For two decades or more, advocate complaints of rising health care coverage costs and legislative efforts to curtail those costs have become commonplace, yet nothing ever works. The fact that nothing ever works only results in a doubling of legislative efforts, as if only reintroducing failed bills, or amending failed programs, or just trying harder will find the ever-elusive promise of expanding coverage, improving care and reducing costs. Indeed, this chasing of magical thinking resulted in the chimera of federal "health care reform." Yet even now, after convincing themselves the mythical unicorn has finally been captured by enactment of President Obama's "Patient Protection and Affordable Care Act (PPACA)," California advocates of public control of private health care refuse to quit, doubling their efforts in reintroducing failed bills. AB 52, authored by Democrat Assemblyman Mike Feuer and sponsored by Democrat Insurance Commissioner Dave Jones, is the latest and best example of this.
While only a year has passed since the last rate regulation bill, AB 2578 (Jones and Feuer), failed on the Senate Floor, much has changed since then. The most important is a change in governors, with the new governor presumably more inclined to sign a rate regulation bill than his predecessor. Also notable is the increasing prospect of the U.S. Supreme Court invalidating PPACA as unconstitutional; this uncertainty over PPACA's constitutional status goads advocates to expand public controls over private health care, if only to ensure state powers stand in place of vacated federal controls. Yet this effort to regulate rates, even if enacted, is no more likely to reduce costs than previously failed efforts. Why is this?
Public Distortions vs. Market Realities
Ever since appointed Democrat Harris Wofford's surprising 10-point defeat of the highly favored Republican Dick Thornburgh in a November 1991 special election for U.S. Senate in Pennsylvania, largely credited to Wofford aggressively highlighting voter concerns over health care costs1, politicians have found it electorally rewarding to attack health care costs. While voter concerns with health care costs are completely valid, politicians seeking electoral advantage have done voters a terrible disservice in consciously distorting health care issues. Public discourse of this complex matter has been degraded to the simplest of terms, to the point where fact and truth are unwelcome strangers to the discussion.
There are many examples of this; none may serve the point better than the popular perception of health insurers and health plans in health care reform debates. There is no question the public's misunderstanding of health care costs being driven by insurer profits result from statements like this from U.S. Senator Dianne Feinstein:
"Insurance companies are driven by the need to return profits to shareholders, and without proper regulatory oversight, will continue to raise rates and drop people from coverage to maximize their profits. It is clear that California's state regulators need the authority to reject excessive rate hikes…. Without legislative action, insurance policyholders face the possibility of multiple, dramatic premium rate increases each year. I will continue to push my federal legislation that would create a national rate review process, and also support efforts in California to grant this authority."2
This is the essential argument in support of rate regulation - that regulators will squeeze profits from insurers, thus halting rate increases so that people can continue to afford health coverage. In the face of ever-increasing rates, who can blame the uniformed for vesting their trust in such promises?
Yet market realities indicate Senator Feinstein's characterization of health care coverage costs as being driven by profit is a complete distortion of the facts. How so?
Health Insurance is Expensive Because Medical Care is Expensive
The problem with the "insurer profits drive costs" argument is that it entirely ignores the underlying costs of health care. The glib notion that coverage is expensive only because of insurer profiteering is just not honest. Over the years, there have been multiple studies commissioned by different organizations pointing out that medical costs, not administrative costs or profits, drive health insurance costs.
