Deadly Spin

by Wendell Potter

  CIGNA markets a limited-benefit plan to midsized employers with high employee turnover, such as chain restaurants, under the brand Starbridge Select. Not only are the benefits very limited, but the underwriting criteria would also appear to guarantee an impressive profit margin. Under the plan, the average age of an employer’s workers cannot be higher than forty, and no more than 65 percent of employees can be female. (Insurers have long charged women more than men simply because they can have babies—and, consequently, maternity-related medical expenses—and are susceptible to breast cancer.) And get this: To qualify, employers must have a 70 percent or higher annual employee-turnover rate—which means that most employees won’t stay on the job long enough to use their benefits. Employees also get no coverage for care related to any preexisting conditions they might need during their first six months of enrollment. Plus employees have to pay the entire premium—employers are not allowed to provide any subsidies. While a relatively small number of employers meet all these criteria, there are enough to make it very worthwhile to market the Starbridge Select plan.

  There are so many restrictions built into limited-benefit contracts that there is always reduced risk to insurers, who appear only too happy to sell these policies to people who don’t realize they could be ill served. Insurance companies are selling the often inadequate policies, which in some cases amount to no more than fake insurance, to keep from losing these people’s business altogether. An indication of just how lucrative limited-benefit plans are is that Aetna and CIGNA were two of the biggest sponsors of the first Limited Medical & Voluntary Benefits Conference, held in October 2009 in Los Angeles.

  Limited-benefit plans, coupled with high deductibles, represent the ultimate in cost shifting and are among the fastest-growing health insurance products. They’re the future that insurers had in mind as they fought bitterly against reform that could jeopardize their profits. The reform bill will put a cap on the amount that an individual or family will have to pay in out-of-pocket expenses, but it will not be low enough to keep many people from having to file for bankruptcy and losing their home if they get seriously sick or injured.

  KEEP SHAREHOLDERS HAPPY—AND RICH

  By jacking up premiums and shifting more and more cost to their policyholders, insurers are able to manipulate an obscure ratio that is especially important to their shareholders: the medical-loss ratio (MLR). It is telling that insurers consider the amount of money paid out in medical claims to be a loss. (Some companies now call it by other names, such as the “benefit ratio,” which may sound more palatable.) When an insurer lowers its MLR, it is spending less on medical care and more on overhead.

  Most for-profit companies provide quarterly accountings to their investors of how well they have performed financially during the preceding three months. Shareholders of health insurance companies look for changes in two measures: earnings per share, a standard measure of profitability at all publicly traded companies, and the MLR, unique to health insurers and always reported as a percentage. An MLR of 90 percent, for example, means the insurer spent 90 cents of every premium dollar on medical care.

  If an insurer reports that its MLR was lower during the preceding quarter than during the same quarter a year earlier, it means the company spent less on medical care—and therefore had more money left over to cover sales, marketing, underwriting, other administrative expenses, and, most important, profits. Such a report is considered very good news by investors and analysts—who want the MLR to decline every quarter. This, in turn, pressures insurers to be vigilant in finding ways to cut their spending on medical care, and this vigilance has paid off: Since 1993, the average MLR in America has dropped from 95 percent to around 80 percent.

  One of my responsibilities at CIGNA was to handle the communication of these financial updates to the media, so I knew just how important it was for insurers not to disappoint investors with a rising MLR. Even very profitable insurers can see sharp declines in their stock prices after admitting that they have failed to trim medical expenses as much as investors expected. Aetna’s stock price once fell more than 20 percent in a single day after executives disclosed that the company had spent slightly more on medical claims during the most recent quarter than in a previous period. The “sell alarm” was sounded when the company’s first-quarter MLR increased to 79.4 percent from 77.9 percent the previous year.

  I could always tell how busy my day was going to be when CIGNA announced earnings by looking at the MLR numbers. If shareholders were disappointed, the stock price would almost certainly drop, and my phone would ring constantly with financial reporters wanting to know what went wrong.

  HOW INSURANCE COMPANY EXECUTIVES

  BENEFIT FROM LOWER MLRS

  If anyone hates to see the MLR going up more than investors do, it is the insurance company executives and their favored senior managers—who get much of their bonus compensation in the form of stock options. When an increase in the MLR prompts investors to unload shares, the stock price will go down—and along with it, the value of an executive’s stock options. The CEO and other top executives can make or lose millions in one day, depending on which way the MLR goes.

  I never got close to the same pay grade as the CEO, but I nevertheless hated to see the value of my stock options go down. So, I paid close attention to the stock price for personal reasons, just as every other executive in a for-profit health insurance company does—including the medical directors who call the shots on whether to pay for expensive treatments and procedures like transplants. They know that they play a key role in reducing medical expenses, and they also stand to benefit financially if the company meets Wall Street’s expectations.

  Rescinding individual policies, purging small-business customers, denying claims, cheating doctors, pushing new mothers and breast cancer patients out of the hospital prematurely, and shifting costs to consumers are the ways insurance companies cut their medical expenses and keep their MLRs from inching up a decimal point or two.

