Where Are the Health Insurance Reserves?

In a statement yesterday, August 16, the associated press reported that President Obama's administration might be leaning towards a compromise with the Republicans who, along with some conservative Democrats, are pushing progressive Democrats to drop the public option for health insurance. I am not at all certain if I am ready to accept the validity of this statement. I will wait for a direct quote from the President himself. I do however, have a question regarding another statement in the report, and the answer to this question might well negate any need for a single payer or public option in health care reform, at least for now.

Under a proposal by Sen. Kent Conrad, D-N.D., consumer-owned nonprofit cooperatives would sell insurance in competition with private industry, not unlike the way electric and agriculture co-ops operate.

With $3 billion to $4 billion in initial support from the government, the co-ops would operate under a national structure with state affiliates but independent of the government. They still would be required to maintain the type of financial reserves that private companies are required to keep in case of unexpectedly high claims.

"I think there will be a competitor to private insurers," Sebelius said. "That's really the essential part, is you don't turn over the whole new marketplace to private insurance companies and trust them to do the right thing."

Where are the financial reserves that the "private companies are required to keep in case of unexpectedly high claims?" I have pored over the financial reports from several of the biggest companies, and I see no evidence of the existence of any reserves. I certainly did not see evidence of any reserves in AETNA's, 2nd Quarter Financial Report of 2009. If a reserve did exist, it does not appear to have been adequate enough to cover an 18% increase in the medical costs from 2008 to 2009 that AETNA reported. AETNA reported a flat line growth in premium membership. AETNA reports "Sequentially, second-quarter medical membership remained essentially flat at 19.052 million..." If memberships didn't grow, how does AETNA explain how premium revenues increased 12%, as reported below in an excerpt from their report. I have chosen to discuss AETNA's financial report because they hold a 35% share of the health insurance market in Alaska.

Health Care business results
Health Care, which provides a full range of insured and self-insured medical, pharmacy, dental and behavioral health products and services, reported:

• Operating earnings of $336.0 million for the second quarter of 2009, compared with $430.9 million for the second quarter of 2008. The decrease in operating earnings reflects an 18 percent increase in medical costs partially offset by an 11 percent increase in revenue.
• Revenues for the second quarter of 2009 increased by 11 percent to $8.0 billion from $7.2 billion for the second quarter of 2008. Premium revenues grew by 12 percent primarily from membership growth and rate increases for renewing membership. Fees and other revenue increased 7 percent in 2009 primarily driven by membership growth.
  Aetna/4
• Medical benefit ratios ("MBRs") for second-quarter 2009 and 2008 were as follows:

It would appear that AETNA was unable to produce a 10% profit margin without raising individual and group premiums 11-12%.

The statement by AETNA that, "medical membership remained essentially flat at 19.052 million," conflicts with another statement that,

Fees and other revenue increased 7 percent in 2009 primarily driven by membership growth.

If premium revenues increased 11-12% (depending on which interpretation of the numbers you choose), plus the additional 7%, that should have covered the 18% increase in medical costs. These figures beg the question, if there had been a reserve, why then did AETNA need to raise premium rates so drastically? Is not the purpose of insurance to provide a pool of reserves from which to draw during difficult times?

In my state of Alaska, insurance premiums have risen much more sharply, and are projected to continue to rise over the next decade. These increases are further discussed in a report by FamiliesUSA.org.

Alaskans have been paying health care premiums for years, there seems to be little to show in the way of reserves as this statement from the FamiliesUSA report points out.

In that eight-year period, family health care premiums rose by 73.6 percent, while median earnings rose by only 13 percent.

In the eighties, the health insurer's membership benefit ratios (MBRs - the cost of medical expenses paid out in relation to premiums) were in the mid ninety percentile, and premiums were remarkably consistent during this period. How does one explain that today, when membership to benefit ratios are in the mid eighties, premiums keep skyrocketing up and up. If my logical thinking skills have not failed me in my middle years, the relationship between membership benefit ratios, and increased medical expenses should be a direct one. If medical costs increase, the MBR increases. If medical costs decrease, the MBR decreases. If the MBR increases, premiums increase, and vice versa. The total amount paid in premiums wouldn't affect the MBR because it is a percentage. One can see the direct relationship between medical cost and the MBR in AETNA's figures: the MBR for 2008 was 80.5% and 85.9% in 2009. Medical costs increased, therefore the MBR increased. If MBRs have dropped since the 90's, why then have premiums continued to soar?

If a reserve exists, then one would expect to evidence of it in the form of a buffer on rate increases. However, AETNA reported that from 2008 to 2009, the MBR increased just over 5%. Why then was it necessary to raise the premiums rate by 11%.

More information on how health insurers use and potentially misuse MBRs when determining premium rates can be found in this link to a report written by James C. Robinson.

http://content.healthaffairs.org/cgi/reprint/16/4/176.pdf

So again I ask, "Where are the financial reserves mentioned in the article by the Associated Press?" I believe the White House has more than a sneaking suspicion, and this knowledge in part compels the Obama administration to place a higher priority on health insurance reform than on creating a public option or single payer system. If abuses by health insurers lies at the core of this debate, then we can be hopeful that a swift kick in the butt of private, for profit, health insurance companies and their parent corporations by Congress will go a long way to reforming health care. I support Obama administration in their efforts. Numbers have meaning for me, and the numbers posted by the health insurance companies make no sense whatsoever.