How insurance companies make money by cutting off customers - A WellPoint Study
Posted on February 3rd, 2010 by Jason Rosenbaum in Profits Before People
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Insurance is supposed to be about spreading out risk among a large number of people. In health insurance, the theory goes that everyone can pay a little bit every month into a large pool. If someone who pays into the pool gets sick, that large pool covers their expenses. Because there are enough people in the pool and only a certain percentage are sick at any one time, it's possible to design a system where people can afford to be covered for their illnesses when they happen.
Under this theory, wider coverage is a good thing. More people paying into the pool means the risk is more spread out. But Wall Street run insurance companies have perverted this system. Instead of striving for the largest risk pool, insurance companies can make more money by selectively insuring only the least risky people and cutting out the rest. In other words, they make money by cutting membership.
Insurance companies are just now disclosing their earnings and membership numbers from 2009. The changes from where they were in 2008 give a clear look into how these companies do business, and the human cost to their business practices.
For example, WellPoint is one of the nation's largest insurers. They have 14 state Blue Cross brands in their portfolio. In 2009, they made $4,746,000,000 dollars, up 91% from their 2008 earnings of $2,491,000,000. How did they achieve those profits? In a large part in two ways. First, they lowered their medical loss ratio - the amount of money they spend on actual health care as opposed to CEO profits and overhead - by 1%. This can cause big changes in the bottom line:
In 2008, [WellPoint] spent 83.6% of the premiums it took in on care - paying for doctors, drugs, and the like. In 2009, they spent only 82.6% of your money on your care. That seemingly small difference actually belies bigger discrepancies. An analysis by the Senate Commerce Committee [pdf] found that while WellPoint spends about 85% of every premium dollar on care in the large group market that big businesses can tap into, they spend as low as 73% of every dollar collected through individual plans, and 79% on small group plans purchased by small businesses.
A small change in this "medical loss ratio" means billions of more dollars that can be spent on CEO pay or reported as profit. Indeed, Martin L. Miller, a Senior Vice President at WellPoint, said that lowering the amount of money WellPoint spends on health care "really is the driver of profitability" and that the lowering of this percentage "is really what's driving our improved financial results this year."
WellPoint also aggressively cut membership. By pricing their services out of the reach of sick people, by cutting off policies of those who get sick (rescissions), by denying care due to pre-existing conditions, or by simply continuing to jack up premiums, 1,379,000 people were cut in 2009 from WellPoint's rolls. These people were undoubtedly sicker or less wealthy, and therefor less profitable for WellPoint. By cutting them as customers, perversely, WellPoint was actually able to make more money.
That's the twisted logic of Wall Street-run health care. Healthy people get coverage, but as soon as you get sick, you're pushed out. And for those still in the system, less of your premiums get spent on your care. By reducing medical spending and coverage, profits skyrocket.
This is a system that has nothing to do with insuring good health, and everything to do with making money. As Congress finishes reform right, they need to hold the insurance companies accountable and make sure they're in the business of keeping America healthy, not keeping shareholders fat with profits.
Wellpoint, Anthem Blue Cross not only cut costs by cutting off customers and dening services/medication they outsource our personal private medical information. Here is a copy of a continued Congressional Investigation I am presuing…
Congressional Investigation – Anthem Blue Cross, Wellpoint NextRX Request
Dated 12/6/2009 and 1/8/2010
Attached please find Anthem Blue Cross’ reply to my concerns in the letter dated 1/19/2010 written by Catherine Landis, ISG Regulatory Management. I had several points I wanted addressed by Anthem and while Anthem did respond there are several points that I do not agree with and I still want a CONGRESSION INVESTIGATION into the practice of the outsourcing of my confidential personal medical information.
On page 2, paragraph 5, Item 1 my complaint states: “How can WellpointNext RX outsource my critical-personal private medical information to Manila, Philippines? Why are my premium dollars being outsourced to someone in the Philippines? I am not an isolationist, but this is my personal medical information being viewed by people outside of America! Isn’t my personal medical information covered by HIPPA regulations?”
Ms. Landis’ letter states on page 2, paragraph 6 “There are a certain amount of Anthem employees and contractors located outside of the United States. This helps us to deliver high quality, cost-effective services. Anthem’s outsourcing and off-shoring of medical information complies with all applicable laws and regulations.”
On page 3, paragraph 1 Ms. Landis states: “The HIPPA law and regulations cover the use and disclosure of your personal medical information. HIPPA requires Anthem to comply with certain safeguards, but does not prohibit us from outsourcing or off-shoring medical information; Anthem fully complies with those safeguards.”
