I had expected by this time to have an entry ready that described my perception of the inadequacies of Senator Hillary Clinton’s healthcare plan. Didn’t happen.
In stead, I had an exchange with some friends that I would like to share. On the website for my book “Chronic Crisis” is information supporting and describing five essential policy issues that every successful foreign healthcare system has addressed. They fit the acronym C-MCGU and I have an essay available by that title on the home page at that website, www.ChronicCrisis.com.
Whenever I review any new universal healthcare proposal I measure it against the policy instruments already proven successful by other nations.
Well, I have a friend to whom I had written regarding the Colorado 208 Commission and Governor Ritter’s desire to accomplish universal healthcare in Colorado. (And by the way, I think there is a pretty good chance they will come very close to the mark for developing a sustainable statewide universal healthcare plan.)
In any case, in a note to my friend I mentioned Medical Loss Ratios. She wrote back that she did not know what Medical Loss Ratios were. I sent back a note of explanation that I want to include here.
My note surprised me. I had no idea I felt so strongly about the subject of Medical Loss Ratios.
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Medical Loss Ratios
The ability to manage Medical Loss Ratios is what makes the health insurance industry very profitable. The definition is simple; it is the percent of total revenues from premiums that is spent on medical services. Therefore, an 85% Loss Ratio means that the insurance company spent 85% of premium revenues on medical services. (That’s premium revenues and not total revenues.) The company keeps the remaining money to cover the costs of operations and as profits.
Typically, operating costs are 6-9%; let’s say 8%. This includes salaries and bonuses, all stock options, etc. A lot of money; insurance executives are well paid. So the company realizes 7% profit. Well, that 7% equals hundreds of millions of dollars per company per quarter, and totals billions of dollars annually.
Not all of this profit is distributed to shareholders. Some goes into company managed investment funds and simply grows. Some is in mutual funds, some is invested in other industries such as corporate farming, mining, global shipping, real estate in Manhattan, and so on. It generates the difference between premium revenues and total revenues.
Insurance companies operate on a short term schedule and they try to operate on a one year cycle. This means they do not consider these extra funds as money in reserve for a rainy day, or as funds to pay for sick peoples’ sudden illnesses. Those problems are to be addressed by increasing premiums in the next year, again with an eye to keeping the Loss Ratio in the neighborhood of industry standards - currently less than 86%.
This money is pure profit. Much of it leaves the healthcare industry.
The health insurance industry is not geared to redistribute the costs of medical services. It is geared to charge clients for “insurance” against financial risk. And if the cost of medical services increases, so much the better; clients are then at even greater financial risk if they happen to become ill. Thus the value - and also the price - of health insurance rises. Insurers are free to charge whatever the market will bear, and they do. The price of health insurance follows the pattern for pricing for an oligopoly, and is substantially higher than the cost of production.
Because insurance companies never have to dip into these extra funds, they become WEALTHY. Is this good or bad? (I am not going there. Plenty of others already do.) What fruatrates me is that there is currently no alternative to private health insurance for people under 65. None. Private health insurance is the only game in town. So when you hear people talk about “Social Justice,” and when they advocate for a single-payer healthcare system, this is where they are coming from. Many single-payer advocates have a visceral disdain for the entire health insurance industry. They insist that insurers are immoral. On the other hand, the health insurance industry plays by a very tight set of rules and they see it as an entirely different game, one that they are playing fairly.
Fine. I am not an advocate of single-payer healthcare anyway. Single-payer systems have not demonstrated long-term sustainability. They are historically slow to upgrade infrastructure and subquently develop a pattern of prolonged waiting times.
A more sustainable alternative is the Multi-payer Universal Enrollment Healthcare System. For the U.S., this would mean changing the rules under which private insurers operate so that they compete against a publicly funded insurance plan. It would mean that client-citizens would actually have a meaningful choice - a choice between private insurance plans or a sustainable public plan. It would mean that all insurars, public and private, would offer the same basic benefits package, and they would do so under conditions of community ratings and guaranteed issue. These few reforms define Multi-payer Universal Healthcare Systems.
These systems are common around the world, have good healthcare outcomes and low costs. If implemented in the U.S. this system might well be sufficient to bump Switzerland out of second place and into first place as the world’s most expensive healthcare system.
