Judi Hilman, executive director of the Utah Health Policy Project (UHPP) recently opined that the Public Employees Health Plan (PEHP) should be made available to all small businesses in Utah as a way to make health insurance more affordable. affordable. Ms. Hilman notes that “PEHP’s claims costs are less than 4%, which compares favorably with private insurers’ average claims cost of 15 percent.” (We assume he meant “administrative” costs rather than “claims” costs.)
UHPP contends that by allowing PEHP to cover small businesses in Utah, the cost of insurance would come down based on PEHP’s lower administrative costs, which in turn would allow more small businesses to offer health insurance to their employees. UHPP also argues that by saving substantial amounts of money, PEHP can help subsidize the Children’s Health Insurance Plan and reduce the uninsured population.
Before we jump on the UHPP bandwagon, let’s look at the hard details. Let’s consider the reasons why PEHP has 4% administration costs compared to 15% costs with private carriers.
First, unlike commercial carriers, PEHP does not have bad debts with customers. That is the advantage of doing business with tax entities. They never close and if they run out of money, they raise taxes. This is not the case in the real world of small business insurance. If a company cannot pay (seeks bankruptcy protection) and by law, the insurance company must continue to pay claims for 1-2 months without charging premium. That would be a shocking new addition to PEHP’s administrative costs.
Next, PEHP has very low billing costs. This is because its clients, state and local agencies, are limited in number and rarely change. Most of its clients are large, such as state employees and water districts. Going from billing and reconciling dozens of invoices to thousands of invoices each month will make a big difference in your overhead.
In addition, PEHP also enjoys low marketing costs. Currently, PEHP’s low number of potential clients minimizes the need for a marketing department. This will not be the case if they want to sell in the small group market. PEHP will either have to hire sales people or set up an 800 number and wait for companies to call them or they will have to pay agents a commission. All of these marketing solutions will cost a substantial amount of money.
Finally, but most importantly, PEHP lacks the necessary staff and infrastructure to properly underwrite small group cases on a large scale. Underwriting is the process of evaluating and assessing risk, and building underwriting capacity is an expensive proposition. Small employers are an extremely price-sensitive crowd. Health insurance is typically your second or third largest expense, behind wages and sometimes workers’ compensation costs. A small employer will switch plans in a heartbeat if he can find a better value. Price too low and lose money. Price too high and your competitors will take your most profitable groups. If PEHP is going to develop the department necessary to underwrite small employers on a large scale, it will incur substantial additional administrative costs.
Last year, when UHPP first proposed that PEHP enter the small employer market to compete with commercial insurers, the most serious design flaw involved the development of premium rating structures. PEHP is used to serving clients that have composite rates (ie, one rate for all singles and one rate for all families) and community rates (all groups pay about the same). Small commercial group rates are segmented by age (older employees pay more than younger ones) and group risk (the law allows a 30% discount for the healthiest groups and no more than a 30% surcharge on the most expensive groups). Providers list this way to provide affordable coverage to younger, healthier people. This helps pool risk and moderate premiums for all of us.
If PEHP tried to implement its current subscription model versus the commercial subscription model, it would attract only the sickest and oldest groups. This is not simply conjecture, but a widely accepted “field subscription” fact. If commercial carrier prices are targeted at the young and healthy and PEHP uses “one size fits all” pricing, it will be an unmitigated disaster of the highest order for Utah taxpayers.
Because of this, we believe that the UHPP proposal will result in the exact opposite of what Ms. Hilman intends will happen; she said that “PEHP will have the advantage of including a younger and healthier population in its risk group, which will reduce costs for all beneficiaries.” To assume that, you must believe that a younger population will join PEHP, whose current risk groups include a slightly older population than is found with small businesses. This argument underestimates the power of pricing and its effect on the kinds of people who actually sign up.
On the other hand, if the plan is for PEHP to mimic the current commercial pricing model, then what are we creating? The answer is; a government entity that competes with private enterprise, with taxpayers ready to rescue any error. This would not be consistent with free market ideals.
For PEHP to enter the small group market, with no experience, would be extremely risky for Utah taxpayers. Under the law, the state would have to compensate for any losses in its business block. On the other hand, if PEHP were to make a “profit”, it could not be shared with other business blocks. The state employee group should be kept separate from the government trust and the Children’s Health Insurance Plan, as well as from the proposed new group. Despite Mrs. Hilman’s optimism, we were unable to subsidize CHIP with any savings from other PEHP funds.
The bottom line is this: PEHP does not have an internal cost advantage over current players in the small group market. Their claims expenses (what they pay to doctors, hospitals, and pharmacies) are about the same as, and in many cases more than, those of commercial companies. They couldn’t serve the small private group market for the same 4% overhead with which they serve the government. They would be entering a treacherous market in which they have no experience. The taxpayer would be at risk if things go wrong. Keep in mind that health insurance losses can be huge.
As a general philosophy, the Utah Association of Health Insurers believes in a competitive marketplace. We’re working hard to provide Utah employers with more choices and better information in the marketplace. We are in favor of expanding options in the private healthcare market. We support government and charitable subsidy of those who need real help.
If the legislature believes PEHP is worth asking to expand its mission, we would strongly recommend a serious review of underwriting and marketing plans before diving into uncharted waters. If UHPP’s forecast results are likely, we would welcome PEHP’s addition to the small group market, but taxpayers should not risk PEHP’s losses as a competitor in the private market.