Micromanagement of Health Insurance Market Will Hurt Michigan Consumers

Published January 18, 2008

At the end of 2007, after a single perfunctory committee meeting, the Michigan House of Representatives passed a series of four bills which, if approved by the Senate and signed into law by Gov. Jennifer Granholm, will further disturb the state’s already discombobulated health insurance market.

House Bills 5282 through 5285 regulate the insurance market in several ways, including by implementing mandates on how private insurance companies allocate the money they earn in policyholder premiums. Should these bills be passed, private health insurance carriers will be required by law to spend no less than 70 percent of premium income on health benefits. If a smaller percentage is used to fund health care for policyholders, state law would require carriers to issue refunds to their customers in the amount necessary to reduce the amount of capital used on anything other than health care to 30 percent of premium income or less.

In effect, the law would cap insurance company profits, limiting them to whatever share of the 30 percent of income not spent on health benefits remained after all other operating and administrative costs were covered. Capping profits stifles innovation and significantly reduces quality of service, as the main incentive for improvement is removed.

The effect of these bills would not be limited to the harms caused by interference in private companies’ financial decisions. HBs 5282-5285 would virtually eliminate the health insurance market in Michigan altogether by naming one carrier the de facto official health insurance company for the state.

Health care giant Blue Cross Blue Shield (BCBS) has long enjoyed tax-exempt status in Michigan, the result of a 1938 deal with the state to be the “insurer of last resort” for otherwise-uninsurable consumers. The carrier was treated as a nonprofit corporation for tax purposes, while actually operating as a for-profit business.

Since that deal was struck, BCBS’s operation has continuously expanded, and it now owns nearly 70 percent of the state health insurance market. The largest market share owned by any carrier in any other state in the country is currently 38 percent.

There is little fault to be found in a company accepting benefits in exchange for providing a public good. In the case of BCBS, that benefit is nonprofit tax status for a company operating for-profit.

However, HBs 5282-5285 would sweeten BCBS’s deal considerably, not only by “repeal[ing] limitations on for-profit subsidiaries of Blue Cross Blue Shield (the Accident Fund insurance company) selling auto, disability, workers compensation and other types of insurance,” but by adding to BCBS’s financial benefits at the expense of Michigan’s other private carriers.

If these bills pass, all other private insurers in the state will be forced, according to the language in HB 5282, to “assume full liability for all excess losses and commissions in the guaranteed-access health benefit plans.” In other words, every private insurer in the state will be held financially liable for losses suffered by BCBS due to its guaranteed-access health benefit coverage, and will be forced to pay a “proportional share” of the total amount necessary to “offset” BCBS’s losses.

Blue Cross Blue Shield of Michigan, which recorded $210 million in net earnings in 2006, and $337 million the year before that, would have its profits boosted even further by the government’s forcible redistribution of capital from BCBS’s much smaller insurance-providing counterparts.

According to HB 5852, the “proportional share” that each carrier is responsible for paying would be “based on each carrier’s share of covered lives in the individual market.” In other words, the more successful a carrier is at providing health coverage to individual Michiganders, the more capital will be taken from it and given to Blue Cross Blue Shield by the state government.

Combined with regulating profit and insurance provider spending, mandating the forcible confiscation of money from carriers to “offset” BCBS’s losses, based proportionally on the carriers’ market shares, will discourage private companies from attempting to expand their respective market shares. Besides stifling innovation and removing incentives for quality improvement, these bills would punish insurance providers for recruiting new policyholders through innovation and efficiency.

This combination of regulations and mandates would effectively leave only one place to go for Michiganders seeking health coverage: Blue Cross Blue Shield. Any incentive for other carriers to innovate, improve quality, or acquire new policyholders would be eradicated, leaving BCBS as the only carrier in the state with an incentive to expand its market share.

HBs 5282-5285 grossly distort the health care market by interfering in the financial decisions of private businesses and by rewarding a single health insurance provider at the expense of the rest of the carriers in the state. The result of these bills, which serve to artificially narrow the market, will be to decrease the quality of health insurance and limit consumer choice in the state.

If the goal of Michigan’s legislature is really to reform health care, and not simply to play favorites in the insurance market, its members should seek to encourage more innovation and competition, instead of penalizing private insurance carriers for actively seeking to insure more people.

Jeff Emanuel ([email protected]) is research fellow for health care policy at The Heartland Institute and managing editor of Health Care News.