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Tuesday, February 9, 2010

Leaving the Evidence Behind: the Obama administration response to Anthem Blue Cross

It had been 19 days since my last post about health care. There hadn't been much material for musing or ranting since the election of Massachusetts's Scott Brown. There was so little material about health care that I was even debating a post on the commercial real state of affairs based on the obvious failure of the new complex next to my office. The creation of a new reality TV show, Obama and the Republicans talking health reform on TV, didn't trigger any new material even though those on the right would call it a spin-off of Big Brother and those on the left would compare it to Fear Factor.

However, readers are spared my analysis of commercial real estate failures based on my proposal that a 7-Eleven can't be the anchor store or yet another reality TV show suggestion. The savior is the Obama's decision to lay the smack down on Anthem Blue Cross's 39% price hike on its 800,000 Californian individual insurance members. Basically, Anthem had a very profitable year but filed this large rate increase with the state insurance division. Although, regulating Anthem's insurance filings is the responsibility of the California state insurance division, the federal government wants to be a part of the action.

What I find disturbing is that while we try to promote evidence-based practice on the provider side of the health care system, we're throwing out the evidence-based practices on the insurance side. Insurance prices are determined by actuaries and their rigorous mathematical analysis. Even after the application of all that math, actuaries sign an attestation while they solemnly swear that their numbers were objectively derived. In other words, using actuarial science to calculate the cost of insurance is evidence-based. Using political pressure to get prices that you like better is debased.

We've made progress in terms of becoming a nation of health care wonks, but I know that the phrase "actuarialy speaking" may still result in some blank looks. In the case of the Obama administration response, he's basically telling Anthem's actuaries that they suck, their mathematical models suck, and their sisters would have sucked if he had- well you get the picture.

The individual insurance market is generally a break even market for insurance carriers at best. Administrative costs are often 20% of the price compared to 5%-8% in the larger group market. It's much cheaper to enroll 1,000 people on one data file and send the bill to one employer then it is to enroll and bill 1,000 people individually. With such high administrative costs, there isn't as much room for profitability as there are for mid-sized groups or other lines of business because it's tougher to add additional margin. If the individual market is subsidized with the profits from the mid-sized group market, then that mid-sized group is paying more than it should. However, given that employer groups don't have to pay taxes on their health insurance and individuals do pay taxes, this subsidization might not be a bad idea.

If anything, Anthem's 39% price increase marks some point of the potential insurance death spiral. Health care has gotten so expensive that it's only beneficial to buy insurance for those who are going to use a lot of it. The Obama administration generally understand this principle which is why health care reform has been rightly framed as an economic issue. However, demanding to see the homework assignment that the Anthem actuaries turned in to the California insurance division is not economics but just politics. But maybe this could be turned into some kind of reality TV show with actuaries?


Inessa said...

I live in a reality show with actuaries, but luckily people don't have to watch it on TV. Anyway, I totally agree with this post. Anyone that thinks that insurers are raking in IB money has clearly never worked in the insurance industry.

Deadhedge said...

I think that you might be selling yourself short on the appeal of a reality TV show with actuaries. If we will watch people lose weight, undercover bosses, or Hulk Hogan's family, we might really get into the lives of actuaries. :)

If you don't mind searching, there's another post that I have while I urge parents to tell their children to be actuaries.

In a Congressional hearing, Anthem showed that their overall profit margins were 3%-5% depending on business unit. Compared to 15% margins in software, as you said, that's not exactly raking it in.

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