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Michigan government’s attempt to micromanage health insurance market will hurt quality and limit consumer choice

January 6, 2008

In late 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 have a very negative effect on the health insurance market in the state.

House Bills (HBs) 5282 through 5285 regulate in 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% 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 of such an amount as t o reduce the amount of capital use on anything other than health care to 30% of premium income or less.

This law would effectively cap insurance company profits, limiting them to whatever percentage of the 30% of income not spent on health benefits remained after all other operating and administrative costs were covered. Passing a series of bills regulating how much of their earnings insurance providers are allowed to keep and how much must be dedicated to certain expenditures will have a noticeably negative effect on the health insurance market since, as with any industry, capping profits stifles innovation and significantly reduces quality of service, as the main impetus for improvement is removed.

The effect of these bills on the health insurance market would not be limited to the negative results of mandated interference in private companies’ financial decisions. In fact, HBs 5282-5 would virtually eliminate the health insurance market in Michigan altogether by naming one single carrier the de facto official health insurance company of the entire state.

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

In the time since that deal was struck, BCBS’s operation has continuously expanded, and it now owns nearly 70% of the state health insurance market (for comparison’s sake, the largest market share owned by any carrier in any other state in the country is currently 38%).

There is little fault to be found in a company accepting benefits in exchange for filling a necessary gap in the health insurance market. In this case, that benefit is the eligibility to claim nonprofit tax status while actually being a for-profit company. However, HBs 5282-5 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 the rest of Michigan’s private carriers.

If these bills pass, all 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.” What this means is that every private insurer in the state of Michigan 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.

What this means is that 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 in the state.

According to HB 5852, the “proportional share” that each carrier is responsible for paying BCBS 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 in the state to “offset” BCBS’s losses, based proportionally on the size of those carriers’ clienteles, will discourage private companies from attempting to expand their respective market shares. In other words, besides stifling innovation and removing incentive for quality improvement, these bills would punish insurance providers for the portion of the market they occupy, and would do a great deal to discourage active recruitment of new policyholders.

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 incentive to expand its market share.

Michigan HBs 5282-5285 meddle in the health care market by regulating 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 to drastically limit consumer choice.

If the goal of Michigan’s government is really to reform health care, and not simply to play favorites in the insurance market, then 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 is research fellow for health care policy at The Heartland Institute, a free-market public policy organization, and is managing editor of Health Care News.


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