Deadly Spin (18 page)

Insurers have been exposed several times for rigging the system to extract as much money as possible from ratepayers while pursuing disparate negotiating tactics against providers. An investigation by the
Boston Globe
in December 2008 revealed a “gentleman’s agreement that accelerated [the] health cost crisis.” The chiefs of the largest provider group in Massachusetts and the state’s largest health insurer made a handshake deal to avoid creating written evidence of the arrangement. In it, Blue Cross Blue Shield of Massachusetts promised to increase payments if the provider group, Partners HealthCare, ensured that no other health plan would be charged lower rates than Blue Cross.
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And as I’ve mentioned previously, insurers retain enough of your premiums to cover profits and ever-increasing executive compensation. The companies reward CEOs lavishly for raising the stock prices of their shares. In 2007, the CEOs at the ten largest publicly traded health insurance companies collected a combined total compensation of $118.6 million—an average of $11.9 million each.
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If it weren’t for a 2006 newspaper exposé that sparked federal probes and civil lawsuits, the former CEO of UnitedHealth, William McGuire, might have gotten away with hundreds of millions of dollars in questionable compensation. The exposé found that some CEOs and board members of public companies had abused their powers by selectively choosing dates in the past for purposes of determining the value of stock options granted to their top people. Evidence showed that United backdated stock options over twelve years for McGuire, the worst example of backdating in the country, according to the
Wall Street Journal
.

McGuire ultimately agreed to give back $620 million in stock option gains and retirement pay to settle shareholder and federal government claims. Even so, he still collected $530 million in non-stock compensation while at the helm of UnitedHealth, and the settlements did not claw back stock options worth more than $800 million, according to the
WSJ
.
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The compensation structures that yielded McGuire’s phenomenal paydays remain at the core of what happens in for-profit health insurance companies. CEOs do whatever it takes to keep share prices up. For example, WellPoint CEO Angela Braly held about seventy-nine million dollars’ worth of the company’s stock during the first quarter of 2010—most of it acquired through stock options. UnitedHealth CEO Stephen Hemsley held about eighty million dollars of his company’s shares, which he acquired at a fraction of their value. Aetna’s Ronald Williams held more than ten million dollars in shares after selling off many more millions.
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These personal holdings create an incentive for companies to repurchase shares of their own stock, which pump up their share prices and earnings-per-share figures by reducing the number of shares outstanding. From 2003 through 2008, the seven largest publicly traded health insurers, which cover 112 million Americans, spent $52.4 billion buying back their own shares. Companies make repurchases with excess cash on hand (drawn from billions of dollars of premium revenue flowing through their accounts each month) or borrow the money to pay for them.

CEOs calculate that the reward for big shareholders, including themselves, will often be greater if they invest available funds in more repurchases instead of improving a company’s operations. When they repurchase shares, they are reducing the amount of money available to them to make the health system run more efficiently, improve the quality of care, or reduce customers’ premiums.

While stock repurchasing is also common in other industries to achieve corporate goals, William Lazonick, an economist at the University of Massachusetts, says that the health insurance industry has been especially rife with share buybacks. In a February 2010 report, he wrote,

Among the top 50 [share] repurchasers for 2000 to 2008 were the two largest corporate health insurers: UnitedHealth Group at No. 23 with $23.7 billion in buybacks, and WellPoint at No. 39, with $14.9 billion. For each of these companies, repurchases represented 104 percent of net income for 2000–2008. Over this period, repurchases by the third largest insurer, Aetna, were $9.7 billion, or 137 percent of net income, and the fifth largest, CIGNA, $9.8 billion, or 125 percent of net income. Meanwhile, the top executives of these companies typically reaped millions of dollars, and in many years tens of millions of dollars, in gains from exercising stock options. A serious attempt at health care reform would seek to eliminate the profits of these health insurers, given that these profits are used solely to manipulate stock prices and enrich a small number of people at the top.
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From 2000 to 2008, the ten largest for-profit health insurers paid their CEOs a total of $690.7 million, according to corporate filings with the Securities and Exchange Commission. As outsized as the CEO pay is, it doesn’t capture the full extent of the health insurance industry’s wasteful overhead. In 2009, WellPoint employed thirty-nine executives who each collected total compensation exceeding $1 million, according to company documents gathered by the House Energy and Commerce Committee. And WellPoint spent more than $27 million on retreats for its staff at resorts in such destinations as Hawaii and Arizona in 2007 and 2008, the documents showed.

