How do health insurers set premiums?
President Obama has unveiled his health care plan, and one part of his proposal would let the government block or roll back excessive increases in premiums. Nancy Marshall Genzer reports.
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Kai Ryssdal: We have heard from the White House on health care today. The president's going to have to sign that bill -- if and when it happens. He put his plan on the Internet this morning, three days before a big televised summit with the House and Senate. Obviously there's a lot in there. One key part of it would let the federal government block or roll back what are called excessive increases in premiums.
We asked Marketplace's Nancy Marshall Genzer how those premiums are set in the first place.
NANCY MARSHALL GENZER: It sounds simple enough.
CORI UCCELLO: Total premiums have to be adequate to cover claims and expenses.
That's Cori Uccello. She's an actuary at the American Academy of Actuaries. Actuaries at health insurance companies crunch the numbers to come up with premiums. She says the first rule is set premiums high enough to cover your costs. You can follow a sort of blueprint looking at a person's age and health.
UCCELLO: So a 55-year-old man, for example, who has a history of health problems is going to be expected to have higher health spending than, say, a younger and healthier 25-year-old.
Then you factor in rising hospital costs, and doctors fees. Sounds simple again. But it gets complicated. Insurance companies have overhead costs: marketing, payroll, lobbying. All that gets rolled into premiums. And insurers are regulated by the states. And each state's regulations are different.
Jerry Katz is a health care analyst at Kurt Solomon Associates.
JERRY KATZ: It's variable state to state how much oversight the state insurance commissioners provide. You got a tough state and an easier state.
And then there's the price of politics.
Alan Sager teaches health policy at Boston University. He says Anthem Blue Cross of California ignored the political climate when it announced plans recently to raise rates by up to 39 percent.
ALAN SAGER: Making outrageous 39 percent premium increases when the political spotlight is on health insurance is remarkably stupid.
Anger over the California rate hikes breathed new life into President Obama's proposed health care overhaul. The plan the president released today would allow the federal government to force Anthem Blue Cross to roll back its rates.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
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From Roach, MO, 04/04/2010
It is possible for an insurance company to drop an insured who gets sick even if that insured pays the premium on the policy? Is it possible for a single insured to have their health premium raised because they have had claims or does the premium have to be raised statewide? I hear stories about insureds getting cancelled when they got sick but there's more to their story they're not telling.
From West Chester, PA, 02/26/2010
Like Cori, I too am an actuary; unlike her, I am a huge critic of members of my profession--the biggest they have ever had.
In health care, they are the largest reason we have never had health care reform and a universal national health care system. The suffering of ordinary people has been incredible and the huge costs of this awful mess we have threaten our very existence as a free people.
I believe we need a universal national health care system, but not one, however that is a single payer, but one that has a public option pitted against insurance companies, not on a plan of the insurers determination but a single one determined by a panel of experts appointed by the President.
The competition would be solely on cost and service, but with additional financial benefits for uncovering fraud, of which there is plenty, by both Medicare and in the private insurance system. You do not want individual members of the public trying to determine which of thousands of individual health insurance policies are good, as even expert actuaries have difficulty doing that. Nor can these so-called public exchanges work as they too do not have nearly the expertise in this highly technical and specialized area.
Individual health insurance policies are the second worst financial product ever foisted on the public, taking around 35-40% of every premium dollar and one mail-order company I am very familiar with once took about 70% of every premium dollar, targeting the weak and vulnerable, especially older citizens, many times with mental problems like Alzheimer’s, often selling them 30 and 40 policies at a clip. These of course are actuarial products.
The worst financial product of all time is yet one more actuarial product, individual level premium whole life insurance policies, which take about 50% of ever premium dollar on a present value basis. Most of that goes to the agent, who often gets first year commissions of at least 90%. These policies have been the cash cow of the entire life insurance industry going back well over a century and are often sold by the agents with no mention that it is insurance, only that it is an ‘investment’. They are also often specially designed by the actuary to have the agent fleece the unsuspecting policyholder.
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The public health care system must, however operate much like an insurance company, sans the underwriting. It needs to carry the correct claim reserves, which extend out many years after the first year they are incurred and yes, also the right amount of 'surplus' so that unexpected results do not cause the systems to falter and go back to the well. In that sense, some of the criticism and concern by the insurance industry is correct.
Both the public and private systems need to determine level premiums, as a % of pay for the Normal Cost and a level % of GDP to pay down the initial unfunded past service liability, under a process known to pension actuaries, called Actuarial Advance Funding. This process has been kept hidden by actuaries for nearly a century and has roots going all the way back to life insurance actuaries in Britain in 1762.
It must be used here and in Medicare and in Social Security as well and, among ten things in all, will lower costs dramatically by having investment returns, compounded over time, pay the bulk of the benefits, and stabilize the system and its costs. It is not the only thing that must be done to fix health care obviously but without it, we can never have decent affordable health care. Further it can be done soon, while it will take maybe a decade to do all the other things necessary to fix health care.
