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:

• Aetna
• Wellpoint
• Cigna

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

How I Would Fix Healthcare

Step 1 – Employers must provide a minimum $300 health insurance policy allowance for each and every worker.

Step 2 – Insurance agencies may not take more than $40 per policy for profit and administrative costs.

Step 3 – Protect Health Insurance Surplus Coffers

Step 4 – Preventative Healthcare Maintenance Schedule

Step 5 – Improve Healthcare Access

A. Institute a “public option”;
B. Regulate rates with blind menu pricing; and/or
C. Provide free clinics and access to community health centers

Stay tuned for steps 6 and 7

How I Would Fix Healthcare – Step 2

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

Step 2: Maximum Non-Medical Costs Per Policy

By Federal mandate, insurance companies may retain no more than $40 per enrollee's health care insurance policy for administrative costs and profits.

Covering the extra costs of healthcare

Walk into an insurance company to buy health insurance. Where does the money that you pay for premiums go?

When you buy health insurance, you are buying more than just healthcare. The individual who sells you the policy receives commission on the sale. The company who brokers the policy receives their cut. The insurance company hires administrators to decide how your healthcare is managed, approving this test and that procedure, this referral, and that prescription. These administrators are overseen by highly paid executives. Staff is hired to assist. Buildings are built and maintained. Advertisements are bought in newspapers, magazines, TV and other venues. Events are sponsored to further advertise services as well as improve community relations. Indemnity insurance is purchased to cover malpractice lawsuits. Lobbyists are hired to go to Washington. After everything it paid for, anything left over is profit to investors and stockholders if the company is a for-profit insurance company.

According to a November 2008 study by the California Department of Managed Health Care (DMHC) and the Center for Medicare and Medicaid Services (CMS), health insurance companies on average retain anywhere from 14 to 18 percent of insurance premiums to cover administrative costs and profits. The average California enrollee in 2006 paid $3,565 per year for their policy, which averages out to only about $300 per policy holder per month. On average, insurance agencies gleaned anywhere from $42 per month to $53 per month to cover administrative costs and profits, or $500 to $641 per year.

Nationally, policy holders paid an average of $3919 per year, about $326 per month, and insurance companies retained 11 percent, or about $36 per policy per month, or $431 per year to cover administrative costs and profit.

The state of California is considering regulating the health insurance industry in their state so that insurance companies may not charge more than 15 percent per enrollee for administrative costs and profits.

This appears to be a fair number. However, where it falls apart is in the percentages.

Flat fees vs. percentages

If you are diagnosed with a serious disease, your insurance company can raise your premium. How high? As high as they want. The higher the better, in their minds, since higher premiums not only bring in more money for medical care, they also equal more money for profits and administrative costs.

In a system where commissions and profits are based on a percentage, prices are bound to go up. Why would I want to sell you an affordable $300 health plan and get $45 a month, when I can tack on risk factors, raising your premium to $2000 and getting $300 a month? I wouldn’t. I’d sell you the $2000 plan – every time.

By taking percentages in profit, rather than a flat fee, insurance brokers are motivated to sell higher priced policies.

However, convert this figure to a flat fee per “enrollee” and you suddenly have no incentive to artificially raise premiums. If an insurance agent understood that no matter how much your policy cost, he would still walk away with only $40 in his coffers, he has no incentive to pad the policy with unnecessary costs. Quite the contrary, he will offer you the absolute lowest priced policy he can which will suit your needs so that you don’t go to “Brand B” to buy your insurance instead of from him. In addition, he might even be inspired to shave off some of his commission so that he is more competitive. He will do better selling 100 policies at $300 per month per policy, than he will do selling 80 policies at $1000 per month per policy. He will be motivated to give you good service and keep his customers happy so that he can get referrals and win over even more customers.

Win-win for insurance companies

Since insurance companies nationwide currently glean about 11 percent on average from insurance policies, or $36 per month per average $3919 policy, limiting their potential profit to $40 per month per policy will essentially feel like a raise.

Only companies who are garnering significantly more for profits and administrative costs will feel the pinch. This regulation will inspire them to cut corners, pare down unnecessary administrative costs, and perhaps even slash a few salaries to highly paid executives.

Although this regulation will not solve the problem of increases in premiums for high risk policy holders, it will reduce one motivation for these increases – the one of profit. Healthcare costs will continue to rise as always, but will be based on actual medical costs, and not on the cost of operating the insurance company.

Reporting and regulation

Insurance companies will be required to submit monthly reports to an overseeing agency within the Federal government, listing the numbers of policies they have sold, the revenue they made, and how much was paid in non-medical vs. actual medical costs. Government accountants will audit each insurance company's books once a year.

Each year, the overseeing government agency will also re-evaluate the maximum $40 per policy per month maximum and adjust it for inflation or deflation, as the case may be.

How I Would Fix Healthcare

Step 1 – Employers must provide a minimum $300 health insurance policy allowance for each and every worker.

Step 2 – Insurance agencies may not take more than $40 per policy for profit and administrative costs.

Step 3 – Protect Health Insurance Surplus Coffers

Step 4 – Preventative Healthcare Maintenance Schedule

Step 5 – Improve Healthcare Access

A. Institute a “public option”;
B. Regulate rates with blind menu pricing; and/or
C. Provide free clinics and access to community health centers

Stay tuned for steps 6 and 7