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Wednesday, August 12, 2009

How I Would Fix Healthcare – Step 3

This is a continuing series addressing the healthcare crisis in America and a possible alternative to President Obama’s healthcare solution.

Step 3: Protect Health Insurance Surplus Coffers

By Federal mandate, insurance companies must reserve anticipated surplus in a special government insured and managed, tax-free, health care savings fund (with no maximum cap) to be used to pay for policy holders’ insurance covered medical costs when premiums fall short.

What Insurance Companies Really Do with Your Money

Have you ever wondered what insurance companies do with the money you give them for premiums? When you buy insurance, you assume that your insurance company is collecting premiums and saving them securely in a large pool, only to be paid out for claims.

What do they really do? It all depends on individual state regulations, whether the company is for-profit or non-profit, and each company’s policies. In some instances, insurance companies invest the money in high risk ventures and then pay out the profits to their stockholders and CEOs instead of adding it to their surplus coffers. It almost makes one think that perhaps insurance companies are really in two businesses: the business of paying claims for health care (when they have to); and the far more lucrative business of investing with the advantage of being able to not only keep all the money, but also not be regulated in the way an actual investment firm would be.

Who can blame them? Must be nice to have all that free money.

However, having money leftover after paying out claims can be a double edged sword.

In years where claims (losses) are lower than expected, for-profit insurance companies have to pony up and pay income tax on what’s left over. That’s not fair either. No wonder so many companies are turning non-profit. Something has to be done.

In order to fix health care insurance, insurance companies must be able to save for a rainy day with no tax penalty to them. Likewise, customers must feel confident that insurance companies are not taking their surplus and investing it foolishly, or worse, taking it as profit instead of rolling it over.

The following case illustrates how some insurance companies are really in business to make money off your premiums; not in business to pay out claims:

The Case of the Hurricane Gougers

In January of 2008, the state of Florida called Allstate Corp. on the table over home insurance premium rate hikes averaging 42 percent in the fall of 2007. Governor Charlie Crist contended that insurance companies were taking advantage of Florida residents by charging extraordinarily larger premiums than necessary to cover hurricane damage, and padding their pockets with the leftovers rather than rolling them over year to year. While Florida did suffer a great deal of damage in bad hurricane years, there were many more good years which passed without hardly any damage payouts at all. Governor Crist suspected the worst – price gouging. He suspected that insurance companies were setting rates based on the worst case scenario each and every year, so that in bad years, the premiums would fully cover the damages for that year, and in good years, the leftover premiums went to pure profit.

Florida Insurance Commissioner Kevin McCarty noticed that no implementation of fines could keep companies such as Allstate from refusing to turn over the company books to prove that they were not gouging Florida policy holders. Instead, he took the radical step of prohibiting them from selling new policies until they came clean.

Allstate worked around the legislation by forming a new company called the Royal Palm Insurance Company where only Allstate agents may write policies. In April 2008, my own personal Allstate insurance agent told me that the real money is in auto policies, anyway, so Allstate was happy to stop selling new home insurance policies and instead, focus on the more profitable business of auto insurance.

In May 2008, after failing to turn over their books, Florida insurance regulators shut down all of Allstate’s 10 Florida companies for one day as punishment for not cooperating in the investigation. That did it! Allstate finally complied and promised to turn over the books. The ban was lifted: Allstate may resume selling new policies in exchange for paying a $5-million fine; writing at least 100,000 new homeowner policies over the next three years; lowering existing premiums; and not increasing rates for at least one year while the government investigates rate hikes.

Florida Insurance Commissioner Kevin McCarty and Governor Charlie Christ were correct in halting Allstate insurance sales for a day. Perhaps a radical approach such as this is what’s needed to keep health insurance companies from doing likewise. Unfortunately, the effort to keep an eye on companies has taken far too much time and still not resolved the issue. An easier way to keep an eye on insurance companies is to require them to deposit their surplus into a federally managed and protected savings account, where they can roll over surplus funds tax free.

This leads me to step 3 on how I would fix health care in America:

Step 3: Protect Health Insurance Surplus Coffers

By Federal mandate, insurance companies must reserve anticipated surplus in a special government insured and managed, tax-free, health care savings fund (with no maximum cap) to be used to pay for policy holders’ insurance covered medical costs when premiums fall short.

Terms:

Each company will have its own, separate account within the fund.

Deposit anticipated surplus at the end of each fiscal period
Companies may deposit anticipated surplus at any time, but must do so by the end of each fiscal period when they will also report this same amount on their taxes.

Tax free
Money deposited into this account will not be taxed by any government entity: federal, state, city, or county.

Roll over
Surplus money will roll over from year to year in perpetuity.

Used for medical costs only
Money deposited into this account must be used to cover policy holders claims for medical costs only, such as reimbursements to doctors, hospitals, equipment suppliers and pharmacies and may not be used towards insurance company administrative costs, be taken for profits, or go towards malpractice suit damage payments, legal costs, bad debts, taxes, fines, payroll, other insurance payouts, or other non-medical claim related expenses.

In the case of HMO's (health maintenance organizations) where the insurance company doubles as the health care provider, money deposited may also be used to cover all hospital and clinic staff and all medical building operation expenses run by that HMO, including administrative staff, accounting and legal fees, malpractice claims, bad debts, fines, payroll, landscaping maintenance, etc., as would be ordinarily necessary. However, surplus money deposited in this tax free account may not be used to cover the business of running the insurance side of the company, such as managing plans, selling insurance itself, legal fees, fines, bad debts, office expenses, taxes, etc. related to the insurance side of the business.

Withdrawal after 35 days
Money deposited may not be withdrawn for at least 35 days. This will allow the government specialists who manage the fund ample time to invest and benefit from the deposit.

Withdrawal no more frequently than once monthly
Insurance companies may withdraw money from their account to supplement claim payments no more frequently than once monthly. This is designed to decrease paperwork.

Company Mergers
In the case of a company merger or acquirement, any money leftover in the account will be merged or acquired into the appropriate company’s surplus fund account and/or used to pay off any remaining medical claims.

Company Closures
In the case of company closure, bankruptcy, etc., the account will be closed and any money leftover in the account will be absorbed by the government to be used towards health care for the uninsured and to pay off any remaining, yet to be filed medical claims.

Interest Bearing Accounts
Interest earned on the entire collective fund will be kept by the government to help pay for managing the fund and for health care for the uninsured. This will serve three purposes: First, it will prevent insurance companies from being tempted to double as an undercover investment firm. Second, the government will guarantee the security of these investments so that the insurance company and their customers can feel secure that the money will be there when they need it to pay out claims. Third, the interest earned will provide revenue for health care for the uninsured.

Federal Government agency
An overseeing Federal government agency will control the surplus fund by forming a small office of accountants and investment specialists to manage and invest the fund itself. Interest earned will be paid into a national uninsured health care fund, perhaps Medicare.

Public information
The exact amounts of surplus in each company account will be public information because companies that are publicly traded must divulge this amount to their stockholders in annual reports, as well as file this information with the U.S. Securities and Exchange Commission (SEC). Non-profits must also divulge this information.

Sources for What Insurance Companies Really Do with Your Money:

United Health Group
Annual financial reports and SEC filings.

Investor Guide:
Annual Reports are linked at the bottom of the page. Search for the company you want to see SEC filings for, such as:

Sources for The Case of the Hurricane Gougers:

Article in Jan. 14, 2008 South Florida Business Journal

Article in Jan. 17, 2008 Chicago Tribune

August 16, 2008 St. Petersburg Times

January 10, 2007 Washington Post