Teaching Moment of the Week #1: United Healthcare’s Profit Transfer

According to Felice J. Freyer in today’s Projo, just about everyone in Rhode Island not on the United Healthcare payroll, including most of the state’s healthcare providers, Attorney General Patrick Lynch, and Governor Donald Carcieri, opposes United’s attempt to transfer $36.8 million from RI to their parent company in Minnesota…

United is seeking state permission to take out $36.8 million in “extraordinary dividends” — profits beyond the “ordinary” profits already taken. Although such permission has long been required, this year United’s request is being considered by the Office of the Health Insurance Commissioner and the Health Insurance Advisory Council, both created by a 2004 law….
An extraordinary dividend is defined as profits that exceed either 10 percent of the insurer’s surplus or the net income from the insurer’s operations in the previous year. Long-standing law requires insurers to win state permission for such dividends, but never before has the state sought public input on such a request.
Consider this story carefully, because it is a perfect illustration of how the healthcare mess faced by our country is NOT the result of impersonal and unstoppable macroeconomic forces, but of a strange system of government regulation maintained in this country out of inertia and not because it serves any public good.
Here’s what I mean. Current insurance laws, obviously, allow health insurers to conduct their business across state lines. Yet for individuals, similar activity is forbidden; individuals are restricted to their home states when spending money on health insurance. The restriction is not the result of any iron laws economic of necessity, but of political decisions made by the government.
If corporations have been given the freedom to pick and choose which states provide the best environment for the use of their resources, then why shouldn’t regular people be given the same freedom and be allowed to “transfer” a few thousand dollars to another state in order to buy a health insurance policy, if they can find a company in another state that better meets their needs? What legitimate purpose does the existing regulatory asymmetry between corporations and individuals serve?

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17 years ago

I’m glad you picked this up Andrew. I find this hearing (and the associated coverage) astounding.
The thought that a private sector company must beg and bribe a state employee to distribute profit to its owner should be fundamentally appalling. Yet virtually no outlet has considered this. While the initial intent of the regulatory mechanism might have been altruistic, the impact has the exact opposite effect.
A significant problem with the health insurance indsutry in the state is the lack of competition. The regulatory actions requiring certain types of coverage and cash management practices do nothing more than build inefficiency into the system and raise the barrier for competitive entry into the market. In effect, RI has, more than most states, instructed the carriers how to run their business. Continuing down this path will ultimately force the only for profit carrier out, leaving us with a single payer system. For some, this may be desirable, but in country after country, this has proven deficient. The most successful of national systems exists in Switzerland, where health care funding originates from at least five unique sources (both private and public) and is completely decentralized down to the town and county level.
The concept that a private entity can exist and operate only at the whim of a state regulatory agency (as opposed to normal market forces) is utterly revolting. Why stop at health care? Why not set up an Office of the Food Supply Commissioner, or the Ministry of Heating Oil Supply? Are we that far away from this?

17 years ago

Roland is 100% correct. Healthcare is the big black hole in the Rhode Island state budget.
I’ll go further than Roland. The lack of competition in RI is not a “significant” problem. It may be Rhode Island’s single most important problem.
Instead of encouraging competition, RI has chosen to encourage regulation by creating yet another government agency dedicated to nothing but regulating the only two health insurers remaining in the state.
As Roland suggests, this is fine if you are trying to enact a government run single payer system. But if we’re trying to reduce costs while delivering quality healthcare, things are moving in the wrong direction.
I’d like to blame the General Assembly for the expansion of regulation but in this case it was Governor Carcieri who expanded the bureaucracy.
As for buying insurance in other states, the premise is right. The problem is with the application.
Insurance carriers have the freedom to pick and choose the state where they do business. But once they choose to operate in a state, they immediately fall under that state’s requlatory scheme. So long as insurers must comply with state-imposed mandates and pay the costs of regulation imposed by each state, they must charge residents of each state differently. Is this efficient? No.
But if you allow Rhode Islanders to buy insurance in Connecticut, the residents of Connecticut end up subsidizing mandates required by RI law and the costs for Connecticut residents go up. That’s not fair for the people in Connecticut.
This continues to be the case until a federal law is passed negating state-imposed mandates.

17 years ago

First, the reason health-care companies don’t want to do business here is because the population is too small. They can’t exclude enough people for pre-existing conditions and still have enough customers to make their profits.
It has little or nothing to do with “regulation.” NJ or Calif have three times the regulation RI does, but companies work there because they can cherry-pick whom they cover and still have enough customers.
But even more boggling than your non-awareness of how health-care insurance works is how you guys all missed one very obvious point:
$36M in excess profits. This is why we have the most expensive health care in the world, with some of the worst results in the world.
Our health care dollars are paying for huge bonuses for upper-level executives, while these guys fight tooth and nail to deny every claim they possibly can.
How, pray tell, is that an efficient allocation of resources?
The bureaucracy exists. Rationing already exists. Faceless bureaucrats deciding which care you can receive exists.
How is this a good system?

