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The Health Plan Lobby’s War For Survival

This past weekend, AHIP – the American Health Insurance Plan trade group – seemed to turn at last against healthcare reform. For nearly a year the AHIP stood silently by, and indeed often made noises in support of the administration’s reform efforts, despite being cast by reformers as the chief villains of American healthcare. Then suddenly, a few days ago AHIP released a study produced for them by Price Waterhouse Cooper which concluded that healthcare reform (at least as advanced by the Baucus Senate Finance Committee) would result in massive increases in insurance premiums for Americans.

Becoming an apostate has always been far worse than being a mere infidel, and the AHIP action (seen as a act of betrayal and not merely an expression of opposition) has invoked the wrath of the powers that be. Democrats and progressives everywhere have quickly responded.

The spokesman for the Democrat majority of the Finance Committee released a statement saying, “This report is untrue, disingenuous and bought and paid for by the same health insurance companies that have been gouging too many consumers for too long as they stand in the way of reform yet again. . . It’s a health insurance company hatchet job, plain and simple.”

The White House Blog (using our tax dollars) called the AHIP report “a self-serving analysis from the insurance industry, one of the major opponents of health insurance reform.”

Bloggers from progressive-friendly media, such as Marc Ambinder for the Atlantic, were quick to attack the insurance industry for their turncoat ways – and to wonder aloud what ever could have produced such a counterproductive move.  After all, he points out, “. . . shifting gears on an increasingly popular health care reform bill at the last minute — playing directly into the hands of Democrats who just knew that the insurance industry only a fair-weather friend — stiffing Max Baucus’s Herculean efforts to craft an acceptable bill without a public option (for the industry!) — is a curious stratagem.”

To further express their sense of dismay and betrayal, the administration and Democrat Senators called yesterday for the repeal of the McCarran-Ferguson Act, which gives a federal antitrust exemption to the health insurance industry. Such an action, of course, would bring the health insurance industry to its knees.

But that’s nothing new. The health insurance industry is on its knees today. This is why the industry has (until now) gone along with the administration’s reform efforts. DrRich has explained this many times (for instance, here). To summarize: the traditional methods by which health insurance companies make their profits (e.g., acquiring non-profit community assets for a tiny fraction of their actual value, and engaging in mergers and acquisitions with one another) are no longer feasible. This means that insurers are now in the untenable position of having to make a profit by actually taking care of sick people. This is something they have never done, and never will do.

So, they have struck a deal with the administration. They will not stand in the way of healthcare reform, and in return they will get – what?  That’s speculation, of course, and DrRich has speculated away for two years now. But it seems likely (to DrRich, at least) that the “deal” struck with the administration provided the insurance industry with at least two essential things: a) a last windfall of profitability (or at least some temporary financial stability), followed by b) a graceful exit strategy, in which the health insurers will shed themselves of actual risk, and become mere transaction processors and administrators for government programs.

Both of these facets of the “deal” would be critically important to the health insurers. The first aspect of the deal – the last windfall – is entirely dependent on the issuance of a strong government mandate that all Americans acquire health insurance. (The addition of tens of millions of new subscribers to the insurance rolls would provide several years of big profits and an increase in stock prices.) In exchange for this, the insurance industry happily gave up their ability to cherrypick patients, that is, they were willing to drop their “pre-existing condition” rules. The inflow of new dollars – much of it from young, healthy individuals who today choose not to buy health insurance – would counter the loss from the sicker patients they would now have to cover. (The resulting growth in profits would hold up for at least a few years. By the end of that time the insurance industry would have “transitioned”  into a non-risk-bearing facet of government-provided insurance.)

The reason the health reformers and the insurance industry have played nice for so long is that they both – tacitly – support the same end-game, which is, government-provided healthcare. That neither party will publicly admit to this strategy, DrRich submits, doesn’t mean much. It remains the explanation that best fits most of the evidence we see from all the parties involved.

This “deal” also explains why the health insurance industry has now come out on the attack. Apparently (“apparently” because no bill has actually been written) the Baucus plan recently dropped critical aspects of the government mandate that all Americans acquire health insurance. It appears that the Baucus plan would allow individuals to forego purchasing expensive health insurance and instead pay a modest annual “fine;” then, when they finally get sick and need health insurance, they would be permitted to buy it (since it cannot be denied because of pre-existing conditions).

Such an arrangement not only negates the “last windfall” portion of the “deal,” but it also massively accelerates the health insurance industry’s inexorable march into fiscal oblivion. It would bring the industry down in a very short time, and leave us with little option but for a government healthcare system. This of course (by DrRich’s calculation) is the end game in any case – but doing it this way altogether eliminates the “graceful exit” that has been promised for the insurance industry.

So, the AHIP (no doubt very reluctantly and with a great amount of fear and trepidation) released their infamous report. That report, it seems to DrRich, was actually quite modest in its analysis of the problems that might issue from the Baucus plan.* This modesty reflects the fact that the health insurance industry not only supports healthcare reform; it utterly relies on healthcare reform for any chance of continued existence. But that industry badly needs its two-part “deal,” and the latest version of the Baucus plan violates that deal.

So the AHIP report actually does not constitute apostasy, or betrayal, or a turning against healthcare reform. It is merely a bargaining chip. It is a shot across the bow – a warning. The insurance industry is saying, “We may go down in flames, but we will do what we can to take you down with us. We can still make things hot for you if we want to.”  The insurance industry is serving up a reminder that the deal they made with the administration provided something to BOTH parties – and that if the reformers want to renege on their promise of a “windfall + graceful exit,” then the insurers can likewise renege on their promise to roll over and play dead.

What we are seeing is not a betrayal by the insurance industry. It’s merely a standard negotiating tactic, the sort of tactic often used by Party A when Party B shows signs of taking them for granted. The insurance industry needs healthcare reform as badly as ever.

*The AHIP report, if anything, underestimates the problems that would result from the Baucus plan. When you require the insurers to accept patients with pre-existing conditions at the same premiums as for everyone else, thus giving healthy individuals a huge incentive to avoid buying health insurance until they get sick, you completely wreck the business model overnight. The only possible result would be a massive increase in insurance premiums (much greater and much quicker, it seems to DrRich, than allowed by Price Waterhouse Cooper), followed by a rapid collapse of the insurance industry. Those who claim that the AHIP report is grossly exaggerating the problem are themselves dissembling.

*This blog post was originally published at The Covert Rationing Blog*

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