I WANT TO KNOW WHAT THOSE SAFEGUARDS ARE AND I WANT TO KNOW THE SPECIFIC HIPPA REGULATIONS MS. LANDIS IS REFERRING TO!
Also, on page 3, paragraph 2, item 2. Ms. Landis does not address my concern that licensed pharmacists reviewed my prescription. Instead she stated on page 3, paragraph 3 “I had contacted our Specialty Solutions Prescription Program and was informed the following: “although Leukine can be self-injected we could not tell that from the order. The doctor only gave us a prescription for the medication. There was no indication that the patient was self-injecting.” This is not an answer. My local pharmacist did not ask me if I needed a reconstitution agent. Was this prescription reviewed by licensed pharmacists? This is a big problem and I feel that the Specialty Solutions Prescription Program is a clearing house for drugs and that medications are not being reviewed by a licensed pharmacists.
I look forward to hearing from your office soon. This is a pressing matter that every American should know about. Is your confidential personal medical information safe?
Dear Dems in the House,
On Reconciliation…if you are counting on the silly "pledge letter" that Nancy is supposed to get from Reid with 52 Dem senators pledging to enact all your socialistic pipe dreams, after you pass the senate version for obama to sign . . . you can't count on that silly "pledge letter" . . . here is why you can't:
Guess what…we've found a loophole in your budget ploy. The loophole in the budget reconciliation process will allow us to offer an indefinite number of amendments. Experts on Senate procedural rules, from both parties, note that filibuster by amendments (not debate) is possible. While reconciliation rules limit debate to 20 hours, senators lack similar constraints on amendments and will continue offering them until 60 members agree to cut the process off (senators do have a life).
The former Senate Parliamentarian, Robert Dove, has said that while its absurd to think it’s a free for all for amendments, it is nevertheless TRUE that amendments can in fact be proposed and requested as long as they are germane - he said — All I can tell you is that reconciliation limits debate to 20 hours, and amendments have to be germane.
Oh…yes…you will say there may be ways that Reid can stop this or maybe the Parliamentarian could make a ruling….but you don't get it…you see you will have already voted on the bill you don't want….Nancy and Reid will have played you like a fiddle….so you must ask yourself if you can really count on the silly "pledge letter". Have a nice day.
________________________________________
You write: "1,379,000 people were cut in 2009 from WellPoint's rolls. These people were undoubtedly sicker or less wealthy"
This shows a fundamental lack of understanding of the health insurance marketplace. The people who cancel coverage are much more healthy than those who keep coverage, which is why the annual rate increases often exceed actual medical inflation every year. This is just simple adverse selection. If you're going to write about health insurance you ought to understand that.
These folks weren't "canceled" - most were either priced out of the market or their policies were rescinded, both of which happen because you get sick and your bills go up or the insurance company yanks your policy out from under you.
These people made the decision to cancel their coverage. I don't know what you mean to say they weren't canceled. Wellpoint did not rescind anywhere near 1.4M people, the bulk of those people lapsed their coverage, and the people who choose to lapse are much healthier than those who stick around. To say they were priced out of the market is irrelevant. A health insurer has to charge a sufficient premium to cover claim costs or they'll go out of business. It would be great if McDonalds would sell everyone a hamburger for 5 cents, but they'd soon go bankrupt if they did.
And despite the cherry picked horror stories you see on the news, the overwhelming majority of rescissions go something like this: Dec 1st, person applies for coverage indicating no health problems on the application, Dec 10th, insured goes in for $75K knee surgery. The claim is flagged for review, the insurer finds out the injury happened in November and cancels the policy. I'm not going to claim that some carriers have not occasionally abused the rescission process, because obviously some have, but unwarranted rescission is an unbelievably trivial matter in the grand scheme of things because it is exceedingly rare. People who want to demonize health insurers love to exaggerate it, but facts are facts.
You also seem to be missing the most salient fact about Wellpoint's 2009 profits. The $2B increase was almost solely due to the profitable sale of a subsidiary. The 1 point decrease in the loss ratio did not have that big an impact, it only represents roughly 13% of their total profits for the year.
You've claimed that the increase in profits came from two sources: lowering the loss ratio and losing members. The former had a relatively small impact compared to the impact of selling their PBM subsidiary, and the latter would serve to make the company LESS profitable, not more, because healthy people who have no claims are more likely to drop coverage. You really ought to get a better understanding of the economics of health insurance before making irresponsible statements like this.
Note: I do not nor have I ever worked for Wellpoint and have no interest in the company.
Yeah, being asked to pay more than you can afford is quite a "decision."
