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Minnesota’s health-insurance model is broken

REUTERS/Eric Thayer

The 50 percent to 67 percent increases in 2017 health-insurance-premium rates are causing great alarm about Minnesota’s individual health-insurance market. Equally disturbing, Blue Cross is dropping 100,000 policies, and we face severe limitation of choices in many parts of the state next year. Clearly, this market is in deep crisis.

Buddy Robinson

Ideas to tweak the market — such as new state subsidies to the insurance companies to help cover losses — will not work. The individual market is fundamentally broken, and cannot be repaired to function in any reasonable way. Our Legislature needs to look at the overall picture to see what is wrong, and to find workable solutions.

Health-insurance companies always want to segment their markets into similar-risk groups, to generate predictability and especially to maximize profits. This central goal of their business model, however, conflicts with society’s need to create policies with the best coverage at the fairest premiums for everyone.

The insurance companies’ business model worked very well – for them — prior to the Affordable Care Act, when they were free to pick the “cherries” and avoid or drop the “lemons.” They could refuse to cover people with the greatest health-care needs, leaving them to taxpayer-funded government programs. The basic concept of insurance, to pool the most people together to share risk, was perverted to increase private corporate profit — including to so-called “nonprofit” health plans — and cruelly deny coverage to those who needed it the most.

Now that the insurance companies aren’t allowed to do that anymore, their growing problems with the individual policies prove that it is fundamentally unworkable to put people in these limited, segregated groups. Markets in general produce “winners” and “losers.” The crisis facing Minnesota is a clear manifestation. Those unfortunate enough to be unhealthy are in the “loser” category and must pay dearly – or suffer without needed health care.

A key part of the Affordable Care Act, the infamous individual mandate, was supposed to prevent this market “death spiral.” It uses the threat of tax penalties to encourage the younger and healthier, who think they can go without insurance, to think again. Obviously, this disincentive hasn’t worked. That’s because people can do basic math.

Even for those who qualify for tax subsidies to reduce their premiums, they might ask: “Why bother?” when they can only afford high-deductible policies. For example, if you’re faced with paying $5,000 a year in premiums plus the first $5,000 in expenses before the policy kicks in a dime, you might easily choose to do without a policy at all, pay a $1,000 fine, and come out ahead on the first $9,000 of medical bills.

It would be a different story if the penalties were many times higher and approached the cost of insurance premiums – but also a politically unfeasible one. That would force people to buy policies at economic gunpoint.

What to do? Instead of limited, segregated pools, we need people in fewer and larger pools. The state has options to combine pools, even with its own employee insurance pool. The ultimate version, for both economic efficiency and fairness, is to have everyone together in one big pool. It could be managed with just one admnistrative entity. That would vastly reduce both the overhead expense of health coverage, and the administrative expense for hospitals and clinics.

The big Health Plans’ reports of large losses on part of their business drive the demand for higher rates. However, we need to view their overall financial picture. Minnesota’s big plans are Blue Cross Blue Shield, HealthPartners, Medica, and UCare. Their subsidiaries and affiliates make them much more profitable than they would like you to think. Despite promises to the contrary, they can easily mix funds between their components, since there is no effective policing to prevent that. A Minnesota Department of Commerce document shows that Blue Cross Blue Shield of MN off-loaded, in 2011 to 2013, $240 million of profits to its holding company, Aware Integrated, in the form of “dividends.”

The health plans’ lucrative, for-profit Third Party Administrator and Pharmacy Benefit Manager divisions have no public financial reports. Meanwhile, the health plans’ overall profits heavily depend on the overpayments they get from the state’s low-income health care programs. For 2015, 100 percent of the overall reported profits for Blue Cross, Medica and UCare came from their state program profits. For HealthPartners, which also owns hospitals and clinics, it’s 68.7 percent. In short, government programs are propping up the health plans’ broken business model. That’s one more red flag that this model isn’t sustainable.

Buddy Robinson is co-coordinator of the Greater Minnesota Health Care Coalition and staff director of the Minnesota Citizens Federation NE.

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Comments (12)

  1. Submitted by Hiram Foster on 10/14/2016 - 04:01 pm.

    Costs

    The problem is that we are against higher costs and we are also against measures that would lower them. As long as we are so strongly committed to two contradictory policies it’s hard to see how anything will get done.

  2. Submitted by Jon Kingstad on 10/14/2016 - 08:45 pm.

    Maybe

    Mr. Robinson does a good job of highlighting the conflicts, or , more accurately, the paradoxes in the Affordable Care Act. Perhaps Pres. Obama was only being realistic in proposing a law with all of these paradoxes. I find it difficult to believe in this age our government is so clueless as to assume the insurance cartel would not react as it has. As Mr. Robinson as described. If not, shame on our government.

    But I choose to believe until facts convince me to the contrary that this was foreseen and that this circumstance of reaction by this greedy insurance cartel would only tighten the noose of government regulation to the point of eventual takeover or elimination. We do not need a cartel of “private” health insurance companies in this country or, for that matter, anywhere else. The cartel that we can now see exists in the US is an excrescence. Health insurance is “social insurance”. It is morally wrong for health care to be rationed by a health insurance cartel or any other organization under the guise of prudent finance.

  3. Submitted by Paul Brandon on 10/15/2016 - 09:38 am.

    The problem is broader

    As long as our national health insurance system is tied to insurance corporations it will be inefficient.
    The real solution is a national health system.
    This could begin with an expansion of Medicare to cover the entire population (could be phased in).
    Then we will have the same benefits (and life expectancy) as the civilized world.

