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How Health Insurers Got Fat by Spending Less on Care

In a counterattack against Republican efforts to overturn or gut the Affordable Care Act, a "grassroots" organization that represents around 1,000 consumer, professional, and medical groups has mounted a full-scale assault on the insurance company greed that it says made the reform legislation necessary. The statistics released earlier this month by Healthcare for America Now (HCAN) certainly paint a disturbing portrait of the health plans, but that picture only partly explains what ails U.S. healthcare.

In HCAN's analysis of the financial reports of five large, publicly traded insurance companies, the organization argues that the insurers sharply increased their profits over the last couple of years by systematically overcharging their customers. From 2008 to 2010, the five companies -- UnitedHealth Group (UNH), WellPoint (WLP), Humana (HUM), Aetna (AET), and Cigna (CI) -- saw a combined profit increase of 51 percent, HCAN notes. While some of that reflects a rebound from the onset of the recession, the insurers' earnings also jumped 17 percent from 2009-2010, after the corporate recovery had taken hold.

Altogether, the five health plans had combined profits of $11.7 billion in 2010.

During that same year, HCAN points out, the portion of insurance premiums spent on patient care -- known in the industry as the medical loss ratio, or MLR -- fell for four of the five insurers, and remained flat at the other (Humana). The biggest drops occurred at Cigna (-3.7 percent) and Aetna (-2.9 percent).

HCAN cites a report by Rep. Pete Stark (D-Calif.) that shows how much the declines in these companies MLRs, when compared to their premium increases, cost employers and consumers. For example, Cigna's "profit padding" siphoned off $709 million, and Aetna's skimmed $708 million off the top, according to the Stark report.

Notably, Pete Stark was one of the congressmen who pushed for the inclusion of a provision in the ACA that requires insurers to spend a minimum percentage of premiums on patient care: 80 percent in the individual and small group markets, and 85 percent in the large-group market. If an insurance company spends less than that, it has to rebate the difference to plan members.

But that provision didn't take effect until this year. Before that, insurance companies continued to reap higher profits despite a decline in commercial membership. HCAN acknowledges that the plans enjoyed strong growth in government business, including Medicare Advantage plans and Medicaid managed care plans. The way HCAN spins it, the financial reports "camouflage" even lower MLRs on the commercial side by submerging them in the company totals. But there's no proof of that. Although the government does limit what it pays private insurers, it has been paying MA plans much more than the cost of conventional Medicare on a per-person basis. That, too, is slated to change under the reform law.

There's no doubt that the big insurance companies have taken advantage of the public in order to maximize profits and boost stock prices. Because of the opaque environment in which they operate, they are in a good position to add an extra margin wherever they're able to bargain healthcare providers down on costs. But in many markets, they're unable to do that; and, more important, insurer profits represent a fairly small percentage of the entire healthcare bill. In 2010, for example, U.S. healthcare spending totaled about $2.5 trillion. The combined profits of the five largest insurers amounted to less than half of one percent of that pie.

Moreover, insurance companies -- despite their unhappiness with the MLR provision and some other areas of the law -- seem to be adjusting fairly well to the Affordable Care Act. Some of them expect continued earnings increases this year, and most expect to have a windfall in 2014, when 32 million more people receive coverage. So while some companies may be conspiring with Republicans to rewrite portions of the law, they're not the major opponents of the ACA.

The real problem is that too many people are making too much money off of healthcare, and patients want everything for nothing. As Pogo used to say, "We have met the enemy, and he is us."

Image supplied courtesy of Flickr

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