Testifying before a Senate committee, a
former senior health insurance industry executive has exposed a
series of dubious practices used by insurers to boost profits. His
testimony comes at a bad time for a health insurance industry
facing regulatory change that threatens to drastically shrink its
Regulatory reform is a major focus of
attention in the US, with health insurance reform arguably the most
hotly debated of all. So much so that the Council of Insurance
Agents and Brokers (CIAB), one of the strongest opponents of reform
focused on the creation of a public health plan, has a “Health Care
Reform War Room” dominating its website.
The CIAB’s opposition to reform is punctuated
by emotive messages to its members. Typical is “RedAlert: Health
Care Reform Puts Brokers in Jeopardy.”
In jeopardy is a huge chunk of business from
employers of 179 million Americans covered by employer-sponsored
health plans advised by CIAB members.
The CIAB warns: “Permitting individuals to
opt-in to a government-run health plan would result in nearly 120
million Americans leaving the private insurance system.”
Echoing the CIAB’s concerns, the largest
health insurance industry body, America’s Health Insurance Plans
(AHIP), notes: “A government-run plan would dismantle
AHIP estimates that 100 million American’s
would migrate from private insurers to a public health system.
The CIAB argues that those leaving the private
system would be healthy individuals opting for a cheaper plan.
This, it adds, would leave riskier, more expensive groups to be
managed by the employer, ultimately discouraging employer
participation in the private health insurance market.
An insider’s story
The CIAB’s argument is at odds with
damming testimony given by a health insurance industry veteran
Wendell Potter before the Senate Committee on commerce, science and
transportation chaired by senator John D Rockefeller, a key public
health plan proponent.
Potter was a senior executive at health
insurance companies for 20 years with his last position that of
head of corporate communications at Cigna, the fourth-largest US
health insurer based on 2007 net income.
Contrary to the CIAB’s argument that healthy
individuals would opt for a public health insurance scheme Potter
noted in his testimony: “Insurers routinely dump policyholders who
are less profitable or who get sick.”
The reason for this is simple, explained
“Dumping a small number of enrollees can have
a big effect on the bottom line,” Potter said. “Ten percent of the
population accounts for two-thirds of all health care
Potter was citing a study by Samuel Zuvekas
and Joel Cohen published in 2007.
Potter also provided insight into methods used
by insurers to rid themselves of unwanted policyholders.
One method, said Potter, is termed ‘policy
rescission’ which entails an insurer checking if a sick
policyholder omitted a minor illness or a pre-existing condition
when applying for coverage. Where omissions are detected they are
used to justify cancellation of a policy, even if the enrollee has
never missed a premium payment, said Potter.
He continued that another practice used is
termed ‘purging’, whereby insurers dump small businesses whose
employees’ medical claims exceed what insurance underwriters
“All it takes is one illness or accident among
employees at a small business to prompt an insurance company to
hike the next year’s premiums so high that the employer has to cut
benefits, shop for another carrier, or stop offering coverage
altogether,” said Potter
Potter noted that purging of less profitable
business through intentionally unrealistic rate increases helps
explain why the number of small businesses offering coverage to
their employees has fallen from 61 percent to 38 percent since
“Once an insurer purges a business, there are
often no other viable choices in the health insurance market
because of rampant industry consolidation,” Potter stressed.
Referring to a report in the publication USA
Today, Potter provided an example of purging.
In 2006, Cigna notified the Entertainment
Industry Group Insurance Trust that many of the Trust’s members
would have to pay more than some of them earned in a year to
continue their coverage. For example, said Potter, the cost of some
family-plan premiums would have exceeded $44,000 a year.
“Cigna gave the enrollees less than three
months to pay the new premiums or go elsewhere,” noted Potter.
“Purging through pricing games is not limited
to letting go of an isolated number of unprofitable accounts,”
added Potter. “It is endemic in the industry.”
As an example he referred to Aetna, the
third-largest US health insurer in terms of 2007 net income.