Justin Katz
17 years ago

I was tempted to respond to you, Klaus, but you’ve made it clear from past threads that your M.O. is to make your declarations, come back in order to declare that nobody has answered you (when they clearly have), and then disappear when others insist that you address their responses.
So what’s the point of attempting to engage you?

Justin Katz
17 years ago

I will say this, though: Delaware has about three-quarters the population of Rhode Island, but many times the number of health insurers. (In fact, the top 10 insurers control only 80% of the market.)
So it isn’t population, Klaus, and whether or not it’s “regulation,” something in Rhode Island’s system leads to monopoly or near-monopoly forces, which you of all people ought to oppose.
But what’s boggling is the arrogance with which you trumpet your lunacy.

17 years ago

OK. So instead of calling me names, as used to be the MO of other commenters, now you’re pointing out my alleged MO. It’s still beside the point, and whether or not I have an MO doesn’t make me any less right.
I come back to declare that no one has answered me, mainly because no one has.
Like right now.

17 years ago

Justin is right.
klaus, I’m not sure how you can say that no one has answered you. Justin provided factual evidence contradicting your statement on regulation and you simply just chose to ignore it.
Virtually EVERY state with a smaller population than RI has more competition and if you check, they seem to offer cheaper rates–at least where you can get online quotes.
I will grant you that population plays a role. An insurance company may be willing to endure greater degree of regulation in states with higher populations. Just as auto manufacturers are willing to develop special emissions equipment to sell cars in a market the size of California, insurers are willing to meet additional requirements in larger states.
But what do you think would happen if RI began to heavily regulate auto emmissions and required a specific emissions system for cars sold in RI? Do you think General Motors would stay in the RI market or would leave? They’d leave in a heartbeat.
The same is true with health insurance. If RI regulated insurance like Delaware, Wyoming, South Dakota and every other state of similar size, you’d see more competition and lower rates.

17 years ago

Without regulation, insurers compete on their ability to avoid insuring the sick. Insurance is about spreading risk, not excluding it.
Competition is good in the health insurance marketplace – just look at the Connector in MA – but competition should be on products and service. Not on an insurers ability to mitigate risk.
And I wonder if anyone saw any cause for concern when the CEO of United was entitled to $1.8 billion in stock options. Don’t get me wrong, medical costs are the real issue behind health insurance costs, but do we really want unbridled competition in this sector?
So, to answer the original question, let insurers come from out of state, play by the rules and offer more choice. But allow consumers to purchase anywhere? Into what risk pools would an individual purchase insurance? Without adequate federal protection, where would consumers go with all the complaints?

17 years ago

bradfric, I’m not suggesting the total elimination of state regulation.
You’re absolutely correct that some regulation is needed to ensure the spreading–and not the elimination–of risk.
You talk about increasing competition on products, but in order for there to be competition on products and services, there need to mulitiple carriers offering multiple products.
In RI there are two insurers and I don’t recall any recent effort to change this.
The requirements for insurance companies to do business in RI are onerous. RI mandates that insurers pay for health benefits to people that are not offered in other states.
You talk about having insurance companies coming in from out-of-state so long as the “play by the rules”. But what if the rules are so complicated that insurance companies won’t come into RI? Then you need to look real hard at the “rules” and compare them to the “rules” in other states.
Other states, both smaller and larger than RI, have been able to increase competition and reduce rates. Consumer benefit from lower premiums when this happens.
This doesn’t mean those state don’t regulate. Part of regulation is ensuring that a competitive marketplace exists. It appears that RI doesn’t want to regulate insurers, it wants to replace the market economy.

brad fric
brad fric
17 years ago

“In RI there are two insurers and I don’t recall any recent effort to change this.” I hear the need for competition, but caution that you should be careful what you wish for. I hear folks who want to bring in insurers that have terrible conumer complaint records; who chafe at guaranteed issue requirements – is that the type of insurer we want, insurance that is good until you get sick? As far as “onerous” requirements we should look carefully at what these are. If we meet on common ground to say that some regulation is good, we need to pick apart the good from the bad rather than allocating RI as being too onerous. I don’t see benefit mandates as a concern for insurers – they are happy to just pass costs on to subscribers. I think the rubber hits the road when they look at the difficulties contracting with providers in RI. We have 12 hospitals in a 40 x 20 area? What would it be like for an insurer to come in an try to conract with providers in such a small area with so many providers? I think they are concerned with market share. Like Deleware, we have many insurers in RI. But only a few have major market share: Blue Cross RI, United and Blue Cross of MA. There are many others, but they don’t add up to significant market shares – they aren’t actively marketing here. So, I agree with you. In this type of discussion the actual requirements need to be parsed out and judged. I just wonder how many we would want to get rid of when we take a close look. Further, when you say that other states have been able to increase competition and reduce rates, where are you getting… Read more »

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