I work in the life insurance industry. On the one hand, we're rather askance of health insurers. After all, we'd like people to live long lives. On the other hand we also write annuities. Why in the world would we want everyone living to 100? That's just crazy talk.
So, officially, we're agnostic as a segment of the insurance industry on matters related to HCR. If people are more confident that they will longer, we will probably sell more annuities - and have to raise prices - and be able to. If people do not live as long (and are more uncertain about their longevity), we will probably have to raise premiums - and we will be able to because more people will be applying for coverage.
We make out just fine either way.
What about health insurers, though?
Let's get to that in a bit.
Now, many insurers are conglomerates, selling life, property and casualty, long term care, disability income and of course medical. In latter years some specification has taken place, in no small measure due to the increasing rigor of policy administration and risk management. Modern day policies of any type are increasingly complex financial instruments. The days when a policy was all about mortality and morbidity (for life and health, respectively) have not been with us for decades, at least a far back as tax code changes in the 1980s. Credit risk, equity risk and more are now all part of the calculation of price on your policy.
So, what does this footnote about financial risks have to do with the ongoing health care debate?
Oh... everything.
The single biggest expense of all insurers is reserves held to cover contingent liabilities - the cash on hand that earns interest income over time that hopefully is enough to cover all the hospital claims (and in life, death benefits) that are incurred.
A long time ago, when people did not live so long and demise was much more likely at younger ages for a host of reasons, the advent of private insurance was lauded as a good thing by the American state and federal government. It was in effect an emergency pension plan, privately financed and provided. It was something the government did not have to provide..and was glad it did not.
And for most of the 20th century, no one had a problem with the arrangement.
Why not?
Because it was only relatively recently that short-run financial incentives drove claims processing behavior.
For most of the industry's history, companies were usually mutuals or fraternal organizations. In other words, not for sale on the stock market. The stakeholders were the policyholders - not the shareholders.
(Northwestern Mutual is a holdover from that era.)
You may be familiar with the recent downturn in the stock markets? Started in October 2007 and then accelerated to a full sprint to the bottom almost exactly a year later?
You are probably wondering who was buying all that Alt-A and sub-prime paper that fueled the housing boom.
(Raises hand.)
It was us. All of us. The insurance industry.
Our bad.
You see, we generally have guidelines to invest only in 'investment-grade' paper. AAA credit, all the way, baby. That's the idea.
Unfortunately in a low interest rate environment two things happen
- First, you can't get sufficient yield to honor first the more aggressive policy benefits you promised (this really hits annuities and universal life policies hardest).
- In time, due to lower rates, the regulators will start requiring you to discount your reserves to reflect actual market experience. Huh? What that means is allllll the obligations for expected future payouts of claims is discounted not at the 7% you originally planned on.. but at, oh, 4%. Or, if current rates continue, at 2%.
In other words, your biggest expense gets much, much more expensive...at the same time customers are demanding richer benefits and at the same time you cannot find qualified assets that will give you the returns you need to make it all work.
For much of insurance industry history, bond yields of course went up and down but they haven't been THIS low since the 1940s...well, except for the early 2000s. And that actually is the era where this discussion takes
place.
So - you are now CEO of a publicly traded insurance company. Your policyholders want valuable products. In other words, once where they get sufficient benefit in return for their premium payments to make it worth their while. Contrary to the frequent insurer-bashing meme, it's generally considered poor business practices to kill off your customers. It's not the first solution that you are going to come to as a CEO. For starters, it is the sort of thing that could get you placed on death row. Not good.
On the other hand, if you don't hit the target benchmark return of, say, 14% per year, you are going to get pushed out on your kiester. Professional exile for Type A winners? Just shoot me now, you are thinking.
Relax, we aren't gonna make you kill anyone. Besides, you know the business history. Here is what you and all your CEO peers did:
You started looking for excuses to buy riskier higher-yield assets to cover your guarantees and keep your products competitive.
