Further observations on insurer insolvency

First, to follow up on a previous post about our state’s history of health institutions with fiscal solvency issues: apparently California was not alone in having difficulties with HMO insolvencies. In the 1980’s, there was a wave of insolvencies in HMOs. In a piece titled “State Responses to HMO Failures”, Christianson et al (Health Affairs 1991) say:

In 1986, Maxicare with over two million members in 26 states was touted as the best managed HMO in the industry: within three years, its founder had resigned, it had filed for bankruptcy protection…It dispelled the myth that HMO failures was restricted to new HMOs with few enrollees.

From 1986-1990, nationally 5%-10% of HMOs failed every year—and another 5%-10% were acquired or merged into another entity: mergers and acquisitions sometimes are undertaken to avoid insolvency. That means that 10%-20% of all HMOs failed or were acquired. Not a great record of financial stability. Indeed only a third of HMOs were profitable in 1988.

Second, failures and scams have left tens of thousands responsible for hundreds of millions in medical bills, according to Mila Kaufman et al in an article on Association Health Plans: What’s All the Fuss About? (Health Affairs 2006). For example:

Between 2000 and 2002, 144 scams left more than 200,000 policyholders with more than $252 million in medical bills. The most prevalent way to sell phony insurance continues to be either through real or phony associations.

Finally, why do insurers and banks become insolvent rather than bankrupt and what is the difference?

Banks and insurers are exempt from federal bankruptcy laws and good thing they are. Insolvency regulation puts first those who are insured or those who have deposits in banks while the bankruptcy law is intended to protect creditors. Hand in hand with this go regulations designed to require financial solvency by requiring adequate reserves.

All the more reason to take another hard, skeptical look at the McCain health proposal.

A side note: insurer insolvencies are not limited to health insurance or HMOs. In recent years, California and other states have seen numerous failures of workers compensation carriers. In California, rates for workers compensation were deregulated; insurers offered much lower premiums, and guess what? They failed to provide for adequate reserves to meet claims, leading to (surprise!) carrier insolvencies.

Health Access California promotes quality, affordable health care for all Californians.

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