HR3200 Sec 116: Golden Bullet? or Smoking Gun?

by Bruce Webb

On Sunday the CBO released a letter addressed to Rep. Dave Camp, the Ranking Member on Ways and Means, which among other things measured the impact of HR3200 (the House Tri-Committee Health Care Affordability bill) and a public option on employer covered insurance. On net it turns out that they project more people on employer paid insurance than current law. Additional Information Regarding the Effects of Specifications in the America’s Affordable Health Choices Act Pertaining to Health Insurance Coverage

I provide the link for anyone who wants to explore some of those issues. But in this post I want to explore one provision that seems to have contributed to this outcome. Now there has been much wailing and gnashing of teeth among the Single Payer Now! contingent that HR3200 with or without a public option just is a huge windfall to the private insurance companies by providing them with a individual mandate that delivers millions of new customers without cost controls with the end result that insurance companies will just cherry pick their way to billions in profits. Now if they would have paused for a second to wonder why people like Kennedy and Waxman would just sell them out this way they might have been tempted to examine the bill language. But since there was no such pause I guess I will have to step in. So in re-examining the bill yesterday I came across this section whose import I had kind of missed before.
http://edlabor.house.gov/documents/111/pdf/publications/AAHCA-BillText-071409.pdf pg. 24-25

SEC. 116. ENSURING VALUE AND LOWER PREMIUMS.

(a) IN GENERAL.—A qualified health benefits plan shall meet a medical loss ratio as defined by the Commissioner. For any plan year in which the qualified health benefits plan does not meet such medical loss ratio, QHBP offering entity shall provide in a manner specified by the Commissioner for rebates to enrollees of payment sufficient to meet such loss ratio.

(b) BUILDING ON INTERIM RULES.—In implementing subsection (a), the Commissioner shall build on the definition and methodology developed by the Secretary of Health and Human Services under the amendments made by section 161 for determining how to calculate the medical loss ratio. Such methodology shall be set at the highest level medical loss ratio possible that is designed to ensure adequate participation by QHBP offering entities, competition in the health insurance market in and out of the Health Insurance Exchange, and value for consumers so that their premiums are used for services.

Why is this the Golden Bullet for those of us pushing the Public Option? And why contrawise is it reason for the insurance companies to go ballistic? Well a little discussion of that under the fold.

This provision, if implemented correctly, almost totally strips the ability of insurance companies to combine cherry picking and premium increases to continue the huge profits they garner today. What it does is to establish a minimum ‘medical loss ratio’ which in simpler terms means a set ratio of care actually paid for to premiums collected. If by whatever means whether that be gaming the risk pool so an to only insure people unlikely to make claims or by denying coverage to insurees on a case by case basis your medical loss ratio drops below an established level the insurance company has to rebate the difference. In practice this prevents insurance companies from just arbitrarily jacking up rates and simultaneously takes the profit out of cherry-picking the risk pool. In a word this Sec automatically limits profits by establishing indirect price controls. Which is not going to make the insurance industry happy.

To see how this works. Under HR3200 Sec 111 bans limitations based on pre-existing conditions, Sec 114 mandates equal coverage for mental health and substance abuse treatment (p. 23), Sec 113 establishes strict limits on varying premiums across the risk pool (p.21), while section 112 guarantees enrollment and renewal, i.e. no more canceling people who actually dare to claim coverage for getting seriously ill. Now cynics can and do argue that insurance companies are extraordinarily skilled in working their way around these kind of restrictions and this is true enough. On the other hand the better they are at ducking the requirements of Secs 111-114 the more exposed they are to our Sec 116.

Lets say you have a company that against all law and regulation manages to have a plan that only in practice enrolls healthy adults aged 25-35 who rarely if ever use much health care. Under the current system this result yields ideal profits with collections but no payouts. Under Sec 116 your profits would be limited to the medical loss ratio. The answer for the insurance companies is to make up the difference with volume, the incentives are there to provide insurance as opposed to denying it.

Sec 116 would not eliminate all gaming as companies would still have an advantage if they shift their very high cost insurees over to the public option. But from the perspective of the government these are exactly the pool of people likely to end up on medicaid or qualifying for Medicare under Social Security disability anyway, for them the Public Option may just be a way station while they wait to qualify for DI.

What does this have to do with the CBO Report cited? Well Sec 116 prevents the Public Option from drawing too much of the overall pool away from the private plans not because it doesn’t have the ability to undercut them on cost, but because it forces them to compete for their share of the overall pool or risk seeing their gross profits squeezed.

I am still trying to work out in my head where the limits are here, and where the sweet spot for balancing the size of your coverage pool vs level of care the company ends up having to pay, but on a top down look it seems like insurance companies under something close to HR3200 end up making money by insuring people and not by denying coverage in whole or in part. It transforms the industry into a straight service industry from its current predatory model.

Sec 116: Golden Bullet for coverage, Smoking Gun for profits. It just depends which side of the divide you come down on.

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