And, wouldn't you know it? These great guys called bond insurance (or guaranty) companies said that they had a note from the rating agencies like Standard and Poors and Moody's saying that if they put up the cash to cover the marginal risk, then they could help 'wrap' sub-prime and alt-A debt into something that fit the bill... and win these securities the needed AAA credit rating.
Even though the underlying risks were A or B or sometimes C grade at best.
And we, the insurance industry, bought it all up. All of us.
Because if we didn't, we'd lose business. We would be priced out of existence.
And many companies faced that fate.
The really big dogs, like AIG, went a step further, making huge credit bets through default swaps.
That story you know.
But the bigger story, the one that drove the market for sub-prime debt in the first place, were insurers sitting on combined trillions of dollars of cash, desperate for yield in a very low yield environment.
And at first, it worked great. Famously, even.
And feeling more comfortable, larger bets - in time including riskier underlying assets than even sub-prime - were undertaken.
And all this would have been hunky-dory except for one minor detail:
While there are 310 million people in the United States..and billions throughout the capitalized world where these types of residential mortgage bets were made (name a country and you will find evidence of this activity; it was literally everywhere), there are at the end of the day only a finite number of people able to afford home mortgages at any price.
People buy and sell houses all over the planet. Insurers are everywhere.
When people stopped buying houses... oops.
Insurers everywhere bit the bullet.
Also, for us, given the (it is truer than widely accepted) narrow margins that insurers live on (to have a 14% benchmark is easy; to actually sustain that income is much more challenging), any shift in the credit worthiness of borrowers or the price demand for houses had a huge impact on the industry's financial well being.
Now...all of this started up long after companies started to de-mutualize and go public. But the financial backstory is a big part of the story of how insurers of all kinds have coped with rising costs, mispricing the value (and risk) of product benefits sold to customers, and - add this to the mix - collapsing asset values in their portfolios.
And this is the place that insurers of all kinds are in. Many have been on the TARP bailout list, or a la AIG have received massive government assistance, in no small part attributable to the vulnerable of their business partners and credit counterparties - the other people making credit risk bets to juice up their own returns.
The financial condition of insurers - all of them - is quite precarious the world over. You may have noticed banks are not lending so easily. Insurers are 'de-risking' too. Which is a bit odd to read in print.. but for many years the pursuit of new business has driven not just what companies offered customers but how they priced these risks.
In the case of many health insurance products - you were promised much more than insurers could deliver on. This began to be seen more and more as shareholder pressures were felt. In the early 2000s the heat was turned up another notch. Now it is at full steam.
The pattern is manifest to insures as well as insureds. The status quo is absolutely broken. It is not a question of a 'next time'; this is the hat trick. This is bad news for insurers too.
If there was any one thing that insurers would like to have right now it would be flexibility to reboot the regulatory computer and reset all existing guarantees to something deliverable.
They aren't going to get that. Nor are they naive enough to ask for such a thing. It would also be a huge rejection of all contract law.
Next up would be some change of the market structure. Any change, really, would be welcome. This is why the mandate is very interesting. It makes it possible to do something that has thwarted insurers for decades - access the middle market, a nice way of saying the lower 60% income band of American households... and do so with taxpayer aid.
You see, a huge challenge to sales to the middle market has been underwriting. But if everyone has to have policies, everyone by default is part of a nationwide grouped policyholder class.
That makes things much simpler to price. You already have population data to work with for assessing risk.
But this is going to cost a LOT in reserves. After all, if you don't have capital, you can't write the business. And if bending the cost curve is a big priority, you can't premium-finance your reserves and expect to stay competitive.
So the industry needs help there too.
Or.. it can do what it is already doing with group health plans now.
- raise premiums, a little bit
- raise deductibles, some
- raise the co-pay limits, a LOT
- tweak the annual and lifetime caps
- phase out PPO (preferred provider) plans
- dilute prescription drug benefits
None of these solutions require any legislation on the part of Congress.