Yes, it is a decision. There are options to reduce the premium, and if the premiums are just keeping pace with then underlying costs of care then someone has to pay those bills. If utilization and cost trend drive up the cost of care it's pretty silly to blame the insurer for raising premiums to compensate.
You're at odds with the facts. This year, insurers *spent less* on medical care than they did last year. And they bought back their stock with billions in premium dollars to buoy the price. This has little to do with underlying costs.
No, you are still failing to understand how health insurance works. The loss ratio being one point lower year over year is completely consistent with needing a very big rate increase. Last year's total loss ratio only tells you so much about the required rate increase. The more relevant fact, the fact that you seem to be missing but is alluded to in Wellpoint's statement, is what the loss ratio was on members who are still active, since thatis what determines the required premium for next year.
Say I have 1M members on average during the year, 500K of whom have no claims at all, and 500K of whom have a 150% loss ratio, for a total of a 75% loss ratio. Over the course of the year the members in the former group are more likely to lapse coverage, since they are healthy and not using the insurance they are more willing to do without, or they find a lower rate with another carrier. By the end of the year I'm left with a disproportionate amount of the latter group, and I need to increase rates even though 75% was the target loss ratio. Plugging in some numbers, if 20% of the healthy members lapse while only 10% of the unhealthy members do (a typical ratio of lapse rates of healthy/unhealthy members), the loss ratio on the remaining members is 79.4%, so now I need to increase rates, even though the total year hit the target and maybe was even lower than the year before.
No one has yet provided any evidence that the underlying experience does not justify the rate increase. Wellpoint put in similar rate increases in the state of Indiana, and the state DOI had an independent actuarial firm review the rates and they found that the increase was indeed justified. If you're going to make bold claims like "This has little to do with underlying costs," you ought to be prepared to back them up.
AB, you're missing the point. Insurers are spending less on medical care, rates are going up, they're posting record profits, and yet the insurance companies claim that with health reform, they'll raise rates anyway.
Clearly, there's a problem here.
It's like you're not even listening to anything I said. Spending less on medical care, i.e. Wellpoint's loss ratio being one point lower in 2009 vs 2008, has almost nothing to do with the required premium for 2010. What determines that premium is the loss ratio on people who are still active, and as more and more people choose to forgo coverage the required rate increase gets higher because of ant-selection. The "record profits" are in absolute dollars, margins have stayed right in the same range as they've been historically. Where is your evidence that the higher rates are not justified by underlying claims costs? When the price of oil rises you don't blame the gas station for higher gas prices. As long as people continue to utilize more health care, providers continue to charge higher prices per unit of care, and healthy people cancel coverage more often than unhealthy, premiums will continue to increase at this high rate. You can argue that we need some huge fundamental changes to the delivery of health care, but blaming the insurers for raising premiums to keep up with costs is simply ludicrous.
Loss ratios were only on average down 1%. Within each kind of plan (large group, individual, etc…), the changes were likely much more drastic. In fact, individual plans generally have loss ratios more like 70% instead of the 85% or so that's the "average."
As for margins, no, they haven't stayed the same, they've increased.
Profits are at record levels, as are margins. Insurers are spending less on care. Premiums are going up. Now, I don't deny that the underlying costs of medical care are going up, too. But both things can be true. Underlying costs can be going up *and* insurers can be gouging their customers more than they have in the past.
These are not record margins. They are right in the historical range, and are in line with the margins that are priced for, the margins that regulators say are adequate for the amount of risk being taken on. Yes, individual plans have lower loss ratios, because they cost more to issue and administer. They can also fluctuate wildly, and it is not at all uncommon for an insurer to lose money in a given year on the entire individual block. Nearly half of Wellpoint's profit this year was from the sale of subsidiary company, you've provided no evidence at all that there is any "gouging" going on, or that the profits are excessive. Not once in your post do you mention the profit margin or revenue, only absolute dollars of profit. Because 4.7 billion sounds HUGE, that must mean Wellpoint is gouging people, even though they have 35 million members, so about $134/member in profit.
Some backup for your claim that profit margins are at record levels?
Margins are up over the last few years. In fact, as Andrew Kurz pointed out, their high margins put them in the top 10% of industries, up there with "luxury" goods like cigarettes.
The fact that they're spending less on care, paying their CEOs millions, and posting record profits at very much increased margins - certainly record with respect to their recent performance - is evidence that they're gouging customers. None of those things have anything to do with the cost of care.
And now you're moving the goalposts. Your claim was not that margins were up over last year, it was that they are "at record levels". No one is disputing that the margins were higher this year, but nothing about that fact is evidence of any gouging, or that there is something special about this year. The margins are still within the historical range, so unless you think they can somehow earn exactly the same profit margin every year of course there are going to be higher and lower years.
