California's Anthem Problem Underscores Need for Health-Insurance Reform

A few days ago, California insurer Anthem Blue Cross announced that it would be hiking  its premiums on some customers. Some of these unfortunate folks would see their rates jump as much as 39 percent. Disturbed by the increase, Health and Human Services Secretary Kathleen Sebelius wrote Anthem demanding an explanation, particularly in light of the company's reported earnings of $2.7 billion last quarter. Today she got her answer, and with it, a compelling rationale for health-care reform. Per Politico:

 Financial woes have pushed healthier people to drop coverage or buy cheaper plans, the company argued to Sebelius, who had demanded an explanation this week for the company's decision to raise premiums by as much as 39 percent. As a result of losing those customers and holding on to sicker ones, the insurer said, its individual business in California operated at a loss during 2009 and an increase in rates would cover the anticipated shortfall this year.
"While this dynamic always exists, in a challenging economy it becomes more prevalent as individuals who are paying for coverage without a government or employer subsidy must choose to continue coverage or use the money for other necessities," wrote Brian A. Sassi, president and CEO of the consumer business unit at WellPoint, Anthem's parent company. At the same time, medical prices are rising faster than inflation. People are also using more health services, "driven largely by an aging population, a lifestyle that results in chronic disease, new treatments, and more intensive diagnostic testing," wrote Sassi.

Sassi's explanation points to why an individual mandate, coupled with subsidies and insurance exchanges to help individuals access coverage, helps make insurance more affordable. When healthy people drop out of the insurance pool and high-cost (that is, sicker, older) individuals remain, insurance companies raise prices to maintain their profit margins. If the pool, and thus the risk, is diversified, the cost of being in the insurance business comes down. That's one of the motivators for universal insurance coverage.

The Anthem problem points to another vexing issue with the status quo. It's raising premiums only in the individual market. Those are people who can't or don't get insurance through their employer. Maybe they're recently unemployed or freelancing or temping or something. They're already in a rotten spot. Without the backing of a large purchaser, they're forced to fend for themselves, and have virtually no bargaining power in terms of pricing or coverage. They don't have an employer chipping in a chunk of the premium cost, and most of them must pay with after-tax dollars, so they don't get the same tax benefits as the rest of us lucky souls with employer-sponsored insurance. (Thanks, NEWSWEEK)

Depending on which version of health-care reform gets passed, those currently getting squeezed in the individual-insurance market would be better off. Many of them would be eligible for subsidies, and they'd have access to an exchange where their purchasing power would be pooled with other individuals to essentially mimic the dealmaking ability of a large corporation. Prices would arguably be more affordable, even for those folks not receiving subsidies. But without reform, we're likely to see more Anthem-ic price increases.