Compare this lavish executive compensation to that of the administrator of the Center for Medicare and Medicaid Services, who manages the health care of forty-four million elderly and disabled Americans on Medicare and about fifty-nine million low-income and disabled recipients on Medicaid. This administrator’s pay tops out at $176,000 a year.

BERNIE MADOFF SHOULD HAVE BEEN
AN INSURER

The health insurance industry’s uniquely American, profit-driven brand of corporate governance has armed senior executives with virtual monopoly power in many metropolitan areas and has encouraged them to pursue often breathtaking rate hikes. They have had little pushback from state regulators—most insurance commissioners lack the authority to intervene, and most state legislatures have taken a passive approach. In many states, health insurers are large employers, so they are even more politically potent—and in every state, insurers are among the biggest spenders on lobbying and campaign contributions. Not only are premium hikes tolerated, but insurance commissioners in most states have no idea what’s really going on inside these companies.

Private health insurers abhor transparency and public accountability regarding claim denials, underwriting rules, payments to doctors and hospitals, death rates, racial or ethnic disparities in health status, or the health outcomes of their members. They are usually allowed to protect this important information as “trade secrets.”

The best example of the industry’s secrecy is the medical-loss ratio, which, as I mentioned previously, is the measurement of the share of premium revenue spent on actual health care. The trend since Clinton’s plan failed has been unmistakable. In 1993, the leading insurers used about 95 percent of premium dollars on medical benefits, according to the consulting firm PricewaterhouseCoopers. The merger wave and the new philosophy about health insurance pushed MLRs down sharply, so that by 2007 the number was 81 percent.

By contrast, Medicare has consistently had a ratio greater than 97 percent since 1993.
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Although Wall Street constantly pressures companies to reduce their MLRs, this imperative for the first time will collide with national standards, as established by the new health care reform law. Insurers are mandated now to spend at least 80 percent of premiums on medical care for the individual and small-group market (one hundred enrollees or fewer) and at least 85 percent for the large-group market.

One might think that these new requirements will benefit health care providers and patients, but you can count on insurers to game the system. They’ve already tried. Within days of President Obama’s signing the law, WellPoint told Wall Street analysts that it had decided to “reclassify” certain categories of costs that it had previously counted as administrative expenses and move them to the medical-spending side of the equation, effectively raising its ratios without making any actual changes in behavior.

When low MLRs were needed to impress Wall Street investors, insurance companies excluded the cost of nurse hotlines, medical reviews, and disease-management programs from medical costs. Now that the government is demanding minimum MLRs, the insurers want regulators to consider those expenses as medical costs, a clear-cut signal to investors that they will resist efforts to get them to trim profit margins. This demonstrates how important it will be for regulators to push back against the industry’s reclassification attempts and other tricks and to consider the needs of consumers more than the profit-motivated wants of insurers.

WE’RE VICTIMS, NOT VILLAINS

As they initiated their rate hikes after the Clinton debacle, insurers professed to be the “victims” of rising health costs, and they have rejected any responsibility for America’s health care affordability crisis. But the size of premium increases has had no relationship to real health costs—or anything else except internal greed.

