At a February conference in Las Vegas, Aetna president Mark Bertolini told a crowd of thousands that “the end of insurance companies, the way we’ve run the business in the past, is here.”
That isn’t just industry whining–it’s the truth. And the chief reason for the shift is Obamacare–to its critics’ dismay and its champions’ delight. The president’s reform law installed dozens of new restrictions on how health insurance plans can be sold, priced, and managed. Selling policies has become a money-losing proposition for many firms. And several have already scaled back or completely shut down as a result.
Make no mistake–Obamacare spells the end of private insurance as we know it. And slowly but surely, patients previously covered by private insurance will find themselves funneled into government health programs.
One of Obamacare’s most disruptive new restrictions is its “minimum medical loss ratio” (MLR). This rule requires insurers to spend 80 to 85 percent of all premiums received on claims. The lower number governs the individual and small-group markets, the other the large-group market.
The idea is to prevent insurers from funneling excessive amounts of revenue toward administrative expenses or profit. If the company doesn’t hit the 80- or 85-percent target, it must rebate its customers the difference.
This rule may sound reasonable. After all, who doesn’t want to get better value for their premium dollars?
But it’s exerting a serious toll on insurers’ bottom lines. WellPoint, the country’s biggest insurer, took an estimated $300-million hit last year because of the rule. Aetna suffered $100 million in damage at the hands of the MLR.
Insurers won’t just eat those losses. They’ll raise premiums to compensate. And consumers will be left holding the bag.
Further, most administrative costs–like office rent and worker salaries–are relatively fixed. And the industry’s profit margin is in the neighborhood of 2 percent. So the easiest way for many insurers to drive administrative expenses below the threshold would be to hike premiums and simply pay healthcare providers more money.
That might be good news for doctors and hospitals–but it certainly won’t be for patients.
On top of those rules, Obamacare installs billions in new taxes. Starting in 2014, insurers will face an additional $8 billion in levies. For each of the next four years after that, they’re expected to pay over $14 billion annually to the federal government.
Insurers will compensate for these new costs in part by passing them along to consumers. Former Congressional Budget Office Director Douglas Holtz-Eakin has calculated that Obamacare’s taxes on insurers will, by themselves, cause family premiums to jump by $5,000 over the next decade.
Obamacare seems to have anticipated the likelihood that its additional rules and taxes would compel insurers to raise their prices. So administration officials will try to control the price of insurance directly. Federal officials now require insurers that want to raise premiums by 10 percent or more to post a formal explanation on a government website.
Then, federal and state bureaucrats will determine if the rate increase is “justified.” Insurers whose hikes don’t pass government muster will be barred from participating in the state-based insurance exchanges expected to be up by 2014.
This exclusion doesn’t just penalize insurers by cutting them off from potential customers. It also harms consumers by limiting their insurance choices.
With provisions like these in place, Obamacare effectively forces insurers to pay out more generous benefits but limits their ability to raise the revenue needed to do so. Consequently, many firms will go out of business.
The decline has already started. Aetna has pulled out of the individual insurance market in Colorado and Indiana and out of the small-group market in Michigan. The Iowa-based Principal Financial Group stopped selling health insurance entirely, leaving 840,000 people without coverage. And Unicare has stopped selling policies in Virginia.
These developments are just the beginning. As Obamacare locks into place, the economic pressures on insurers and taxpayers will only grow stronger. Indeed, the Congressional Budget Office just revealed that Obamacare will cost $1.76 trillion between 2012 and 2022–about $800 billion more than the Office estimated when the bill was signed in March 2010.
To Obamacare’s supporters, the death of private insurers may be a feature, not a bug, within the law. But for patients who like their current health coverage–and aren’t looking forward to paying government-inflated rates for their care–the death of private insurance will be an unfortunate one indeed.