Between 1996 and 1999, said Potter, Aetna
initiated a series of acquisitions and became the largest health
insurer in terms of members, then some 21 million. In the wake of
this expansion, Aetna spent over $20 million to revamp its computer
systems, which said Potter, quoting from an August 2004 Wall Street
Journal story, enabled it “to identify and dump unprofitable
“Within a few years, Aetna lost 8 million
covered lives due to strategic and other factors,” noted
Aetna enjoyed considerable profit growth,
increasing its net income from $127 million in 2000 to $1.83
billion in 2007. According to Health Care for America Now (HCAN), a
pro-public health plan organisation.
Blame it on Wall Street
Potter emphasised that behind the
disturbing situation is a drive for ever-increasing profits to
satisfy the demands of investors in health insurers.
“The top priority of for-profit
companies is to drive up the value of their stock,” said Potter. “I
saw how they confuse their customers and dump the sick, all so they
can satisfy their Wall Street investors,” he added.
“Wall Street investors and analysts look for
two key figures, earnings per share and the medical-loss ratio, or
medical benefit ratio, as the industry now terms it,” said
“To win the favour of powerful analysts,
for-profit insurers must prove they made more money during the
previous quarter than a year earlier and that the portion of the
premium going to medical costs is falling,” he stressed.
Even very profitable companies can see sharp
declines in share prices moments after admitting they failed to cut
medical costs, Potter added.
“I have seen an insurer’s stock price fall 20
percent or more in a single day after executives disclosed the
company had to spend a slightly higher percentage of premiums on
medical claims during the quarter than it did during a previous
period,” said Potter.
“The smoking gun was the company’s
first-quarter medical loss ratio, which had increased from 77.9
percent to 79.4 percent a year later.
Battle lines drawn
Despite the vivid picture painted by
Potter of a profit-growth-at-any-cost industry, it was not this
that prompted him to testify before the committee.
“It was never the intention to go
public as a former insider,” stressed Potter.
His change of heart, he explained, was
prompted by intense lobbying by insurers to influence the path of
“It recently became abundantly clear to me
that the industry’s charm offensive – which is the most visible
part of duplicitous and well-financed PR and lobbying campaigns –
may well shape reform in a way that benefits Wall Street far more
than average Americans,” said Potter.
His view has widespread support, not least
among the general public. Notably, HCAN reports two recent opinion
polls place support for a public health insurance option at between
76 percent and 83 percent.
On the political front, Congress’
tri-committee on health reform has just released a draft of
proposals for a radical reform of the health insurance market,
while the Senate finance committee is anticipated to release a
health insurance reform bill after Congress reconvenes this
Central to the Congressional committee’s
proposals are the creation of a national Health Insurance Exchange
(HIE); a public health insurance option; curtailment of private
insurers ability to discriminate; and promoting health insurance
The committee describes the HIE as a
“transparent and functional marketplace for individuals and small
employers to comparison shop among private and public
Over time, added the committee, the HIE will
be opened to all employers.
A public health insurance option, noted the
committee, “will create a new choice in many areas of our country
dominated by just one or two private insurers today.”
The public option will be subject to the same
consumer protections as private insurers and will be financed only
by its premiums.
Addressing discrimination, the committee
proposes that insurers will no longer be able to refuse to sell or
renew policies due to an individual’s health status or exclude
coverage of treatments for pre-existing health conditions. The
proposal also limits insurers’ ability to charge higher rates due
to health status, gender, or other factors though premiums can vary
based only on age, geography and family size.
Cracking the whip to promote health insurance
uptake, the committee proposes that all employers must provide
health insurance coverage for workers or contribute funds on their
behalf. Employers choosing to contribute will pay a fee based on 8
percent of payroll.
Certain small businesses would be exempt from
providing cover while, in addition, a business tax credit would be
available for small firms who want to provide health coverage to
their workers but cannot afford it.
Individuals who choose to not obtain coverage
will pay a penalty based on two percent of adjusted gross income
above an unspecified level.
Unsurprisingly, the committee’s proposals met
with overwhelming approval from groups such as HCAN and
condemnation from those calling for change to be contained within
the current health insurance structure, such as the CIAB.
Preempting the inevitable showdown between
opposing interests in the reform battle, Potter in his testimony
advised legislators: “As you hold hearings and discuss legislative
proposals over the coming weeks, I encourage you to look very
closely at the role for-profit insurance companies play in making
our health care system both the most expensive and one of the most
dysfunctional in the world.”