In that process insurers may well settle on a new industry standard for Medical Loss Ratios, likely above 90%. Insurers will become more efficient. Executive salaries will fall. Bonuses and stock options will no longer be in the hundreds of millions of dollars annually - dollars that might otherwise be spent on care for the ill and dying. (Of interest may be the fact that in Japan health insurance executives’ salaries are comparable to government employees with comparable responsibilities.)
Perhaps because Loss Ratios are such an unfamiliar term, they seldom enter the discussion of healthcare reform. The problem is not with Loss Ratios per se. The problem is that there is currently no less expensive alternative to the private health insurance industry. Therefore, there is no market pressure for Loss Ratios to rise. The only sustainable way to develop such an alternative is in the public sector with universal healthcare.
Under current regulations the private health unsurance industry cannot be expected to behave any differently than it does. Such a public alternative would be much less expensive to administer and would place serious market pressures on the private health insurance industry to streamline costs, develop efficiencies, provide good service, lower premium prices, and raise Loss Ratios.
Similar systems already exist in Australia, Ireland and elsewhere. In those countries a low cost public plan is in place. Universal enrollment is achieved through default enrollment. Citizens then have the alternative of “opting-out” of the public plan if they enroll in a private plan. They are provided a modest tax incentive for doing so. Ireland and Auatralia have very low per capita healthcare costs relative to the U.S. and no waiting times for medical procedures. (A topic for another day.)
The problems of universal healthcare are not insoluble. If a multi-payer healthcare system with a public alternative is developed in the U.S. we may expect to see Medical Loss Ratios rise, a sign that more of healthcare premiums are being spent on medical care. The long term economic effect of this will be that that the profits once invested by the private insurance industry will now be available for investment by those who previously paid high insurance premiums - and that would be me.
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Well, I shared that little description of Loss Ratios with several friends with the following question:
Dear X,
Would you please let me know what you think of this before I submit it?
Sel
One friend responded with the following:
Are health insurers regular companies like others on the Dow or are they utilities?
Do they deserve to make appropriate returns for their shareholders like other companies or should their shareholders be expected to expect less than from other investments?
Should they be taking appropriate steps to prepare for nationalization?
To which I responded:
Dear X,
I am a market guy. My only real beef is that there is presently no alternative to the expense of private health insurance unless one is disabled, in prison, or in the poor house.
I believe that citizens constitute a community and that a community ought to be able to join together to perform communal tasks when they want to. We go to war as a community. We build roads as a community. We supply water as a community. We deliver our mail as a community. We educate ourselves and our children as a community.
We ought to have the opportunity to organize some kind of healthcare coverage as a community if we so desire. And healthcare is now so expensive that a community alternative is looking more and more attractive.
Fed-Ex and UPS compete with the Postal Service. People buy private wind and solar generators that compete with public utilities. People sink private wells. In all these cases, there is still a public service available. The fact that there is a public program for these services has not prevented private enterprize from filling a percieved need.
Likewise, if a public healthcare plan is implemented there should still be a private alternative. And I see no reason why the private sector cannot provide services as well as or better than the public sector. But that should not preclude the community from organizing itself with regard to healthcare.
So, to address your questions:
Are health insurers regular companies like others on the Dow or are they utilities?
Health insurers are regular companies.
Do they deserve to make appropriate returns for their shareholders like other companies or should their shareholders be expected to expect less than from other investments?
They absolutely deserve appropriate returns for their share holders.
Should they be taking appropriate steps to prepare for nationalization?
Unless they adopt a plan like a multi-payer universal enrollment system, they may well need to prepare for extinction and a single-payer healthcare system.
I know so many single-payer advocates who cannot be persuaded to even consider any form of multi-payer system it would make your head spin.
Incremental reform with continued price and product differentiation will not lower healthcare costs. Only systems with standardization of a minimum benefits healthcare package and universal enrollment have contained costs. That happens in only two kinds of systems. 1. Single payer, and 2. Multi-payer universal enrollment.
This means a multi-payer universal enrollment system with default enrollment in a public plan and the choice of opting-out to a private plan, as is done in Ireland and Australia and to a lesser degree in Germany.
Furthermore, I do not believe we would even be having any discussion at all about healthcare reform except that corporate costs for health insurance overwhelm American corporations in the global arena.
Unless we can develop a system that will actually change total healthcare costs, the debate will not be over either for multinational corporations, large American corporations, or for American workers’ whose jobs go overseas because of high healthcare costs.
The real goal of U.S. healthcare reform should be to remove Switzerland from its positon as the world’s second most expensive healthcare system. With careful planning, there is really no reason this could not happen.
Sel
