Friday, June 11, 2010

Mass. Insurance Official: Premium Caps "Will Be A Train Wreck"

Cross-posted from Critical Condition on National Review Online.

Earlier this week, the Associated Press obtained explosive internal e-mails from Robert Dynan, Deputy Commission for Financial Analysis at the Massachusetts Division of Insurance. The e-mails were drafted in reaction to the April 1 news—which Dynan only learned about by reading the papers—that state insurance commissioner Joseph Murphy was imposing price controls on Massachusetts health insurers. Drynan writes that Murphy's action "has the potential for catastrophic consequences including irreversible damage to our non-profit health care system."

In an e-mail sent to colleagues on April 6, Dynan expresses his fear that insurers will go bankrupt as a result of Murphy's decision:
The rates, by design, have no actuarial support. This action was taken against my objections and without including me in the conversation, but this does not relieve us of the burden of monitoring solvency. Indeed, our job of monitoring solvency just got exponentially more difficult and exponentially more important. There most likely will be a train wreck (or perhaps several train wrecks).
On April 30, Dynan sent a detailed assessment to Murphy, outlining 13 key concerns, which I summarize here:
  1. If an HMO goes insolvent, the non-profit hospitals will be forced to eat millions of dollars in un-reimbursed claims, "potentially jeopardizing their financial condition."
  2. Most HMOs "showed less than stellar results" in 2009, and lack the "excess capital" to sustain further losses. "I can guarantee you that there are very few regulators in the United States who would disagree with me."
  3. The Massachusetts insurance market is mostly non-profit; non-profit plans have narrower profit margins and are therefore more likely to fail. "If they were to fail, the void may be filled by for-profit insurers."
  4. Some HMOs in the state, for whatever reason, undercharged for health insurance in 2009; these insurers will be especially hurt by a second year of losses. "Over time, consumers and employers will take advantage of this price inefficiency and will...swamp them with further losses."
  5. The rate caps will not affect any other practices in the health care system. "Hospitals do not seem inclined to tear up valid contracts with the HMO's in order to give them relief."
  6. There is a "serious potential for brokers and insureds to game the system...A rational person would cancel their old policy and take out a new policy at the artificially low could be very damaging to the 2010 business plans."
  7. If the HMOs succeed in overturning the price controls in court, "employees run the risk of a retroactive bill from their employer for health insurance back to April 1."
  8. Three insurers are already under formal state oversight due to insolvency risks, and more such situations are likely due to the price caps. "This has the potential for a 'run on the bank' for the [insurers in question]."
  9. All insurance companies, including HMOs, "are still recovering from a very difficult investment climate," leading to further concerns about their solvency.
  10. "The HMO's cannot be legally required to sustain these losses in the merged market forever." HMOs will exit the market, leaving Massachusetts residents without access to insurance.
  11. Some hospitals will be hit disproportionately if an insurer goes bankrupt, "depending on the level of business with the insolvent HMO. Also, the Commonwealth's General Fund is in no condition to assist in a bailout."
  12. A Massachusetts resident who incurs health expenses out-of-state, if his insurer goes bankrupt, will be personally liable for those expenses. The out-of-state hospital "will demand payment from the Massachusetts resident, who may only recover cents on the dollar [from his bankrupt insurer]."
  13. An epidemic of insurer bankruptcies could lead to a loss of Massachusetts' accreditation with the National Association of Insurance Commissioners, which "would not be helpful to the many life and property and casualty companies that call Massachusetts home."
Murphy, Dynan's boss, did not take too kindly to these objections. "Negative and conclusory statements about the effect of the Divison's actions on insurers and the market are unprofessional and counterproductive." Dynan half-heartedly apologized in a written letter dated June 4, saying "I should have been more careful in the selection of words I used to express my private opinion."

On June 9, both the Boston Globe and the Boston Herald ran stories about the dust-up. Dynan could not be reached for comment and appears to have been muzzled. "Murphy said Dynan was either on vacation or on a state-mandated furlough," reported the Herald.

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