California Death Spiral

[Slartibartfast]

Op-Ed Columnist - California Death Spiral - NYTimes.com

Here’s the story: About 800,000 people in California who buy insurance on the individual market — as opposed to getting it through their employers — are covered by Anthem Blue Cross, a WellPoint subsidiary. These are the people who were recently told to expect dramatic rate increases, in some cases as high as 39 percent.

Why the huge increase? It’s not profiteering, says WellPoint, which claims instead (without using the term) that it’s facing a classic insurance death spiral.

It looks like the unraveling of our insurance system may have just began. Its pretty obvious that the collapse would have started in the most expensive and risky market, individual insurance.

Basically whats happening is that as insurance prices go up, more people who don't need insurance at the moment are dropping it, which worsens the risk pool, causing a downward spiral.

I think this problem will affect company provided insurance at some point to. The company I currently work for is doing some fairly drastic things to try to keep insurance cost inflation under 7%. We are losing a lot of benefits because of it. Eventually, that camel's back is going to break.

More broadly, conservatives would have you believe that health insurance suffers from too much government interference. In fact, the real point of the push to allow interstate sales is that it would set off a race to the bottom, effectively eliminating state regulation. But California’s individual insurance market is already notable for its lack of regulation, certainly as compared with states like New York — yet the market is collapsing anyway.

I tried to find comparisons between California and other states, but I was not successful. But the fact is, that if we sold insurance across state lines (which probably isn't a bad idea) the only real effect it looks like it would have is to slow down the deterioration. For example

1. California's insurance melts down, as it is currently doing.
2. People start buying insurance from other states, however premiums continue to increase faster than inflation, meaning fewer people can afford it every year.
3. Healthy folks begin to drop out, the risk pool gets worse and we are back to the spiral.

I think we are getting to the point where we have to do something drastically different. The only way any type of insurance is going to be saved is if we fix the risk pool, but mandatory medical insurance is a very unpopular idea.

So given these new developments, what do you guys propose we do to fix this market, or do you think we would be better off if we let the thing fail and go back to direct payments to doctors? Whatever your opinion is, why?

 

[donsutherland1]

When evaluating claims, one needs to be careful to go to concrete evidence that is required by law to be accurate. Media statements are not necessarily subject to such constraints. Hence, the best place to test WellPoint's claims is to examine the information it provides to regulators.

Looking at such information, I have to vigorously disagree with the WellPoint rationale for its rate hikes. If one goes to WellPoint's most February 2010 10K filing with the SEC, one finds no mention of a so-called "death spiral" nor supporting actuarial data to sustain those claims. Discussions in "significant events" and "Industry Overview" sections (pp.5-8 of the document) yield no mention of a rapid and material deterioration in the risk profile of its customer base.

If one goes to p.13, one finds a reference that individual customers are its most sensitive (riskiest) segment so to speak. Then, on p.14, one finds that individual customers as a share of total customers has fallen from 6.5% in 2008 to 6.3% in 2009. In other words, the actual data suggest that the company insures fewer customers from its highest risk segment.

More importantly, if one goes to select financial data on p.44, one finds a relatively stable benefit expense ratio (benefit expenses as a percentage of premium revenue) since 2007.

Benefit Expense Ratio:
2007: 82.4%
2008: 83.6%
2009: 82.6%

Furthermore, if one calculates net income per customer (using the data on pages 14 and 44), one finds:

Net Income per Customer:
2008: $71.06
2009: $140.93

In other words, profitability per customer almost doubled in the past year.

In sum, the actual financial data and discussion of the firm's business in the SEC filing tells a very different story than the rationale offered for an up to 39% increase in premiums for some of WellPoint's customers. In the end, given the actual filing, which must be accurate by law, it appears that the rate hikes likely have far more to do with the company seeking to meet profitability targets/other business objectives and much less to do with significant adverse changes in overall risk associated with its customer base.

The 10K filing can be found at: http://ir.wellpoint.com/phoenix.zhtml?c=130104&p=irol-sec

 

[Slartibartfast]

[awesome analysis]

I sincerely hope that these Wellpoint execs testified under oath then. Then we can send them to jail.