From 2000 to 2008, insurers hiked premiums in employer-sponsored group health plans by 97 percent for families and 90 percent for individuals, according to the Kaiser Family Foundation. At the same time, private-insurance payments to health care providers grew by 72 percent, medical inflation increased only 39 percent, wages only 29 percent, and overall inflation 21 percent, according to government data.
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If the industry had chosen to raise premiums at the exact pace that it increased spending on health care from 2000 to 2008, insurers would still have made substantial profits without pushing millions of people to go without health benefits. But during those years, insurers raised family premiums 2.5 times faster than the rate of medical inflation, 3.3 times faster than that of wages, and 4.6 times faster than that of general inflation.
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This data refutes industry claims that insurers are best situated to manage care and costs efficiently—claims that, as an industry spokesman, I tried, with considerable success, to spin as indisputable truth. The reality, however, which became increasingly evident to me as I rose up through the ranks, is that Wall Street–driven financial imperatives trump the needs of millions of Americans.

The lack of affordable, quality coverage has meant that many Americans with medical needs are driven to financial ruin. Medical debt was a key reason for 62 percent of personal bankruptcy filings in 2007. In 2008, there were 1.07 million household bankruptcies. And as I noted previously, the lack of coverage will contribute to the deaths of about 45,000 people this year, or 123 people every day, according to Harvard Medical School researchers.

Yet in 2009, the five largest for-profit insurance companies waltzed through the worst economic downturn since the Great Depression to set records for combined profits. WellPoint, UnitedHealth Group, Aetna, CIGNA, and Humana reported total profits of $12.2 billion in 2009, up 56 percent from the previous year. It was the best year ever for big insurance.

How did they do it? Not by insuring more people. In 2009, the five companies covered 2.7 million fewer Americans in private health plans than in 2008.
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Throughout the health care reform debate of 2009 and 2010, top health insurance executives argued that total industry profits equal only one penny of every dollar spent in the U.S. health care system. That was a big part of the industry’s effort to make people think—erroneously—that insurers have little to do with rising health care premiums. But even using their one-penny formula, that would mean the health insurance industry collected $25 billion in profits in 2009 alone. At that rate, over a ten-year period that penny of profit could finance more than 25 percent of the $940 billion health care reform law.

Health insurance company executives—including me when I was spinning for the industry—have consistently asserted that premium hikes of as high as 40 percent are necessary to cope with rising medical costs. They also like to complain that hospitals charge private insurers more to make up for lower Medicare rates. This all fits the industry’s self-portrait of powerlessness in controlling medical costs—despite the fact that, collectively, the large insurers have as much purchasing clout as Medicare. WellPoint alone—with 33.6 million members as of December 31, 2009—has nearly as much purchasing power as Medicare.

A 2008 actuarial analysis commissioned by AHIP as part of the industry’s propaganda campaign argued that Medicare doesn’t pay hospitals enough, causing private insurers to pay well above hospitals’ costs to keep them solvent. Insurance companies invoke this myth frequently in their attempts to justify soaring premiums. The nonpartisan Medicare Payment Advisory Commission (MedPAC), an independent expert panel created by Congress, refuted this argument and found that a hospital’s relative market strength—not what Medicare pays—determines what a hospital is paid by private insurers.

The history of private insurers and hospital price negotiations is telling, as MedPAC explained in its March 2009 report to Congress. From 1987 through 1992, hospital profits from private payers grew, and from 1987 through 1993 the rate of hospital cost growth was above the rate of inflation for goods and services purchased by hospitals. From 1994 through 2000, insurers restrained private-payer payment rates, and hospital cost growth fell below the rate of inflation for hospital-purchased goods and services.

“By 2000, hospitals had regained the upper hand in price negotiations due to hospital consolidations and consumer backlash against managed care,” MedPAC reported. With the loss in leverage over many hospitals, private insurers in turn passed along these costs through higher premiums, higher deductibles, and benefit buy-downs, the industry’s euphemism for reducing benefits. “While insurers appear to be unable or unwilling to ‘push back’ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins,” MedPAC said.
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