Sick system

Critics blame "socialist" health care reforms for driving up local insurance costs. But the free market may be the real culprit.

A downtown high-tech company called Destinations.com got an unpleasant shock this summer when it received its health insurance renewal rate from Regence BlueShield: a whopping 45 percent increase. Destinations, which makes software for the travel industry, leavened the blow by switching insurance carriers, but it still felt it had to reduce benefits to get costs down. Its approximately 60 employees now pay $100 more a year towards their deductible, for a total of $300, and shell out more than twice as much as they used to for some drugs.

Destinations' human resources director Lynda Mills is afraid next year's increase will bring more of the same. "At that point I really don't know what we're going to do," she says. "I imagine that we'll have to shift more of the cost to employees."

Working, it seems, is no longer a protection against out-of-control health insurance rates. While public attention has focused on the disastrous collapse of the market for individuals buying insurance for themselves, the past year has also brought a crisis for businesses and their employees.

"We used to be looking at single digit increases, and people would be upset," says Gary Bylund, a broker who helps companies and individuals find insurance. "Now they'd be elated. My week so far is to see what options are available for [companies receiving] 67 percent, 32 percent, and 92 percent increases."

As Bylund's experience shows, it's not just small businesses that are having a tough time. The phenomenal 92 percent increase is going to a high-tech company with a solid 150 employees. In fact, actuaries at the office of Washington State Insurance Commissioner Deborah Senn say that for the first time they are noticing the largest increases going to businesses of more than 50 employees (although the office does not compile an average increase for this "large group" market). Regence spokesperson Chris Bruzzo says simply that "everyone saw an increase" this year from the state's largest insurance carrier. And the increases, he says, "were all double digit."

It would be easy to blame state-based health care reform, and that's exactly what some in the insurance industry do. "The problem started back in '93," says broker Jan Chapman, whose clients include the Seattle Weekly and who is president of the King County Association of Health Underwriters, an industry group. She's referring to the year that the Legislature passed its first reform effort, which was modified two years later.

The connection is fuzzy, however. Health care reform has had the biggest impact on the individual, not the business, market by requiring insurance companies to sell to anyone, no matter how sick, and minimizing waiting periods for coverage of preexisting conditions. And though Chapman and other brokers talk about expensive state "mandates" which tell insurance companies what they must cover in all markets, most came out prior to reform and are in any case not major money-eaters, according to insurance companies themselves. "The net impact is very, very small," says Regence's Bruzzo, talking about one frequently cited regulation that in practice requires coverage of alternative medicine beginning in January (making it hard to understand why the insurance industry fought the regulation for years in court).

While health care reform is viewed in some quarters as a brand of state-imposed socialism with all the financial inefficiencies that implies, it turns out that the current crisis has some quintessentially capitalist causes. "If I were to point to one culprit, it would be prescription drugs," Bruzzo says, voicing a common sentiment among insurance companies. They say they are spending 15 to 25 percent more a year on pharmaceuticals, in large part because of advertising campaigns that prompt patients into asking for new, high-priced drugs. You can't get more market-driven than that.

While drug companies are getting rich on this scheme, patients are going to be paying for the damage to insurance companies. In a backlash to a purportedly self-indulgent "consumer demand," most insurers are instituting new policies that require patients to pay heavily for drugs not on an approved list. A patient insured by Premera Blue Cross, for instance, will typically have to pay $40 for a nonapproved drug. Insurance companies are hoping that their lists will prompt patients into asking their doctors for the cheapest drugs, even though it will sometimes put sick patients into the difficult position of challenging their doctor's prescription.

If market forces in the pharmaceutical industry have been pushing up costs, market forces in the insurance industry may have been preventing carriers from completely compensating with rate hikes. "In some ways, carriers may have been underpricing for competitive purposes," says Commissioner Senn, at least in the high-volume big business market. "Now they're trying to make up for losses."

Strange as it sounds in an era of insurance industry penny-pinching, such a price war is not inconceivable when you consider the financial model of the industry. While claims of "million-dollar losses" circulate today as evidence of reform's failure, carriers have long planned on temporary periods in which they take in less money on premiums than they pay out on claims and administration. Regence's Bruzzo describes the cycle this way: "Normally, we lose money, lose money, break even; lose money, lose money, break even." The company still comes out ahead, even when it "loses" money (nearly $23 million in 1998) by investing in the stock market (though Regence, like Blue Cross, is technically a nonprofit).

Health care reform may have intensified this process, but not in a direct, state-managed way. "My view is that there was some aggressive pricing that came out of reform," says Gary Gannaway, CEO of the new insurance company First Choice Health, which was not around at the time. "There was a strong feeling that you needed to go out and get market share. . . . There were new rules, you had to get ahead of the game when health reform hit." He says insurance companies, however, underestimated the trends that would increase costs and extend their period of "losses" far beyond the normal cycle. And insurance companies don't feel they can rely on the stock market forever. Rates, consequently, went up, way up.

Businesses, which may have experienced hefty rate increases in recent years even if they weren't paying the full load of spiraling health care costs, are reeling from further rate escalation. While big businesses got hit harder than usual this year, small businesses tend to feel increases most acutely. The community development group SouthEast Effective Development (SEED), for example, got a 45 percent increase this year on the heels of three previous 30 to 40 percent jumps. In past years, SEED had switched carriers in response, but the 20-person nonprofit was running out of options. Paul Baker, a manager there who handles payroll, was worried that his choice was to "drastically cut back coverage or drastically limit who would get benefits." Instead he found a way out by joining an industry group, the Master Builders Association, that offers an insurance plan to members.

But even industry group plans are not as stable as some new members hope. A small Everett credit collection agency called Sentry Credit saw its insurance through the Association of Washington Business rise in price by 47 percent this year. "We had to scale back," says president Mike Mathis, who stopped offering employees a choice of plans and went with a basic policy offered by the association that entails a $15 co-pay per visit to the doctor's office. The association is considering making a similar choice. "We're finding the price of choice is too expensive," says president Don Brunell.

In the worst case scenario, businesses are asking employees to reach deep into their own pockets for coverage. After a 30 percent rate increase in 1998, the 10-person Alps Language School began having employees pay 40 percent of insurance premiums, or $53 a month. Larger companies are following suit. Hit with a 66 percent increase, the Seattle Weekly for the first time is requiring its 85 employees to contribute to premiums, amounting to between $9 and $74 a month depending on choice of plan.

With businesses as well as employees feeling the pain of rate hikes, anger at the insurance industry may be building among a new class of people. "I'm all for free enterprise and everybody making some money," says Mathis of Sentry Credit. "But all these insurance companies are supposedly nonprofit. When you hear about executives making over a million dollars a year, that doesn't sit real well with you."

One intriguing possibility is that such anger will fuel truly radical reform. A statewide organization called Healthcare 2000 is currently drafting an initiative that would bring a Canada-style single-payer system that would guarantee universal coverage. Once considered a left-wing political fantasy, some unlikely people are taking it very seriously. "It will be another 695," worries broker Chapman, referring to the car tab-slashing initiative that swept to victory on a surge of populism. Certainly, many people feel that the state's version of health care reform is inadequate. The system is still broken.

 
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