The Death of Private Health Insurance

Well, Nancy said they would have to sign it to find out what is in it and now the various newly-minted government administrative agencies are spewing forth their rules and regulations. The bottom line is unless something drastic happens soon you will be witness to the collapse of the private health insurance industry.

New rules have come out dictating how much insurance companies can spend on administrative costs; you know, things like payroll, utilities, and leasing costs.

The healthcare law requires large group health plans to allocate at least 85 cents per premium dollar to medical care, not administrative costs or profit. Plans for individuals or small groups must spend 80 cents per dollar.

If plans do not spend at least that much on care, policy holders get a rebate. HHS said Monday up to 9 million Americans could be eligible for up to $1.4 billion in rebates starting in 2012.

Sounds reasonable and high-minded, doesn't it? Would it surprise you to learn that most charities have administrative costs that are in the 30% range?

This will give you the percentage the charity spends on administration and fund raising. The Better Business Bureau suggests that this percentage should be under 35%. The federal government's charity drive (the Combined Federal Campaign) wants it to be under 25% (though it will allow charities to participate in the CFC with higher expenses as long as they submit a plan for lowering these expenses).

Wait, it gets better. Insurance companies by federal law must have money set aside in the event of a catastrophic event. This money is referred to as a cash reserve. The purpose of this is to ensure that an insurance company has the necessary funds on hand to pay out to all members in the event of some crisis like hurricane Katrina or the recent Gulf Oil spill. Care to guess how much money must be in this reserve?

Generally speaking, life insurance companies must keep reserves in stable investments, for example in cash, or in government bonds (or bond-like investments). This ensures that the reserves are sufficiently protected from loss. While there are usually no specific investment recommendations, insurance companies are generally encouraged to invest in very conservative investments for their cash reserves.

State Requirements

States have individual requirements. For example, in New York, life insurance companies must separate their general account from their sub-account and treat each one differently. The general account is used for fixed investments for life and annuity contracts. The variable sub-account is used for variable life and annuity products.

Mathematical Formula

States will also use a mathematical formula to calculate the reserve requirements of life insurance companies based on the assets that they hold, and a state defined reserve minimum. Any life insurance company that does not meet the state minimum must then sell assets or raise capital to meet the reserve minimum.

The current percentage is 15% of premiums. Now anybody with a 6th grade education can add 85 and 15 and come up with the correct answer. Doesn't leave anything for the company, does it?

I am sure some financial bean counters can set me straight, but from the inside looking out all I can say is I know what type of business model the company I work for is shifting to.

It is no wonder Nancy can gloat. She won, and unless this monstrosity is repealed the rest of us have lost. Of course, with all of the freshly unemployed who formerly used to work for health insurance companies that will be flooding on to the rolls, I'm sure this will work out just great for them.