This morning, the Senate Health, Education, and Labor Committee (HELP) held its first post-health reform hearings on Sen. Dianne Feinstein’s (D-CA) proposal to allow the federal government to review and reject insurance premium increases in states that don’t already have this authority. President Obama included the idea in his health care plan, but it was kept out of the final bill for budgetary reasons, leaving federal regulators without the ability to protect consumers from unreasonable premium hikes.
Already, CEOs of Cigna and Aetna have hinted that they will increase premiums in the near future and during today’s hearing, AHIP President and CEO Karen Ignangi also suggested that high health care premiums are only a symptom of rising health care costs and said that lawmakers should not fault insurers and their relatively small profit margins for rising prices. She argued that Feinstein’s bill did not address the root cause of rising prices and repeatedly invited the Senators to consider the industry’s cost-containment proposals. Ignagni’s effort to shift the blame for rising premiums was unsuccessful, however. The industry’s profits and salaries have made headlines in recent days and several Democrats questioned Ignagni about the increases. Sen. Jack Reed (D-RI) and Michael McRaith, Director of the Illinois Department of Insurance, caught Ignagni in a contradiction:
REED: How do you respond to Mr. McRaith’s point that publicly traded companies essentially respond to Wall Street their strategy is denying claims and raising premiums above the cost of inflation. That doesn’t seem to be a cost saving strategy.
IGNAGNI: Sir, our members have, are organized to provide the highest quality care for the lowest price to consumers and to business purchasers…Our members are very clear about their fiduciary responsibilities, in terms of maintaining solvency and their responsibilities to consumers…
REED: So they have no responsibility to their share holders?
IGNAGNI: I said that they have fiduciary responsibility. They have responsibilities with respect to solvency…
REED: What’s their primary responsibility? Their fiduciary responsibility is to their share holders.
IGNAGNI: Their primary responsibility in a growing concern…to do the job you have been asked to do by people who purchase your product.[...]
REED: Frankly, we’re having a discussion about firms that go to the Street and say ‘our strategy is we’re going to deny claims and raise premiums above the medical inflation.’
IGNAGNI: Sir, I thought I said this and I apologize if I didn’t say it, but I dont’ know of any company that has gone to Wall Street that says it is in business to deny claims. [...]
McRAITH: There are companies operating around the country with loss ratios of 50% or less. All I would submit is that what Ms. Ignagni is saying is true…then rate review will only enhance and support that position.
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Indeed, Ignagni is arguing that compared to other health care stakeholders, insures maintain relatively small profit margins and raise premiums only to keep up with medical inflation and maintain company solvency. And while Ignagni is correct in her analysis, her frame of reference — placing insurance spending within the broader context of overall health care spending — is purposely misleading. Within the context of overall health care spending, insurers’ profits seem small. But within the context companies’ revenues, insurers skim off approximately 15-20 percent of premium dollars for administrative costs and profits and make a good penny, as the astronomical pay increase to WellPoint’s and UnitedHealth’s CEOs suggest.
That said, insurers are not the main drivers of health care spending. Policy makers do need to adopt more stringent systematic cost controls, but if insurers are as efficient as Ignagni says, why would they oppose federal rate review? There is a lot of waste and inefficiency in health care, and insurers are low hanging fruit and not a bad place to start.