  4. Submitted by Frank Phelan on 10/15/2016 - 10:41 am.

    A Few Points

    First, it is a little reported fact that even with the proposed rate hikes, rates are still lower than what the Congressional Budget Office had projected. It is a market, and markets can take a while to reach equilibrium. Some players underestimate their costs, gain market share and lose money. They can leave the market, or adjust rates accordingly. See Econ 101 for more on this, for those not familiar with capitalism.

    Second, I agree the ACA is lousy. Single payer is the way to reduce overhead.

    Finally, complex legislation is refined & tweaked all the time. It is only because one political party has decided to display the maturity of a three year old that we can’t make changes that are both reasonable and necessary.

    When I was young, a neighbor kid and I were playing ball. I’d pitch and he’d hit; then we’d switch. After a bit, he said he wanted to just hit, all the time, which was of course the more fun role. That’s what it’s like today, one party wants to be everlasting batter.

    • Submitted by Bob Petersen on 10/17/2016 - 08:01 am.

      A Few Other Points

      I’d go into more that the ACA is beyond lousy. Single payer is NOT the way to go. A monopoly will not reduce overhead and actually will be proven to induce more waste and fraud. We’ve seen this is every corner what government do.
      The comment about a party having the maturity of a 3-year-old is funny because that party was given zero opportunity for input both at our state level and the government level. Everything this 3-year-old warned back when things were initiated have come true and, what I am assuming is the thought of the ‘adult’ in the room, has been nothing but petulant and beyond wrong.
      As for the first point about rates still being lower than CBO as planned, if that is true, at 50-67% increases, that will also be proved wrong. But hey, who needs statistics anyway because the guy that almost all the states, Minnesota included, and the government used and got stinking rich over, admitted that he skewed his data to make ACA look like it was going to be great.
      But let’s not worry about the hundreds of millions of dollars just our state has funneled into a terrible program. We seem to have lots of money to take from the taxpayers. Or at least that’s what those that made up the ACA seem to think.

      • Submitted by Sean O'Brien on 10/17/2016 - 01:21 pm.

        Alternative?

        I note that nowhere in your comment do you illustrate what any of the “input” the 3 year old might have contributed to the ACA may have contained, which is no surprise since no Republican has yet been able to come up with a coherent policy proposal alternative to the ACA.

        The fact is the ACA is not a complete fix to a broken system, and as many others have commented single payer is the way to get it right.

        “A monopoly will not reduce overhead and actually will be proven to induce more waste and fraud. We’ve seen this is every corner what government do.”

        Where are the facts to back up this claim? A simple search for world-wide health care costs per capita among developed countries (for the most part all single payer systems) reveals the United State far and away above everyone else. And middle of the pack for life expectancy. Government monopoly seems to be working pretty well for everyone else.

        But it’s much easier to complain and hyperbolize about the bogeyman of government inefficiency, right?

      • Submitted by Frank Phelan on 10/17/2016 - 06:22 pm.

        Tell Me You’re Joking. Please.

        Obama adopted a good conservative plan, backed by the Heritage Foundation, compromising right out of the box. He met with GOP Congressional leaders, to get their input. Too bad, Obama didn’t know that on Inauguration Day, Mitch McConnell et al met and agreed to not give Obama any victories, including the passage of a conservative health care plan.

        The GOP has said over and over again they want to “tear it out by the roots”. (They also want to “keep the best parts of it”; no clue on how that needle would get threaded.) And you say Dems want no compromise?

        As for administrative costs for Medicare and Medicaid (while not perfect) run about 3%. Private insurance is over 20%.

        i am not interested in ideologies, just getting health care at a price more in line with the rest of the world’s industrial democracies.

        So when will the GOP come out with the plan they long said is coming? Seems like during an election would be a good time.

  5. Submitted by Richard O'Neil on 10/15/2016 - 12:08 pm.

    Why are we so afraid if the words “single payer” health care? Our west European neighbors have it and their people appear to be well taken care of.

    • Submitted by Gerald Abrahamson on 10/15/2016 - 05:29 pm.

      We aren’t afraid. The healthcare industry does not

      want to give up over $1T in excess profits they currently receive each and every year. Now you understand the *real* problem of fixing the healthcare system.

  6. Submitted by Alan Muller on 10/15/2016 - 09:01 pm.

    Author seems to be saying….

    That the State of Minnesota is mismanaging aspects of the ACA, etc, that are under state control.

    Meaningful federal action seems unlikely unless the upcoming election yields Democratic control of both houses. And past history suggests that even with that, the insurance industry chokehold on national policy will not be broken.

    So it seems appropriate to focus on what the state can do, and the politics and personalities behind what it’s not doing. Has Governor Dayton been challenged on this stuff?

    am

  7. Submitted by Britter Ritter on 10/16/2016 - 02:43 pm.

    NonProfit is ForProfit

    Isn’t the problem entirely with the HMOs who have been allowed to administer coverage, whose interest is in profitmaking to boost executive pay?

    • Submitted by Paul Brandon on 10/17/2016 - 09:49 am.

      No

      Insurance companies aren’t HMO’s.
      Two different types of corporations.
      Medical salaries (both practitioner and executive) and hospital costs have both been going up, and are higher than European national health services. This includes independents as well as Health Maintenance Organizations.

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