It’s About Risk

Recently comes the news of the HHS decision to take more power to regulate insurance:

Under the 136-page rule, the federal government will now decide what counts as an “unreasonable” rate increase, and HHS Secretary Kathleen Sebelius wrote to Governors yesterday urging them “to prevent unjustified and excessive health insurance premium growth.” Apparently, “unreasonable” means rate increases that exceed 10% next year, except when it doesn’t. If an insurer crosses this arbitrary threshold, “The review process would then determine if the increase is, in fact, unreasonable.” So that’s cleared up.

I fear we have gone past the time when the use of the term “reasonable” or “unreasonable” meant something which was legally concrete. From a little further down the article:

Yesterday, HHS reiterated Ms. Sebelius’s threat to exclude certain insurers from ObamaCare’s insurance exchanges if they show “a pattern” of unjustified rate increases. In practice, that would be a corporate death warrant. In September, after some carriers spoke honestly about rising costs, she warned that “there will be zero tolerance for this type of misinformation and unjustified rate increases.”

Insurance, whether medical, auto, home or any other type, is about sharing the risk. It would be nice to know that Ms. Sebelius understood this, but I’m more and more convinced that she does not. Or, if she does, she does not care because any risk is too much.

Did you know that when you co-sign for your daughter’s auto loan, you are an insurer? The bank said it wouldn’t give her the loan at the desired rate and term, but if you would be her insurance, a more pleasing outcome could be secured. The bank was making sure that its risk was lessened to what it determined was an acceptable level.

As I noted this morning, I just had four wisdom teeth removed. I’ve carried dental insurance for the last decade or better, with a couple of interruptions, and never needed more than the bi-annual checkup/x-rays and perhaps a filling or two. During those years of paying premium, I contributed several thousands of dollars to the insurance company’s bottom line, without coming any where close to using insurance benefits which would offset the premium which was earned. In short, I paid out much more than I got back.

That all changed when the dentist told me that I not only had four wisdom teeth that needed to be removed, but that they were all impacted, with crowns rotated to the inside of the mouth. It was for times such as this that I am glad I’ve been sharing my dental risk with an insurer. The roughly $3000 cost of extraction is precisely the type of expense which I wanted to directly avoid. So, I shared the risk. Over the long term, the insurer still makes money. If they don’t, then they have some options as to how that equation can be changed.

At some point in the future, it is likely that my dental insurer will increase premiums. Why? Well, because they want to remain in business. Could these premium increases be substantial? Absolutely. Might they be substantial because the insurance company executives got greedy? I suppose it is possible, but it is more likely that they will increase because the risk (the cost, if you will) of providing coverage has increased.

Going back to where we started with HHS for a minute, let’s look at “unreasonable” increases in premiums. No, first let us look at probabilities. Among otherĀ  reasons, insurance companies share the risk of their policyholders because the future is uncertain. If we can lessen the probability that certain insured event occurs, then the insurance company is often able to reduce the premium from previous levels. Why? Because they are not sharing as much of the risk as they once were. As an example (though I understand this is changing with the market) I paid about 25% less for auto-insurance upon turning 25 than I had upon turning 24. The simple reason was that, in the aggregate, I was less likely to be involved in automobile accidents at that advanced age.

So, these insurance companies are being unreasonable–or are they? If they are being told that the basic policy must include far more coverage than it once did, they have every reason to charge more for the basic coverage because they are now sharing more risk than was previously the case. When costs of medical care and hospitalization increase, health insurance premiums must also go up. We can argue about all the things that drive up medical costs, but it is rather obvious that if insurance premiums do not keep pace with claims payments–one reduces coverage, improves efficiencies in processing, negotiates better rates with providers, increases premiums, or engages in more profitable investment strategies.

Right now, health insurance companies are trying to do all of the above, but they are being increasingly told by government regulators that all of the above are not options–particularly, premium increases and coverage levels. With regard to the other options, one can only derive so much efficiency from a business processing system. One can only negotiate rates with providers down to the level where the providers are breaking even. One can only engage in more profitable investment strategies if one can find them (and if the government regulators will approve them).

I fear I am rattling on (probably due to the Ibuprofen and blood loss) but allow me to close by saying this: If insurance companies cannot be profitable with their products, they will not remain in business. If insurance companies do not get to determine which risks they are comfortable sharing, then it is not insurance any more.