Has the Health-Insurance Industry Buckled on Reform? Sort of, But Not Really

(MoneyWatch)  When the Clinton health plan died in 1994, the health-insurance industry's fingerprints were all over the murder weapon. Now that rumblings of comprehensive healthcare reform are starting to take on critical mass in the incoming Obama administration and Congress, the insurance industry has apparently reconsidered its adamant objection to a major health-system overhaul -- and flinched, at least a little.

The big news on this front came yesterday, when the two giant health-insurance trade associations -- America's Health-Insurance Plans and the BlueCross BlueShield Association -- said their members could accept a reform plan that banned the key business practice of medical underwriting, under which insurers limit or deny coverage to individuals with pre-existing medical conditions (i.e., people who would otherwise cost insurers too much). The price: Washington would also have to require all Americans to buy insurance with the much-chattered-about "individual mandate." (See the AHIP statement and the BCBSA statement.)

There's no denying the significance of this concession, even if both organizations have hinted for some time that they'd be willing to broker a deal once momentum for reform started building. That's because medical underwriting is, in many respects, the foundation of the modern health-insurance industry -- one of the primary tools health plans use to keep medical costs down and profits up. For some insurers, in fact, medical underwriting seems to represent the bulk of their business plan -- and when it fails, so do they.

The quid pro quo here makes a certain amount of sense, even if it's still not the best deal for insurers. Expanding the customer base by requiring everyone to buy insurance is a fairly attractive proposition for health plans that have been shedding their most profitable members at a brisk rate for the past year or two. It's also necessary on an actuarial basis to bring in healthier (read: lower-cost) individuals to balance out the risk of insuring a sicker population.

The deal almost certainly isn't the sort of arrangement companies like UnitedHealth Group and WellPoint would agree to were times better. What it suggests, in fact, is that the big insurers -- already battered by the whirlwind that's raged through their business for the past year -- seem to understand that they're holding a weak hand. It's as if they're actually starting to understand that their existing business model is fundamentally broken, and that to carry on as they have is to risk radical downsizing or extinction.

There are plenty of unanswered questions in this deal, making it much more a starting point for negotiations than the finish line. Some, of course, are more serious than others. The NYT, for instance, makes a big deal out of the fact that President-elect Barack Obama opposed an individual mandate during his campaign, while I've long suspected his opposition was more a tactical matter of electoral politics than a bedrock position -- largely because expanding coverage without an individual mandate or something like it makes little sense. (The insurers actually have a point when they argue that without it, many people will sign up for insurance only when they're sick, eliminating the pooling of risk insurance is all about and driving up costs for everyone.)

But here are some other big issues that we'll be hearing a lot more about in coming days and weeks:

• Enforcement of the mandate. No one yet has come up with combination of carrots and sticks that's isnt' either wholly inadequate (the Massachusetts model) or politically toxic.
• Premium costs. The insurers pointedly did not agree to "community rating," in which all individuals in a defined insurance pool pay the same premium. (Group insurance offered by employers typically works this way.) Community rating means that healthy people subsidize the costs of the sick, whereas in today's individual market, insurers typically charge more to people who are older, sicker, living unhealthy lifestyles and similar factors. Community rating means premiums are higher on average, but the alternative means that insurers may well offer plans to sick people that they simply can't afford.
• Government-run insurance. Plans sketched out by Obama and Sen. Max Baucus envision setting up a government-run health plan -- a kind of mini-Medicare -- that individuals could choose instead of private plans if they chose. Although federal employees can already opt for such a plan in their health program (known technically as the Federal Employees Health Benefits plan), insurers hate the idea of competing directly against the government, with some reportedly calling it a dealbreaker for comprehensive reform.

And that's just for starters. Like I said, there will be plenty of fireworks as this process gets underway, so pop some popcorn and get ready.

Addendum: Maybe it's just me, but I also found it amusing to see that BCBSA and AHIP members together claim to cover more than 302 million Americans. That's actually quite a trick, since the Census Bureau puts the U.S. population at roughly 306 million, roughly 46 million Americans are uninsured, and an additional 40 million or so are covered by Medicare. I sure hope the insurers' internal accounting is more accurate than their PR bluster.
Update: D'oh! There's overlap in the membership of the two organizations -- many Blues plans are represented in AHIP, and BCBSA may well include the Blue arms of companies like WellPoint. Apologies for the error.

Image via Flickr user thrig, CC 2.0