And no, health insurance is not one of the most profitable industries, it is decidedly middle of the pack. http://mjperry.blogspot.com/2009/10/health-insurance-companies-rank-86-by.html
I don't care what Andrew Kurz says, facts are facts, and insurers are simply not all that profitable compared to other industries. You've yet to provide any evidence for your claims. Though this bit is telling: "certainly record with respect to their recent performance". This betrays yet again a fundamental lack of knowledge about this industry. It's called the underwriting cycle, and anyone writing about trends in insurer profits ought to know about it. Looking at any industry's profits over time, of course you're going to see local minimums and maximums, but unless those are outside of historical averages (and these are not) it is silly to assume that a higher year is evidence of gouging. Once again you completely ignore the facts I give you. Please explain how Wellpoint making $134/member is evidence of gouging (not to mention that $57 of that was from the one time sale of a subsidiary and not from higher premiums, so the margin each customer was paying was only $77, which is higher than 2008, but lower than both 2007 and 2006).
You can rattle on about "CEO salaries" and "record profits", but that is all meaningless rhetoric devoid of any understanding of how the industry works. Your very claim that premiums going up while losing a lot of members is evidence of excessive profit seeking shows that you really don't get it, because the more membership you lose the more likely you'll need to raise premiums. Failing to understand that basic dynamic that is fundamental to the entire industry, how is that you consider yourself qualified to make a judgment on the pricing activities of health insurers?
You're really missing the basic point. Profits are higher (record levels), margins are higher (record for the last few years), administrative costs are up, less money is spent on medical care. All of this things have nothing to do with "underlying costs" and increase premiums.
If insurance companies spent 97% on medical costs, like, say, Medicare, that would drop premiums instantly by at least 10-20%, perhaps more for those in plans where the loss ratio is much lower.
Now, 39% increases are certainly not all due to insurers taking more customer money off the top, but as I said before but you serially refuse to acknowledge, both things can be true. Insurers can both be raising prices due to the underlying cost AND taking more money off the top at the same time. Both problems need to be addressed.
Profits are higher because revenues are higher. Of course you're often going to have record profits in absolute dollars since medical costs and thus premiums grow every single year. But the margins are right in line with historical averages, a fact that you continually refuse to acknowledge. Saying "margins are higher in the last few years" is totally meaningless. Historically health insurer margins have been in the 3-6% range, so if you have a few years at 3-4% followed by a few years at 5-6%, it is not true that insurers are gouging customers, it is just a result of the underwriting cycle, random fluctuation of claim costs, as well as companies trying to get back to target margins (because they typically price for 4-6%, when they only get 2-3% for a year or two they'll increase premiums to get back to the targets). Are you really trying to claim that the profit margins being earned right now are outside of the norm for the industry? Because that is unequivocally false. Feel free to state falsehoods if you'd like, but don't think someone won't call you on them.
It is funny that you're also choosing to play the "Medicare has 3% admin" canard. First of all, Medicare expenses are measured as a percentage of claims, but since Medicare beneficiaries are older and unhealthier, they have higher average claim costs, so all of the fixed expenses associated with running an insurer appear lower for Medicare, but the expense ratio would be higher if Medicare insured younger healthier people who had lower average costs. Also (a much smaller impact, but worth mentioning nonetheless), the 3% number does not count the portion of the expenses that are in other branches of gov't (IRS collects Medicare taxes, etc). Some of those costs even show up in an insurers admin ratio, since their payroll departments are collecting Medicare taxes and sending them to the gov't. But the third and most important difference, a large portion of the expenses for private insurers involves investigating fraud and making sure all payments are legitimate and appropriate. Medicare just cuts a check (watch the 60 minutes piece on Medicare fraud in Miami and see how easy it is to defraud Medicare for millions of dollars, that doesn't happen to private insurers). Medicare could reduce claim payments quite a bit if they did more fraud investigation, which would both add expenses to the numerator, and reduce claim payments in the denominator, increasing the expense ratio way beyond 3%. The point is that not all admin expenses are waste. Clearly even with all of these things Medicare is still going to have lower admin than private insurers who pay executive salaries, advertise, pay commission, etc. But the real gap is nowhere near 20%. And given that Medicare costs are also growing at an unsustainable rate this is all a moot point anyways. Take away every dollar of profit and admin from private insurance and all you've done is by a few extra years. It is the rate of growth that is the problem, not profits or administrative costs.