In a March 2004 Issue Brief on rate regulation, the California Health Care Foundation (CHCF) reported on a study it commissioned from RAND Health. RAND Health analyzed health maintenance organization (HMO) premiums and profits from 1997 to 2000 and found that, while premiums increased about 18 percent, profits remained flat. The CHCF report indicated the increased premiums were used to pay higher claims for medical care and further stated the "(m)ajor causes of rising medical care costs include higher pharmaceutical expenses, technological changes in medical procedures and products, tight labor markets for nurses and physicians, hospital consolidation and market power, expansion of insurance coverage and mandated benefits, and changes in the population's age structure."3
More recently, according to the 2008 PricewaterhouseCoopers (PwC) report "The Factors Fueling Rising Healthcare Costs," commissioned by America's Health Insurance Plans, found that in 2007, the cost of health services increased at an annual rate of 6.4 percent, while health insurance premiums increased by 6.1 percent,4 less than the cost of the covered health services. The report also found general inflation accounted for 46 percent of the 2007 increase in health insurance premiums. Increased utilization of services accounted for an estimated 25 percent of the increase. Price increases in excess of inflation for healthcare services accounted for the remaining 30 percent of the increase in health insurance premiums.5 The reasons listed for price increases in excess of inflation include reduced provider competition (0.8%), cost shifting from Medicaid and the uninsured to private payers (0.5%), and higher-priced technologies (0.5%).6
PwC also found that "about 87 percent of the costs of health insurance are benefits paid out (for medical claims). Administrative costs and profits account for the other 13 percent."7 PwC reports the private insurance health care dollar breakdown, in declining order, as follows: physician services 33%; hospital inpatient services 20%; outpatient services 15%; prescription drugs 14%; other medical services 5%; consumer services, product support and marketing 4%; claims processing 3%; government payments and compliance 2%; other administrative costs 1%; while health plan profits were just 3%.8
Get Rich Investing In Private, For-Profit Health Insurers?
It is impossible to ignore the aggressively promoted and widely subscribed myth of health insurer profits driving ever-increasing insurance premiums. One only has to check the easily accessible industry financial data to debunk this distortion. For example, the chart below (abbreviated from https://biz.yahoo.com/p/5qpmd.html) , shows the year-over-year net profit margin in the entire publicly-traded healthcare sector is 15.59%. That is impressive, but a closer look at the chart shows that most every industry in the healthcare sector is more profitable than health care plans:
|Industry||Net Profit Margin|
|Drug Manufacturers - Major||16.1|
|Drug Manufacturers - Other||13.5|
|Medical Instruments & Supplies||13.1|
|Medical Appliances & Equipment||12.9|
|Specialized Health Services||8.9|
|Drug Related Products||7.9|
|Home Health Care||6.3|
|Drugs - Generic||4.7|
|Health Care Plans||4.3|
|Long-Term Care Facilities||1.6|
|Medical Laboratories & Research||1.2|
The average rate of profit for the 16 listed healthcare industries is 9.5%. Healthcare plans average less than half the average rate of profit of all industries in healthcare and, at 27% of the sector's net profit margin, average slightly more than a quarter of the sector's rate of net profit. It is important to note, that under the rubric of rate regulation proponents, this chart shows only the publicly traded, for-profit health insurers that Senator Feinstein describes as "insurance companies (that) are driven by the need to return profits to shareholders." The chart does not include nonprofit health insurers and plans. It is also worth noting that health insurers (public or private) pay for all the health care goods and services provided by the other industries listed on this chart, industries most of which are significantly more profitable than health insurance.
The Deceptive Value of Rate Regulation
Proponents of rate regulation tell us they, if only empowered by the law, can reduce the cost of health coverage. We can test this claim with at least two examples of government's ability to control health care costs through rate regulation.
Currently, there are 27 states that regulate insurance rates in the individual market, and 22 that regulate rates in the group market.9 In the individual market, for the 29 states for which rates are known, California ranks 19 th, paying an average premium of $2,943 for non-rate regulated coverage. The highest rate in the nation is New York, which has an average rate of $6,630 (nearly three times greater than California's), and is rate regulated. In fact, the states with the three highest rates in the individual market are rate regulated, and six of the top ten state rates are regulated.
In the group market, the same pattern holds. Of the 51 different state insurance markets (including the District of Columbia), California ranks 30 th highest at average rates of $4,280. Of the 22 states regulating rates, 14 of them are in the top half in rates, 13 of them have higher than the national average in rates, and five of the top ten rates are regulated.10 If the promises of rate regulation were true, we would expect to find that rate regulated states would have the lowest health coverage rates, yet the numbers show the exact opposite.
So while it is clear that state rate regulatory schemes fail to control private health coverage costs, surely the federal government must provide an example of greater success? The federal government launched Medicare on July 1, 1966. Generally, Medicare is the federal government's health insurance program for citizens 65 or older and for those younger than 65 with certain disabilities. As of September 2010, Medicare provides health coverage for 47 million Americans11, making this federal program the nation's largest health insurer and, consequently, the single largest buyer of health care services. The federal government has, without exaggeration, significant market power. Market advocates generally agree market power is an advantage, so one should expect to see significant cost containment for Medicare. Given these facts, and the arguments made by proponents of public rate regulation, one should believe that the rate of per capita Medicare expenditure growth (which translates to the rate of per capita private insurance premium growth) would be significantly less than per capita private insurance premium growth.