  While I was at the RAM expedition in Wise County, I talked to people who told me that they had health insurance, but their plans had such limited benefits or high deductibles that they couldn’t afford to get the care they needed. Others told me that while they had coverage for medical care, they had lost their dental and vision benefits because their employers had stopped offering them or made the benefits so expensive that they couldn’t afford them. In the euphemism-laden language that insurance executives, investors, and analysts use, these unfortunate people were the victims of “benefit buy-downs.”

  As I listened to their stories, I realized I was witnessing the consequences of those trends in health insurance coverage. Soon after I left my job at CIGNA in 2008, I called RAM headquarters in Knoxville and asked how many people who showed up for care at the organization’s U.S. expeditions had insurance. It was about 40 percent. Small wonder when you think of all the health care that a plan with a thirty-thousand-dollar deductible won’t pay for.

  In fact, I learned that the demand at RAM’s expeditions has increased dramatically in recent years owing to the number of people now underinsured. As a result, RAM volunteers turn away more people than they treat at many expeditions. For example, at RAM’s first urban expedition, held in August 2009 at the Forum in Los Angeles, care was provided to 6,334 people. Yet despite the thousands of doctors, nurses, dentists, optometrists, and other medical professionals who volunteered their time, more than 10,000 people were turned away.

  In all the years that RAM has been providing free care to thousands of Americans, founder Stan Brock said that except for an occasional matching contribution of less than one hundred dollars, the group has not received any financial support from an insurance company.

  Not even, he said, from the one he used to work for, Mutual of Omaha.

  C H A P T E R V I I

  It’s All About the Money

  WHEN President Bill Clinton was forced to give up on comprehensive health care reform in 1994, the damage
was far more extensive than anyone could have imagined—the administration’s defeat emboldened health insurance companies to totally redefine the mission and methods of an industry that now strands nearly fifty million people without insurance.

  As I outlined in the previous chapter, insurers knew after the Clinton disaster that the coast was clear for them to abandon nonprofit practices, long-standing commitments to public service, and traditional insurance models and turn instead to satisfying Wall Street investors’ desire to make money, by limiting spending on health care.

  It may seem a distant memory, but this outcome appeared unlikely in the euphoric months after Clinton defeated President George H. W. Bush in 1992. The White House and the Democrats thought they could fulfill one of Clinton’s key campaign promises: extending health coverage to millions of uninsured people while protecting the benefits of those already enrolled in public and private plans. Upset about rising health insurance premiums, most Americans said they were ready for change.1

  Clinton also seemed mindful of voters’ desire to overhaul the health care system without expanding government or raising taxes.2 In a speech to Congress in September 1993, he announced his Health Security initiative, and it was greeted with excitement in the press. Mainstream media and political figures spoke of the plan as if it were a fait accompli. The political class chattered about history in the making, the guarantee of health insurance for all—an outcome that would rank with President Lyndon Johnson’s successes in the 1960s.

  Polls showed widespread public anxiety about access to adequate health care. Health costs were rising at the punishing annual rate of 8.5 percent, leaving millions uninsured and saddling doctors and hospitals with a growing burden of uncompensated care.3 On paper, conditions were favorable for passing a comprehensive program.

  In January 1993, when Clinton was inaugurated, I had just been promoted to head of communications at Humana and was reporting to Wayne Smith, the company’s president. Smith reported to Humana’s founder and CEO, David Jones, who had relinquished day-to-day control of the company to focus on the more pressing matter of health care reform.

  That year, Jones assumed the chair of a coalition called the Healthcare Leadership Council, formed in 1990 by fifty CEOs of insurance companies, hospitals, drug companies, and medical-device manufacturers to influence reform. The CEOs didn’t particularly like or trust one another because they made money in often-conflicting ways—there was the “one man’s profit is another man’s loss” thing at play—but the single motivation they shared was their general disdain for government regulation of their businesses. The group had tried to get President George H. W. Bush to support changes the HLC wanted, thinking it would have a better chance during his administration of getting legislation enacted that would actually eliminate existing regulations the member companies didn’t like. But health care was not a priority for Bush.

  So when Clinton was elected, the HLC felt a sudden sense of urgency. And for the first few months, there was a kind of uneasy honeymoon, with insurance company executives and their allies saying positive things about Clinton’s approach to reform—mostly because Clinton had indicated that his legislation would be based on a concept the industry supported: managed competition.

  The term came from an industry-friendly think tank, the Jackson Hole Group, named after the Wyoming ski resort where the group’s members met. One of them was Larry English, who headed CIGNA’s health care operations. English also headed a coalition of big insurers called the Alliance for Managed Care, which advocated for industry-friendly reform. The AMC called managed competition “a private-sector approach to health system reform that uses the marketplace and the power of informed consumer choice to achieve better coverage, while improving quality and cutting cost.” Other advocates of the concept were Alain Enthoven, then a professor of economics at Stanford University, and Dr. Paul Ellwood, a pediatric neurologist who had coined the term “health maintenance organization” during the Nixon years. The big insurers loved managed competition because it was based on the premise that government would have minimal involvement.