The insurance industry has not wanted to do Actuarial Advance Funding in the absence of laws telling them to do it because it would cost more upfront and place them at a competitive disadvantage, yet the evidence for it being needed is overwhelming and, as I indicated long standing in the actuarial profession. In fact it is one of the most fundamental of all things an actuary can learn: how do you level out and lower costs of a future stream of cash payouts when it is clear that in the absence of doing this, those payouts will rise exponentially so rapidly they cannot possibly be paid for from then current revenues?
This was the process invented way back in 1762 and it is used in various forms by nearly every major business combination for 50 years. And every major business school teaches a similar process, this forecasting and present valuing—but we invented it and use it more than anyone else—but as I said, it has been kept a secret by my fellow actuaries.
It is basically putting into action in a social context a mathematically rigorous, systematic, highly disciplined and self correcting way of using what Albert Einstein once said, is, ‘the most powerful force in the universe…compound interest!’ to help pay the bulk of the promised benefits, whether they be pension, Social Security, Medicare or medical care.
Anyway, fixing Social Security by changing the way it is financed from PayGo to Actuarial Advance Funding and by passing strong laws with teeth to protect the assets and prevent the past service accrued benefits from being cut back. Congress tried to do this back in 1974 when they passed ERISA, the Employee Retirement Security Act, for all corporate defined benefit pension plans, but failed miserably. The result has been the nearly complete collapse of the entire private pension industry.
Pension-consulting actuaries (called Enrolled Actuaries because they must be enrolled by the federal government to do the required annual pension actuarial valuation) took advantage of these deeply flawed laws, screwing plan participants out of more than a trillion dollars by my estimation.
The fixing of these systems involves no increase in retirement age--as both The Society of Actuaries and The American Academy of actuaries has recommended as their 'fix'--nor any reduction in benefits nor should it. The system is weak and must pick up the slack caused by the collapse of both defined benefit pension plans in private industry and their twin sister, corporate retiree medical plans, and in addition, provide benefits for women who take time off to raise children.
Fixing these systems will also fix our badly broken economy--indeed fix all economies as all nations need to do these things too--and in time also fix capitalism by providing long-term patient capital only to corporations that deserve it, like some large institutional investors are already doing, including some very large public pension systems, like CalPers, to mention the largest one.
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My name is Andy Lang and I am a 70-year old retired actuary, a member of The Society of Actuaries, FSA, and a member of the Academy of actuaries, MAAA, and I have been saying how to fix Social Security, Medicare and medical care beginning 45 years ago. Since 1995, I have given many lectures on these subjects and written extensively on them also. You may Google me, Andy Lang actuary and find a lot more, such as a 7-page letter I wrote to the IRS denouncing actuaries for doing Cash Balance Pension Conversions and one I wrote to the NLRN (National Legislative Retirees Network), who asked for one on the subject of 'asset leakage' in pension plans. You may also find out the help I have given to dozens of other employee groups, such as IBM employees, who Lou Gerstner, head of IBM screwed out of billions of dollars in their pension plan, with help, naturally from their pension-consulting actuaries at Watson-Wyatt, now part of Towers-Watson, far and away the largest pension consulting firm in the world.
From Napoleon, MI, 02/23/2010
People have gotten very exercised over Anthem’s 39% increase. Unfortunately increases of that magnitude aren’t all that rare. Michigan Blue Cross/Blue Shield (a not-fur-profit, supposedly) increased 2009 premiums for a Medicare plan by 34.5% over the 2008 premium for nominally the same plan. For 2010 they dropped that plan entirely.
In comparison, a certain large Michigan hospital system only increased the prices for identical services by about 10%; 10% 2008 over 2007, 10% 2009 over 2008, 10% 2010 over 2009.
From Houston, TX, 02/23/2010
Forgot to mention executive payout and compensation packages, as well as supporting stock price needs to get figured into the premium. I don't believe Medicare or the VA have those costs in their "premiums".
From Atlanta, GA, 02/23/2010
Did I learn anything in this piece? Revenues must be greater than costs. Duh! How about giving us some guidance about how much overhead and regulation add to the cost. Numbers backed up with real data is always good. While you are at it, drop the BS about Anthem raising premiums is stupid. That doesn't do anything to help us understand what drives insurance costs.
From Salt Lake City, UT, 02/23/2010
Cori is right on, but we need to add that insurers also have to cope with what state legislators think are well-meaning benefit mandates which may help a few, but which add to the cost of health insurance for everyone. As an actuary, that is my biggest challenge -- calculating what adding something new to the benefit package will cost.
02/22/2010
Thank you Anthem Blue Cross of California.
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