Insurers' profit strategy becomes flashpoint in health reform debate

A note sent by Goldman Sachs to investors about health plans' rate hikes and willingness to drop customers drew quick reaction from the Obama administration.

By Emily Berry — Posted March 22, 2010

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For seven years running, Goldman Sachs has invited the same expert to hold court on trends in the health insurance business during an annual conference call with investors. Typically, the investors have been the only ones to react to those comments, which are transcribed in a note written by the Goldman analyst leading the discussion.

This was not a typical year.

Not long after that guest expert's assessment -- that health plans are quoting increasingly high premiums to business customers as market competition diminishes -- reached investors March 3, they became fodder in the fight over health system reform.

The Obama administration used the note, meant as investment advice, as fresh evidence of merciless dealings by health insurers benefiting from a broken system.

"We just got a Goldman Sachs analyst who said that the market competition is decreasing in this country ... in the individual market, in the small group market, where small employers are absolutely caught," Dept. of Health and Human Services Secretary Kathleen Sebelius said March 7 on NBC's "Meet the Press."

On March 8, President Obama cited the investment bank's research note at a rally at Arcadia University in Glenside, Pa., to raise support for the passage of health system reform.

"So you've got a choice: Either no health insurance, in which case you're taking a chance if somebody in your family gets sick that you will go bankrupt and lose your home and lose everything you've had -- or you keep on ponying up money that you can't afford," he said.

The insurers know people are making that choice, but "because there's so little competition in the insurance industry, they're OK with people being priced out of the insurance market," he said. "Because first of all, a lot of folks are going to be stuck, and even if some people drop out, they'll still make more money by raising premiums on customers that they keep."

Health plan pushback

Insurers -- already under criticism by Obama, Sebelius and others for their rate hikes after Anthem Blue Cross announced a 39% maximum increase for individual plans in California -- lashed back at what America's Health Insurance Plans President and CEO Karen Ignagni called the "villainization" of their industry.

"The health care reform debate should be driven by data and facts, not the personal opinion of one broker who does not speak for our industry," said Robert Zirkelbach, AHIP spokesman. "Some in Washington are just looking for anything they can find -- legitimate or not -- to criticize the insurance industry because they are unwilling to take on the real issue of skyrocketing medical costs."

Goldman's guest expert, Steve Lewis, is a regional leader for the employee benefits practice of Willis, the world's third-largest insurance broker. Goldman Sachs investment analyst Matthew Borsch presented him to investors as one of the few industry sources who has described health plan pricing trends accurately over the last two years.

Lewis told Borsch and investors on a conference call that his customers, small and mid-sized businesses shopping for health insurance for employees, have been quoted increasingly high premiums without much flexibility or difference between companies. "Price competition is down from a year ago," he said.

Borsch declined to comment for this article. Willis representatives did not respond to requests for comment by this article's deadline.

During the call with Borsch, Lewis did not comment on the rates that health insurers charge individual subscribers. This is the line of business that has drawn most of the attention in Washington, D.C., lately -- including congressional hearings and a health plan executives meeting with Sebelius -- as news spread of double-digit percent rate hikes rolling out in several states.

Instead, Lewis was talking about the premiums his employer customers were offered for the 2010 benefit year to cover their workers.

He said rate hikes ranged widely but in most cases "were in the low to mid-teens out of the gates" with subsequent negotiations allowing for no more than "one to 1½ points with no plan changes. ... That's less movement than we've had in each of the prior years and certainly, not turned in the right direction from our clients' perspective. ...

"We feel this is the most challenging environment for us and our clients in my 20 years in the business," Lewis said. "The incumbent carriers seem more willing than ever to walk away from existing business."

"Pricing discipline"

Sticking to higher prices -- ostensibly to cover high medical costs -- is what is known in the industry as "pricing discipline," as opposed to charging a lower premium just to gain or keep business. That's sometimes referred to as "buying membership," because an insurer will lose money to win or keep customers. During the past 18 months, multiple industry sources have supported Lewis' observations, Borsch said in the research note. "Price discipline has strengthened notably further."

Lower levels of competition make strict pricing discipline less risky for health plans, because if there are fewer choices and all the companies are offering premiums within the same range, members and employers are less likely to switch companies.

The American Medical Association's most recent analysis of competition in the health insurance market, published in February, showed a decline in competition compared with figures released a year earlier. Their analysis of HealthLeaders-InterStudy data, based on insurer enrollment figures from January 2007, found that 99% of 313 tracked markets qualified as "highly concentrated" under the standards used by the U.S. Dept. of Justice and the Federal Trade Commission. The AMA said that level of market dominance has allowed health plans to force physicians into take-it-or-leave-it contracts, and allowed plans to force patients into take-it-or-leave-it premium pricing.

Health insurance executives regularly reassure investors and analysts that they are sticking to pricing discipline to maintain profits, even if it means losing membership.

For instance, WellPoint President and CEO Angela Braly was called out by members of Congress for saying during a 2008 conference call that the company "would not sacrifice profitability for membership."

But her counterparts at other insurance companies have made similar comments. Speaking to investors in late 2009, Aetna executives made clear that higher prices for coverage in 2010 might mean a loss of as many as 600,000 members but would improve profitability. On March 17, WellPoint, blaming the weak economy, announced it expected to lose 400,000 members in 2010, although it said its projected earnings per share should remain at $6.

More recently, however, executives have insisted that price increases are merely reflecting underlying medical costs and are not part of an overall strategy toward boosting profits at any cost.

Inopportune timing for health plans

The Goldman note came as AHIP met in Washington, D.C., March 9 for its National Policy Forum.

Hundreds marched and protested outside the meeting site, staging a "citizens' arrest" of health insurance executives.

One protester held up a giant puppet of a what was called a vampire squid, telling a National Public Radio reporter that it represented "the bloodsucking aspect of trying to make profits in a publicly traded, for-profit company, out of people getting sick."

The same day as the meeting and protest, AHIP released a new TV advertisement using a pie chart to demonstrate that a small segment of overall health care spending goes to health insurance, while the majority is for doctors, hospitals and medical tests.

Speaking to anchor Neil Cavuto on "Fox Business News" March 10, Ignagni said there is a "full-bore villainization campaign going on," and compared it with what she said was the "playbook" when the Clinton administration pushed health system reform in the 1990s -- "find a villain, go after them with everything you have, and throw the book at them."

The focus on insurers obscures the reality that premiums are rising not because of insurers' greed, but because doctors and hospitals are pushing up costs by demanding higher pay, she said.

"No group is more concerned about rising premiums than ours," she said. "What we're trying to do is get the American people, the Congress and policy community to focus on what's driving this."

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