As to your final point about insurers increasing margins while underlying costs are also growing, I have not "refused to acknowledge" anything. It is a completely banal point. Like I already said, yes, an insurer will sometimes increase premiums above and beyond trend to increase margins back to target levels, but that new level is still within the historical average and within the acceptable range that insurance regulators and the NAIC understand is necessary to have a functioning insurance market. If an insurer's profit margin falls to 2% one year, but their required return on investment is higher than 2%, are they supposed to just be stuck there? Should an insurer go out of business because in one year their margins fell below targets and Jason Rosenbaum finds it unconscionable that they will increase premiums enough to get back there? Should they bear all of the downside risk of underlying costs driving profits below acceptable levels, without any ability to get back? Your final paragraph implies that an insurer should never be able to increase premiums beyond medical trend as long as they are not losing money. That is ludicrous.
Please answer these questions:
Do you acknowledge that the total loss ratio year over year says next to nothing about the required rate increase, and so is pretty much irrelevant for this discussion?
Are the margins being earned by insurers right now outside of historical norms?
What would you say is an "acceptable" profit margin for a health insurer?
Please explain how $134 per member per year (which is really only $77, and around $90 in recent years) constitute "gouging"?
Sigh. Still missing the point, which is typical of insurance industry apologists.
They are spending less on medical care. That's a fact. They are making record profits, and profit margin up over the last few years. All facts.
And they're increasing rates and cutting customers. Again, facts.
Isn't there something wrong with that business model?
I figured you would dodge direct questions.
"They are spending less on medical care"
Loss ratios fluctuate. If you think a 1% drop in the loss ratio from one year to the next is evidence of something nefarious you are clueless about this industry.
"They are making record profits"
They are making record profits IN ABSOLUTE DOLLARS. A fact which is meaningless, because in an industry where revenues grow every year, of course profits are going to also going to increase in most years. It is basic arithmetic.
"profit margin up over the last few years"
Yet still within historical ranges. In order for margins to be up in the last few years, they would have to have fallen in the few years prior to that. Were you singing the praises of the insurers when that happened, or did you just chalk it up to swings in the underwriting cycle and inadequate pricing?
"And they're increasing rates and cutting customers."
They are increasing rates to keep up with medical trends. The total loss ratio says nothing about the required rate increase, and the big loss in customers is what causes the need for higher rate increases because healthy customers lapse more than unhealthy. They are not "cutting customers, so no, that is not a fact. Customers leave because they either cannot afford or choose not to continue their coverage.
Stop being a coward and answer a direct question.
"loss ratios fluctuate" is a dodge. Since the 90s when health reform failed last time, loss ratios have dropped steadily from around 96% to the sup 86% we see today.
And that has nothing to do with underlying costs, and it's something that continues to trend in the downward direction.
Again, what part about spending less on care and more on profit don't you understand?
""loss ratios fluctuate" is a dodge."
No it's not. Loss ratios in the 90's were not around 96%, you're just making up numbers now. For years now loss ratios have been in the same range, fluctuating a few points up and down as the you'd expect given the underwriting cycle.
"what part about spending less on care and more on profit don't you understand?"
They are not getting more profit, I don't know why you continue to insist on just making things and up and stating blatant falsehoods. Profit margins for health insurers have pretty much always been in the 3-6% range, and obviously there will be movement up and down within that range. Pretending that movement from 3 up to 6 within a couple year time frame is evidence of gouging is foolish, and evidence that you are ridiculously uninformed.
You continue to refuse to answer direct questions, and it is pretty clear why. I've addresses every point you've tried to make, why don't you man up and answer my questions from above?
Here's the numbers:
http://hcfan.3cdn.net/15b2e716998ad2bdd0_ktm6bz8u0.pdf
Questions?
That's hilarious. Apples and oranges. As I suspected, you're comparing the HMOs on the early 1990's (the HMOs that consumers roundly rejected for plans with richer benefits and fewer restrictions on care) with PPO/indemnity plans. Compare the same types of plans across time and you won't see loss ratios anywhere near 96% for private major medical insurers, and you won't see declines in LR anywhere near what your chart shows.
Not to mention the decline from 1999-2000 to now (when there is a little more uniformity in plan types) is due to insurers spending on more on medical management activities, it is not flowing to the bottom line. Compare profit margins over time and you'll see a basically flat line.
Dodge dodge dodge. Why are you so afraid to answer simple questions?
The information provided was average loss ratios for all plans under private companies in the time period. The fact that they drop as more people move from HMOs (more popular in the early 90s) to PPOs (more popular now) means that if anything, modern PPOs spend less on care than old HMOs do.
So, when confronted with numbers, it still seems you won't back down. I'll consider this conversation over.
Thanks for the discussion!