Democrats: delighted and proud. Republicans: horrified. The American public: anywhere from ‘hallelujah’ to doomsday. And insurance companies? That’s one of the questions the media rarely asks. So how do they feel about the nearly $1 trillion overhaul of their industry? Nervous.
And they have every right to be . While new regulations and limits on their practices are certainties, the parts of the bill designed to compensate for these changes involve more risk. Although the industry?s public response to the reform?s passage has been measured, behind-closed-doors discussions must be frantic. For decades, the health insurance industry’s revenue model has been based on insuring those people who need health insurance the least?keeping the healthiest enrollees and keeping out or kicking out those who are likely to have high healthcare costs. The reform bans such practices.
Before the reform, insurance companies could refuse to enroll those with pre-existing conditions (even as benign as asthma), cancel policies for customers who got sick and refuse to pay once a customer reached the lifetime cap. This meant even the insured were one health crisis away from financial ruin. Losing a job (and thus employer-based health insurance) could have devastating consequences.
Post-reform, these practices will be illegal, making health insurance services significantly less profitable. Other measures will also affect the industry?s revenues. Insurance companies will be required to spend a certain percentage of premiums on actually paying for medical care?85% for groups and 80% for individuals. Parents will be able to keep adult children on their family plan until age 26. Companies will no longer be allowed to charge astronomical rates to high-risk individuals.
If things go as planned, insurance companies will be able to compensate for these losses with the flood of new customers. The law?s ?individual mandate? will take effect in 2014?everyone must have health insurance or pay a fine. More than half of the projected 32 million new healthcare enrollees are expected to take private insurance. Since many of the currently uninsured are young, healthy people, adding them will put money in the system to pay the new cost of insuring those with pre-existing conditions or expensive care.
While the individual mandate may work on paper, the industry worries that reality may be different. Since the fine for an individual without health insurance will be just $95 in 2014, the first year, many healthy adults will choose to pay the fine rather than buy costly insurance they likely won?t need. Even when the fine reaches $695 in 2016, some people may still prefer paying it to buying insurance. Healthcare reform?s success is contingent upon enrolment of the uninsured. If too many people choose to pay the fine and healthy people stay out of the system, the insurance industry will suffer. It was upon deciding that the individual mandate was too weak that the insurance industry went from trying to help craft the legislation last summer to launching public campaigns against it in the fall.
Another legitimate complaint from the insurance industry is that the new legislation doesn’t do enough to control costs. In fact, the bill’s cost control mechanisms are limited to pilot programs. This is a major failure for a reform designed to overhaul a sector drowning in out-of-control costs (Americans already spend more on healthcare than any other developed country?and get less). The insurance industry?and most of America?believed successful reform should address cost control in order to keep premiums down and make medical care more economically sustainable. Faced with new restrictions on their practices and a weak individual mandate, it will be even harder for insurance companies to keep premiums low.
But now that healthcare reform is the law of the land, the insurance industry must make the best of it. Since many changes don?t start until 2014, insurance companies will try to squeeze as much revenue as possible out of the next few years (similar to the credit card companies? response to reform of their industry). Since insurance companies desperately need the individual mandate to succeed, they are participating in Enroll America , a campaign to enroll the uninsured in health insurance plans.
However, not all affected industries rooted against reform: the pharmaceutical industry comes out in great shape. By staying at the negotiating table, the most damaging proposals?imported drugs from Canada , bans on deals to delay the release of generics, a shorter period of market exclusivity for branded biologics?were left out. On top of that, millions of more patients will be consuming drugs. The insurance industry, on the other hand, compromised its ability to shape the bill in its favour by campaigning against reform. Today, the insurance industry is paying the price for that decision.