  During his campaign, Clinton embraced the managed competition approach, and within weeks of being inaugurated he sent Ira Magaziner (who was helping Hillary Clinton develop legislation that the White House would eventually present to Congress) to Jackson Hole to meet with the group.

  The honeymoon ended when it became clear that the Clintons and Magaziner were considering not only more regulation of the insurance industry but also federally imposed spending caps—or “global budgets,” as Democrats called them—to control rising health care costs. Insurance executives and their allies wasted no time attacking price controls. Humana’s Jones called global budgets a “top-down” approach that would amount to “rationing by chaos … a trap to be avoided at all costs.”

  When the Clintons unveiled their plan several months later, the insurers were already on the attack, both visibly and behind the scenes. CIGNA executives, in a newsletter to employees and customers, lamented that the Clintons’ proposed reform legislation “shed many essential free-market principles upon which managed competition functions.”

  The HLC office in Washington became a war room for the special interests united in their opposition to price controls. Headed by Pamela Bailey, who had been deputy director of Ronald Reagan’s Office of Public Affairs, the HLC was already operating full tilt as a message-creation and -distribution factory when I attended my first meeting there during my final weeks as a Humana employee. (I was already talking to a recruiter about taking my eventual job at CIGNA’s health care operations in Connecticut.)

  Another former Reagan appointee, Claire del Real, headed the HLC’s communications operation. Del Real had been acting assistant secretary for public affairs at the Department of Health and Human Services. Her husband, Juan del Real, had been HHS’s general counsel.

  It became clear to me that the HLC was going to conduct a fearmongering campaign against the Clinton plan that the insurance companies, drug companies, and hospital systems could not conduct themselves without appearing self-serving. They needed a front group to do it for them, and the HLC fit the bill.

  It didn’t help Clinton that the White House plan was intimidating in scope and complexity (or that the initiative was formulated by political and academic “elites” convened behind closed doors by the president’s wife). The heart of the plan was the creation of mandatory purchasing cooperatives in each state that would insert themselves into the insurance relationship of employers and patients. In addition to establishing global budgets to limit total spending on health care, the Clintons wanted to place caps on health insurance premiums and create a federal council to review prices for new drugs. They also wanted drug companies to pay rebates to the Medicare program.

  The concept was without precedent, and the administration had difficulty comparing it to anything that people recognized. Haunted by the Reagan-Bush era that had just ended, Democrats were loath to own up to the reality that Health Security would be an expansion of governmental authority that would benefit the public. The administration instead tried to portray it as a huge, voluntary, nongovernmental program. But this created the opening that the health insurance industry needed to undercut Clinton without appearing to be intransigent or hostile to the interests of American families or, at least initially, even being very visible in attacking the plan.

  As the National Journal noted in a story about the Clinton plan headlined “Lost Cause,” the HLC mounted a multipronged attack including grassroots organizing, lobbying by corporate chief executives, and public relations efforts. At the same time, it ran ads around the country raising the specter of health care rationing and warning of bureaucratic interference with patients’ rights.4 All of this was done under the name of the HLC, not the individual companies that funded it.

  Although it was a propaganda operation, the HLC described itself as “the exclusive forum for the nation’s health care leaders to jointly devel
op policies, plans, and programs to achieve their vision of a 21st century system that makes affordable, high-quality care accessible to all Americans.” It also bragged that “because of the broad scope of the HLC membership, HLC is well known by congressional members and staff as an integral source for comprehensive information on health care issues.”

  In reality, what the HLC wanted was reform that would benefit its member companies far more than “all Americans.” It wanted fewer, rather than more, government regulations. One of its initial goals was to exempt employers of all sizes from state insurance mandates. Had the HLC been successful in getting that accomplished, state insurance commissioners would have virtually no authority to regulate health insurers.

  An effective tool in the health insurers’ kit turned out to be the Goddard Claussen–produced series of TV commercials starring “Harry and Louise,” a fictional middle-aged, middle-class couple. One of the ads showed Harry and Louise sitting at the kitchen table worriedly discussing the benefits and choices they would lose under a “government-controlled” health plan. Funded by the Health Insurance Association of America, the ad campaign truly resonated—a vast majority of Americans enjoyed employer-sponsored health insurance, and they worried about what Health Security might do to their benefits. Opinion polls began showing public support slipping after the messages from Harry and Louise, the mild suburbanites, hit the airwaves.5

  But while the “Harry and Louise” ads got much of the credit for killing the Clinton plan, the HLC’s stealth campaign was arguably more effective where it counted. The HLC aired radio ads blasting Health Security and warning that it could lead to “Washington bureaucrats deciding how much care can be given to you and your family.” The Ridley Group, a Washington-based communications firm, produced the ads, which encouraged listeners to call a toll-free number to tell Congress how much they hated the Clinton plan. When callers dialed the number, they reached Bonner and Associates, a “grassroots” lobbying firm that patched the calls through to members of Congress.