The national debate on health care hit home for 40,000 New Mexicans with individual coverage through Blue Cross. In February, customers received notice of premium increases as high as 30 percent. Some of them have contacted my office to say they’ve already been forced by earlier premium increases to switch to less generous coverage plans and higher deductibles. They have no options left and can’t afford more increases. The Public Regulation Commission directed Morris Chavez, the superintendent of insurance, to give the Blue Cross hikes a formal review. The increases were suspended pending a Monday, April 26 hearing that will be held at the PRC’s offices in Santa Fe.
Regardless of the short-term outcome for customers of Blue Cross and other New Mexico health plans also facing rate surges, it is painfully obvious our health care system is a massive financial failure.
The Blue Cross situation illustrates three of the main reasons why the private-market-based health care system broke down in the U.S.—first, the inability to control medical cost inflation; second, the natural tendency of certain insurance pools to fall into a death spiral of rate increases; and third, the weight of administrative overhead, waste and profit.
Behind the Blue Cross trouble is inflation in the price of health care itself. Cost escalation for medical procedures, services, supplies and drugs consistently outpace the general Consumer Price Index. Add to that an inexorable trend toward a rising intensity of medical care (i.e., the use of more services and products to treat each episode of illness or injury). Per capita health expenses in the U.S. rose by 6 percent annually over the past decade—more than double the annual Consumer Price Index jump of 2.5 percent. (These inflation rates calculated from the federal government's national health expenditure estimates.)
Average medical expenses for these folks go up, causing premiums to increase. The whole cycle then repeats.
Medical inflation trends have interacted with the individual insurance market to force costs even higher for the Blue Cross plans. Here’s how it works: As the premiums for a particular plan increase, subscribers look around for alternatives. People in good health and with low risk factors are more likely to find a better deal elsewhere—or might even take the risk of going without coverage. Those with serious health issues find it difficult to get coverage with another private insurer and are forced to stay with their existing plans. Average medical expenses for these folks go up, causing premiums to increase. The whole cycle then repeats. The technical term for this is the aforementioned “death spiral.” An insurer may even intentionally close a plan to new enrollees once it starts getting expensive, then create a fresh, new plan it can offer at a better price to customers who have competitive options.
The PRC’s Insurance Division has no control over medical providers' prices. The division can only examine and regulate the conduct of the insurance companies. Superintendent Chavez will likely scrutinize Blue Cross’ operating and overhead budget. Unfortunately, these costs have swollen at about the same rate as hyper-inflated medical expenses.
Gov. Bill Richardson signed a law regulating health insurance premiums. For group plans, an insurer must spend at least 85 percent of premiums on health care and no more than 15 percent on marketing, operations and profits. For individual plans, the superintendent will set the ratios, but in no case should an insurer spend less than 75 percent on health care. Blue Cross’ proposed premiums may not meet this standard of reasonableness.
The congressional plan for health insurance reform addresses some of the issues I have described. The creation of large health insurance exchanges, combined with the mandate that all Americans obtain coverage, should serve to distribute the cost burdens more evenly. The congressional plan provides new federal subsidies to make premiums more affordable for struggling families. It prohibits some practices used by insurance companies to deny coverage to those who need it the most. There’s a solid argument that it is a positive step forward.
On the other hand, there is little in the plan addressing the fundamental problem of climbing medical costs. Our system just isn’t working. Neither health insurance nor the health care industries display the benefits we expect from marketplace competition. As BusinessWeek reported in July 2009, most health insurance markets in the U.S. are monopolies or duopolies. The article found the same thing for hospitals. Insurance companies are unable to extract significant long-term cost savings from providers. And health care providers feel the squeeze of “inadequate reimbursements” from insurers, but costs keep going up—as do salaries and compensation.
We could learn a lot from the countries with comprehensive, affordable health care. Or we can let ideology and pressure from entrenched interests persuade us to stay with the status quo. Unfortunately, the one part of the congressional plan that might have started toward fundamental change in our system, the “public option,” may be dead for now. Offering Americans the option to enroll in a health insurance plan sponsored by the government would provide an alternative for people who have been priced out of the private insurance market—such as our 40,000 Blue Cross subscribers.