In fact most of this activity is taking place with large companies that aren't even covered by the current HCR bill in the first place.
However, the HCR bill creates a default national group health risk classification and underwriting structure.
The end result for individual health policies - all of them - will be to recapitulate the group health plan experience this year.
And the insurers yet need financial assistance. Just expanding the market and changing costs is not enough.
They also need something else to never, ever happen - they need the current U.S code regarding treatment of reserves for tax purposes to never, ever be tampered with.
So, if you thought you did not have leverage?
You did.
At some point, all of those insurers will be coming back to DC hat in hand, asking for money 'to make HCR work'.
Because just having compulsory access to a simplified nationwide market will not be enough.
They are going to want additional concessions, on par with the sweetheart deals that the banks got.
So... why am I not worried and how did I come to learn to love the bomb that is this bill?
Easy - The insurance industry needs this bill far more than you do. You , as Democrats, only need it (as in really NEED it) for electroal reasons. The companies need it to stay in business in the long run.
That's why they are willing to accept the new restrictions. They paid this price months ago. Of course... if everyone is on a nationwide group plan, there is no real selection to speak of. Even if it is a hollow meaningless concession "insurers won't be able to refuse you coverage" makes for a great sound bite, don't you agree? Of course...everyone is part of the same mandate. Why would we refuse anyone?
All this blah-blah about holdouts in the senate is a charade.
Reid could call for cloture today and get it.
He could call for the final vote and get it.
If Lieberman could not help himself and insisted on being a dork, a Republican - any of them - would step up and save the deal.
This bill, as crafted, has at its heart the start of what is needed to save the insurance industry.
If the bill fails, that one-sixth of the U.S. economy that insurance helps to pay for will start to fall apart.
And if you thought our military and money made us mighty, guess what? If we lose our status as a medical superpower, the empire is well and truly done.
And that, my friends, is why I am not so worried about reform - and this reform in particular.
If every other Democrat started to oppose it it would still pass. Insurers need it too badly and feel they have enough leverage on GOPers to get it through regardless. If Republicans proved intractable, the insurance industry would turn on them. And the industry has a lot of money to bear down on difficult people.
Which is why progressive activists have been hit hard from the outset. No additional competition for the industrry will be suffered, especially competition for future handouts. That is why the PO and Medicare were DOA, despite their popularity.
So, in a nutshell
- insurers are gasping financially
- they need public help to break into wider markets
- the no-preconditions/coverage rules do not mean a lot if everyone is effectively in nationwide group coverage
- the insurance mandate is the key for the insurers.
- The Kabuki with Lieberman is just an excuse to get rid of competing plans that would cut into the ability of the insurers to ask for more money later on. If the PO or Medicare expansion were around, it would be too easy for later Congresses to say 'forget it'
- None of this would be happening without last year's financial crisis
- Reid could call for cloture today; there might be a brief filibuster to make it convincing for Lieberman supporters and republicans but no one is going to get in the way of bailing out the insurance industry.
So there you go. Opinions may of course vary. But this is as close to a full understanding of what we are witnessing as I can muster. Again, I do not work in health insurance, nor in the offices of the Senate. But from where I am sitting, this entire process is almost entirely for purposes of political posturing to obfuscate a deal that was pretty much decided on by last spring.
It is understandably a deal that insurers wish they did not have to make with Democrats - this is not an industry that likes the blue team very much. Many in the industry would prefer to wait a year, and do the exact same thing with Republicans. HOWEVER... all talk aside - some of it from myself in less calm moments - the chances of the Dems losing control of Congress are quite small and become non-existent if HCR of any kind passes...because the insurance industry will be invested in protecting the Democrats from an incensed, jilted GOP that wild probably make repealing 'Obamacare' (their word) a top campaign meme.
But this only happens if HCR passes.
The stakes are a close call in 2010... or a solid defense of Congressional majorities.
But Dems are not likely to lose.
If they were, the insurers would have pulled the plug on this deal long ago.
So love the bomb, I say! I know I do.