The recession is driving up enrollment in Medicaid at higher than expected rates, threatening state budget gaps even as Congress and the White House seek to expand the government health insurance program, according to a survey. The annual survey of state Medicaid directors, conducted for the Kaiser Family Foundation's Commission on Medicaid and the Uninsured, found that the program had been spared the worst effects of massive state budget shortfalls because of federal aid in the stimulus package. But it also revealed concerns about what will happen when that relief ends in 2010, reports the New York Times.
President Barack Obama announced a plan to spend $5 billion to create new jobs for medical and scientific research, medical supplies, and improved laboratory capacity. The funds, to come from the $787 billion economic stimulus package, will pay for "cutting-edge medical research in every state across America," the White House said in a statement.
A new report provides a state-by-state projection that concludes how the number of people without health insurance will increase, spending on Medicaid and children's healthcare programs will balloon, and out-of-pocket health costs for individuals and families will jump. The report was commissioned by the Robert Wood Johnson Foundation and written by the Urban Institute, and makes 10-year projections.
Congress attempted to achieve a social objective—higher homeownership rates—on the cheap by using Fannie Mae to acquire mortgages. The subsidy, in the form of an implicit guarantee of Fannie Mae's capital, meant that Fannie did not need to hold the levels of capital required to support the explosion in mortgage lending that resulted. The results are plain for all to see.
Fast forward to the healthcare debate: Congress is now proposing to repeat the trick with health insurance cooperatives. Health insurers are regulated by state insurance departments, who, over time, have built up a wealth of experience of the levels of capital needed to support an insurance enterprise. After all, if a health insurer should default, it is the state insurance department that is left to protect policyholders. This has led to what is called risk-based capital (RBC) requirements for health insurers.
The minimum level of free capital (also called surplus) that an insurer needs to hold is somewhere between 8% and 11% of premiums in most states (New York is an exception, and its rule is 25%). If an insurer's capital falls below this level, the state insurance department can step in and take action that could ultimately lead to winding-up the insurer.
Prudent insurance companies—for example, members of the Blue Cross Blue Shield Association, which has its own (higher) guidelines for its members' capital—hold considerably more than the minimum required by the state. Typically, well capitalized insurers hold anywhere between 15% and 40% of premium income in the form of free capital.
Capital, of course, is not free. An insurer with 100,000 members could well have $500 million in premiums, and require the backing of between $50 million and $200 million in capital. Assuming a 10 % return on capital pre-tax, this requires between $5 million and $20 million in profits, pre-tax, to service the insurer's existing capital, or an additional charge to the monthly member premium of between $4 and $17.
Because of healthcare inflation, an insurer has to constantly increase this capital. The additional capital can be provided by investors (in which case the return on capital scenario above applies) or, more likely in the case of insurance co-ops, it will have to be provided by insured members. A 10% increase in premiums ($500 per year) could require an additional charge (to increase its capital) to the member's premium of between $50 and $200 per year. These additional charges are offset somewhat by earnings on an insurer's capital, but the rules for what counts as admissible assets for RBC purposes tend to result in conservative investments and (relatively) low yields.
Bills in front of Congress imply that the co-ops will have to meet some sort of solvency standard, although it is not clear that they will have to meet the same state standards as existing insurers. Given that the cost of capital can add as much as $8 to $35 per month to the premium, the more likely course is that co-ops will receive either an implicit guarantee (as did Fannie Mae) or will operate at the minimum state standard.
In the latter case, they will initiate a "race to the bottom" in terms of capitalization, forcing existing prudent insurers to reduce their capital standards to compete. In the former case, co-ops run the risk of becoming the next Fannie Mae, as either the states (or the US Treasury) are forced to bail out failing co-operative insurers.
Policymakers would do well to review the history of cheap mortgages as they contemplate their plans for cheaper health insurance.
Ian Duncan, FSA, FIA, FCIA, MAAA, is president and founder of Solucia Consulting, a SCIOinspire company. Solucia, based in Hartford, CT, provides analytical and consulting services to the healthcare financing industry. An actuary by training, he has 30 years of experience in healthcare and insurance product design, management, financing, pricing, and delivery. He is active in public policy and healthcare reform, and serves on the boards of directors of the Commonwealth of Massachusetts Healthcare Connector Authority and SynCare LLC (an MBE Care Management Co.).
After an intense debate, the Senate Finance Committee rejected two Democratic proposals to create a government insurance plan to compete with private insurers. The votes underscored divisions among Democrats and were a setback for President Obama, who has endorsed the public plan as a way to "keep insurance companies honest."
Battling to overcome deepening losses, the board of Jackson Health System wants voters to approve a new taxing district that might add $300 a year in taxes to the average Miami homeowner. Jackson's leaders have been struggling to find new revenue because of the rising numbers of uninsured and lower funds from the sales and property tax money it already receives. The system faced a $133 million shortfall in 2010 before it balanced its budget by announcing the closure of nursing homes and primary care centers.