Yet a quick look at the facts indicates this faith placed in rate regulation to control expense growth is, in fact, unjustified. According to the Centers for Medicare & Medicaid Services ( CMS), between 1987 and 2004, the total personal health care average annual growth, on a per-capita basis, averaged 6.6% for persons 19-64 (mostly covered by private insurance). And for Medicare? The total personal health care average annual growth, on a per-capita basis, was 6.2%12, or nearly 94% of the same growth in costs faced by those with private coverage. Advocates for regulation could argue that on the margin, over time, 2/10s of a percent lower growth rate in costs adds up to real savings, and this would be true enough. Nevertheless, this also ignores (willfully, if one has any understanding of health care finance) the hidden tax paid by the privately insured for significantly lower reimbursements to providers by the Medicare and Medicaid programs. According to a December 2008 study "Hospital and Physician Cost Shift" by Milliman13, the federal government shifts 15% of its costs for Medicare and Medicaid to private insurers. In other words, the private health coverage that AB 52 seeks to regulate rates is 15% more expensive than it ought to be because public health insurance programs like Medicare shift costs to the privately insured. Shifting costs to private insurers enables the federal government to mask the true costs of Medicare.
It appears the federal government, with 45 years of experience issuing health care insurance to America's senior citizens, and the advantage of controlling reimbursement rates, utilization, and shifting 15% of its costs to the privately insured, can only reduce the rate of growth in health care costs per capita by 2/10s of a percent less than private insurance.
Distraction from the Real Cost Drivers
What is most disappointing about this effort to regulate rates is that, given the evidence, anyone believes it works to reduce costs. It serves as a significant distraction from the real issues. It takes no skill, less honesty, and shameless cynicism to promote a simplistic idea to fix a complex problem. Eventually the magicians run out of tricks, the clowns are no longer funny, the balloons have lost their air, and yet the problem persists, if not made worse. Indeed, as the California Healthcare Foundation 2004 Issue Brief stated, "Rate regulation in other insurance markets has resulted in less access to coverage for high-risk individuals, fewer insurers participating in the market, and less incentive for individuals to control costs. These undesirable effects are likely to occur in the health insurance market if health care costs continue to rise while premiums are controlled."14 While there are significant problems with AB 52 beyond the simple fact it will not work as advertised, those issues will be raised during the legislative process for the bill itself.
This brief implies no defense for the existing, third-party payer system. The third-party payer system, which itself results from federal tax and labor laws favoring employer-based health care coverage, severely distorts the health care market and promotes what Robert Galvin, MD aptly labeled "The Cycle of Unaccountability."15 Instead, it concerns itself with how honest consumer and voter frustrations are seized and explains how the underlying issues are distorted to advance an ideological agenda to take greater control of an industry. Because that agenda is based upon distortions and deceptions, it does nothing to address the underlying costs of medical care which result from previous public policies distorting America's health care market. It distracts from the honest understanding and difficult work necessary to serve the better interest of Californians, and it leaves the public process that much poorer, ill served, and rightfully cynical.
3 http://www.chcf.org/~/media/Files/PDF/S/PDF%20ShouldCARegulateHealthInsurancePremiums.pdf p.2
4 http://www.ahip.org/content/default.aspx?docid=25123 p.4
5 http://www.ahip.org/content/default.aspx?docid=25123 p.4
6 http://www.ahip.org/content/default.aspx?docid=25123 p.5
7 http://www.ahip.org/content/default.aspx?docid=25123 p.4
8 http://www.ahip.org/content/default.aspx?docid=25123 p.14
12 https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/2004-age-tables.pdf p.2
13 http://publications.milliman.com/research/health-rr/pdfs/hospital-physician-cost-shift-RR12-01-08.pdf p.5
14 http://www.chcf.org/~/media/Files/PDF/S/PDF%20ShouldCARegulateHealthInsurancePremiums.pdf p.5
For more information on this report or other Health issues , contact Tim Conaghan, Senate Republican Office of Policy at 916/651-1501.