boards, who we may be sure will be packed by Obama with leftist ideologues, going to agree to 200-300% increases.
And the caller only mentioned one aspect of those increased costs. What about all the uninsured with pre-existing conditions, who now must be granted coverage by private health insurance companies, but who can only charge the rate that a presumably healthy customer is paying?
85%? No, 150% wouldn’t cover it…
It’s a formula for financial disaster and guarantees the certain extinction of private health insurance.
If allowed to stand, in less than 5 years there won’t be any private health insurance available to anyone.
And it’s entirely intentional on the left’s part. This ‘reform’ lays down the conditions that inevitably result in a single-payer, government-run public health system. That’s the goal and this health ‘reform’ enables its achievement.
The left is trying to coerce, bribe and illegally force socialism upon America. While ‘reinterpreting’ the Constitution to allow it.
I was going to add that they wouldn’t be allowed to increase their premiums to accomodate their own costs, but didn’t want to have too many posts in a row 🙂
Since they won’t be allowed to raise rates, they’ll have to miraculously have twice the business and be able to pull it off with half the capacity to run it. Won’t happen. They’ll go under. Government takeover complete.
Also, remember, under the current 65%-35% split, some of the 35% is applied to insure against a catastrophic run of claims: i.e. if a horrible flu plague or something requires a sudden huge influx of monies to pay claims.
Modest Proposal and Open Letter
Rush, you didn’t become a very rich man by accident. Surely you’d like to be an even richer one.
It’s possible to profit from the collapse of the health insurance stocks. Short them, buy options, or a combination of the two.
Do you feel lucky, Rush? Well, do you?
I look forward to hearing that your broker has executed your instructions. I look forward to following the market value of the Limbaugh Portfolio.
The worst thing about this is on some tv show (Beck?) there was a clip of Obama stating that he wanted to get to single payer health care but was willing to get there in an incrementalized manner.
I don’t watch much TV at all, so it had to be one of my rare Beck shows.
None of this should be surprising at all.
“It’s possible to profit from the collapse of the health insurance stocks.”
That’s the Soros method: vulture speculation. Limabaugh would likely say that he is happy to build his fortune through Excellence in Broadcasting and the outrageous ad rates it can earn.
He might also raise a point about betting on failure. Barry is not a businessman, so wanting Obama to fail is the pro-enterprise position.
But, it is true, there will be fortunes made by shorting health shares over the next few years. It might be your way to go from where you are to a Limbaugh-sized bankroll.
Geoffrey Britain: but do the health insurance exchanges get set up simultaneously with the 85-15 rules? If the 85-15 rules are first, and there’s a time lag before the exchanges start, then the increases could occur as the interviewee said. I don’t know the details of the time frame. Do you?
The 85% (in large markets) or 80% (in the small/individual market) ratio rules go into effect in 2011. They can’t raise premiums to meet this goal, because if they end up spending less than the amount they set aside, the law requires they rebate their policyholders. The figure of 65% in this transcript is bogus. The loss ratio in large markets for the largest insurers, ranged from 82.9% to 86.8%. For example, Aetna’s ratio was 85.6%:
http://www.ama-assn.org/amednews/2009/11/30/bisb1130.htm
This is an attainable goal.
Mitsu: well, according to the voices at Democratic Underground (not my favorite spot, but you might like it), it’s 65-35.
See this March 14 discussion there of the HCR bill:
I don’t know where they got that 65-35 figure, but it certainly is congruent with the one mentioned in the Rush interview. There are also some other interesting comments that are part of the Democratic Underground thread discussion as to what it will mean for premiums, etc..
And here’s a big long article (I must confess I only read a few paragraphs) that seems to be about how the “medical loss ratio” is an almost meaningless statistic, since it can be arrived at (and/or fudged) in so many different ways.
It appears the 65/35 ratio is incorrect for health insurance – this number is close to the ratio for property & casualty (i.e. auto, homeowners, etc.).
That said, the discussions above fail to consider that timing of payments – $$ taken in today is paid out at a later date. In the meantime it is invested. This is why you can have combined ratios (losses + expenses) over 100 % and still make a profit.
I’ve read all sorts of different numbers, such as the average loss ratio is 74% in California, the loss ratio averages 85% for large insurers, etc. It’s certainly worth more research, but I think we’d have heard a lot more about the unattainability of the 80% or 85% figure if those figures really are unattainable; and as I noted Aetna certainly seems to be able to do it in large markets.
I don’t know anything about takings cases, but if the caller is correct, it seems possible the insurance companies would have an actionable Fifth Amendment “inverse condemnation” claim; i.e., for a governmental taking without paying just compensation.
but I think we’d have heard a lot more about the unattainability of the 80% or 85% figure if those figures really are unattainable; and as I noted Aetna certainly seems to be able to do it in large markets.
‘Cuz the Mainstream Media has been so skeptical and critical of “Healthcare Reform”…..
You can argue any arcane rule of insurance; but the bottom line is less care for more money.
….and that pisses me off.
Hey, Mitsu:
Since you know the Healthcare Bill so well, starting which year will it be advantageous to me to drop all coverage for my family, pay the penalty, and then buy in if someone (God forbid) gets really sick?
That seems like the smart move. That would save my family some money and cause me to really, really like the HCR Bill. Thanks in advance,
Gray.
I don’t know anything about payout ratios, but Gray hit the nail on the head for the whole premium issue.
Since people can opt out of insurance, pay a small penalty, and then opt back in again when they get sick, insurance companies will eventually only have sick people enrolled. That will drive insurance rates to the moon, and no-one will have insurance.
Then the single payer plan kicks in….
James
And don’t forget that for businesses it will also be less expensive for them to simply drop the health insurance for their employees because the fines imposed on them for not covering their employees, in many cases, will be less than the cost of paying for health care for their employees. As a pure monetary decision, it would make the most sense. Many will keep their coverage for other reasons, but if the premiums go up too high — I see all kinds of wonderful unintended consequences to this monstrosity.
See the following from this “source”:
CARPE DIEM
Professor Mark J. Perry’s Blog for Economics and Finance
Thursday, February 18, 2010
Health Insurance Companies Rank #88 by Industry Profit Margin, Earning $100-200 on Avg. per Policy
I’ve posted several times before about the profitability of the “Health Care Plans” industry, see posts here and here, and reported previously that the health insurance industry ranked #86 by profit margin out of 215 industries, at 3.3%.
Updated data are now available for Q4 of 2009, and the Health Care Plan industry (includes Humana, Aetna, WellPoint, Magellan, Unitedhealth Group, etc.) slipped to #88 with a profit margin of 3.4%. Actually, that industry profit margin was boosted by WellPoint’s 18% profit margin for Q4 2009, which was due largely to a one-time sale of its Pharmacy Benefit Management division. Without that sale, WellPoint’s profit margin would have been only 3.9%, the industry average profit margin would have been closer to 3%, and the ranking for the industry would have fallen a few places down to #92.
America’s Health Insurance Plans (AHIP), the industry’s trade association representing 1,300 members, reported last October that annual health insurance premiums averaged $2,985 for individual coverage and $6,328 for family plans in 2009. Using the industry average profit margin of 3.4% means that insurance companies make about $100 per policy in profits for individual coverage, and a little more than $200 in profits for each family policy.
So even if we could strip away 100% of the health insurance industry’s profits, it would only save patients between $100 and 200 per year in health insurance costs.
“… higher taxes, longer waiting lines, and rationed care will not be happening until 2013 through 2018.”
Just in time for Republicans to get blamed for it, the (Democratic) PARTY (police state) doesn’t do anything unintentionally, you can count on that…
Great article on what the bond market has to say about it….