We have already commented on the bail-out of AIG this week and what it says about our values.
It also says something important about the value of regulation. Apparently AIG’s problems were in its “bond wrap business” which some regard as an insurance product, others as a financial product–and we wonder whether it was something designed to escape normal regulatory scrutiny.
What the AIG failure and the failure of several major financial firms remind us is that financial solvency requirements, including adequate capital, are basic consumer protections. Think about George Bailey in It’s a Good Life. Think about a run on the bank, something most of us have only seen in Mary Poppins but that caused the failure of thousands of banks in the Depression. Financial solvency is a basic consumer protection: it says that your money, your insurance will be there when you need it.
What does this have to do with health care? Well, apparently it is another one of the things that John McCain forgot when he proposed his health plan. Or overlooked.
Financial solvency of health insurers is regulated state by state. Capital requirements for health insurers and plans vary by state.
California is no angel when it comes to financial solvency and health insurance. Let me recount a bit of history.
The Knox-Keene Act (authored by two legislators named Jack Knox and Barry Keene, both good guys who did lots of good work) was enacted in 1975 because some HMOs were taking capitation payments from employers and individuals and sending them to the Bahamas. Literally. So all that language about adequate networks and timely access to care was devised to assure that the HMOs actually HAD contracts with doctors, hospitals and other needed services. And equally important Knox-Keene set real and enforceable standards for tangible net equity and other measures of financial solvency so that HMOs had enough money on hand to pay the doctors, hospitals and other providers. Gee, whiz, pretty basic.
Well, not basic enough. In the mid-1990’s, some managed care plans “delegated” responsibility for managing care to medical groups. These medical groups were not five doctors down on the corner: these medical groups included hundreds or thousands of doctors and took responsibility for the care of tens of thousands or even hundreds of thousands of consumers. In some cases it was just care provided by physicians but in other cases it included hospital care as well as care now provided on an outpatient basis, like chemotherapy and most surgery. And guess what had happened by the late 1990’s? Yup, many of the medical groups were not adequately capitalized and lacked basic financial management so they were going upside down left and right. So part of HMO reform was new regulation of the financial solvency of medical groups. The very first act of Daniel Zingale as the HMO czar was to require all medical groups to have financials audits. Shockingly, some medical groups responsible for the care of literally tens of thousands of Californians lacked something so basic as financial audits. Zingale who had run various non-profits was as shocked as we were that medical groups handling millions of dollars lacked routine financial audits.
And in between 1975 and 1999, California joined many other states in having similar experiences with MEWAs. What is a MEWA? A multiple employer welfare arrangement created by non-union employers that cannot participate in labor-management trusts. Milo Kaufman, now Insurance Commissioner in Maine, wrote a 2004 paper for the Commonwealth Fund titled “MEWAs: The Threat of Plan Insolvency and Other Concerns” that highlights the lack of financial solvency as one of the basic problems with MEWAs. California fixed its problem by grandparenting in a handful of financially solvent MEWAs and closing the barn door. The classic MEWA Ponzi scheme involves an entrepreneur of some sort cobbling together a bunch of employers by promising them big discounts on health coverage, then failing to collect enough premiums to meet claims when they come in. Who loses? Well, everybody but the entrepreneur. Sound familiar? Sound just like Wall Street in the past few months?
There is a long history of various schemes in which insurers or entities standing in the place of insurers attempt to lower premiums by failing to collect enough to pay claims. While those of us who worry about insurance may argue about what constitutes an adequate reserve, everyone who understands insurance agrees that adequate reserves are basic to insurance.
So what does all this have to do with John McCain? Well, his plan allows “people to buy health insurance nationwide instead of limiting them to in-state companies”. Most of the discussion has focused on the consumer protections that consumers have won—whether it is mental health parity (47 states), reconstructive surgery after breast cancer (49 states), mammograms (50 states), maternity stays (50 states), well child care (31 states) or coverage of newborns and adopted children. (If you are thinking, good grief, people had to get legislation to cover stuff this basic! Then you know why we fought so hard for HMO reform.) (Source: Council for Affordable Health Insurance: www.CAHI.org)
All those consumer protections are important. But making sure that insurers are financially solvent is a basic consumer protection as well. And just as states vary in the consumer protections they provide, they vary in the financial solvency requirements they impose on insurers.
John McCain has now decided that perhaps a bit more regulation would have been in order to prevent the debacle on Wall Street. But the premise of the McCain health plan is that deregulation will solve the problems of health insurance. Really? Or will we just end up with another debacle like the one we are witnessing in the financial markets?