 

[donsutherland1]

I sincerely hope that these Wellpoint execs testified under oath then. Then we can send them to jail.

I believe WellPoint's CEO will testify before Congress next week. Now, there remains a possibility that there is a sub-segment within the company that has faced financial challenges even as the overall data suggests that the company is not facing such challenges. If so, that data--detailed actuarial and financial data for that segment and its customers--should be fully disclosed.

The 10K doesn't contain such data nor mention of such a situation. A failure to provide concrete and specific details that can readily be substantiated will highlight what the 10K suggests: business objectives not a material deterioration in the company's customer base is the primary driver of its rate policies. Broad data that lacks details will be insufficient.

It will be interesting to see what happens. My initial guess is that specific actuarial and financial data probably won't be forthcoming. Instead, the company will mention examples that are technically accurate where some problems exist, but crucial contextual data that would allow one to dig into the details won't be provided. As such, I believe the 10K will continue to provide the better overall picture of the company's state of affairs.

 

[Councilman]

Even as the costs for individual and group continue to rise the profit of the insurance industry remains relatively flat at about 4% and less which means what we are being told but those pushing the fake reform plan are nothing but lies.

There are issues at play that are not being addressed at all such as tort reform which is badly needed regardless what we're being told. Other deals like the restriction of importing drugs from Canada and Mexico also hurts cost control efforts.

The restriction of companies to sell across state lines is crazy and restricts competition.

The list of items not being addressed goes on and the Obama plan will be adding to the cost and to Government control of your life and contribute to more deaths, in every State.

California is being tanked by the same mind set that is trying to cruah the National economy with Arnold RINO Schwarzenegger helping as much as he can.

 

[jujuman13]

The Socialist way is to clamp a freeze on all price rises as well as all incomes.
Naturally it never works, but it sure sounds good at least initially to a dumb electorate.

 

[RightinNYC]

When evaluating claims, one needs to be careful to go to concrete evidence that is required by law to be accurate. Media statements are not necessarily subject to such constraints. Hence, the best place to test WellPoint's claims is to examine the information it provides to regulators.

Looking at such information, I have to vigorously disagree with the WellPoint rationale for its rate hikes. If one goes to WellPoint's most February 2010 10K filing with the SEC, one finds no mention of a so-called "death spiral" nor supporting actuarial data to sustain those claims. Discussions in "significant events" and "Industry Overview" sections (pp.5-8 of the document) yield no mention of a rapid and material deterioration in the risk profile of its customer base.

If one goes to p.13, one finds a reference that individual customers are its most sensitive (riskiest) segment so to speak. Then, on p.14, one finds that individual customers as a share of total customers has fallen from 6.5% in 2008 to 6.3% in 2009. In other words, the actual data suggest that the company insures fewer customers from its highest risk segment.

More importantly, if one goes to select financial data on p.44, one finds a relatively stable benefit expense ratio (benefit expenses as a percentage of premium revenue) since 2007.

Benefit Expense Ratio:
2007: 82.4%
2008: 83.6%
2009: 82.6%

Furthermore, if one calculates net income per customer (using the data on pages 14 and 44), one finds:

Net Income per Customer:
2008: $71.06
2009: $140.93

In other words, profitability per customer almost doubled in the past year.

In sum, the actual financial data and discussion of the firm's business in the SEC filing tells a very different story than the rationale offered for an up to 39% increase in premiums for some of WellPoint's customers. In the end, given the actual filing, which must be accurate by law, it appears that the rate hikes likely have far more to do with the company seeking to meet profitability targets/other business objectives and much less to do with significant adverse changes in overall risk associated with its customer base.

The 10K filing can be found at: WellPoint > SEC Filings

While it may be true that nothing substantial changed from 2008 to 2009, isn't it just as likely that this prospective rate hike is due to their concerns about what will happen in the future? If people started dropping out at an increasing rate at the end of 2009 and into 2010, or if they project a substantial increase in expenses or decrease in revenues, then it's perfectly plausible that this increase is more directly based on projected market conditions. I have to assume that a major corporation like this relies heavily on a fairly complex system for projecting its costs and revenues in the future, so the fact that a cause for this rise is not found in past performance doesn't seem that surprising to me.