Category Archives: Insurance

Virginia Obamacare Update

Anthem Healthkeepers, with 190,000 enrollees in Virginia, is filing for an average 15.8% hike in its 2017 Affordable Care Act premiums.

Innovation Health, with 61,000 enrollees, is seeking a 9.4% increase.

United Health, with 6,900 members, wants a 17.9% increase.

The overall weighted average increase request in Virginia, according to Investors Business Daily, is 17.9%.

I thought the cost curve for health care was supposed to bend downward, not upward.

–JAB

What Went Wrong with Long-Term Care Insurance?

Long-term care insurance information, form, Folders and stethoscope.

Long-term care insurance information, form, Folders and stethoscope.

by James A. Bacon

I am one of those schlubs who takes out insurance policies to protect against bad things happening. One eventuality I worry about is the need for long-term care. The longer you live and the more chronic conditions you develop, the greater the odds – about 50/50 for a 60-year-old today — that you’ll wind up bed-ridden at home or in a nursing facility. Feeling strong and fit at 53 when I took out a policy ten years ago, I was betting that I’d live longer than the average Joe and be more likely than not at some point in my life to benefit from having insurance. Signing up at a relatively young age would lock me in at an affordable rate. Or so I thought.

About two months ago I received a letter from my insurer, New York Life Insurance Company, informing me that my long-term care policy, which had remained stable ten years, was scheduled to increase 20%, costing me, in rough numbers, an extra $300 per year after a three-year phase-in. Three hundred bucks won’t bust the Bacon bank, but I was miffed — it was the principle of the thing. I had not been led to understand that my insurance rate would go up. And I bet there were other policy holders for whom $300 per year would cause real hardship.

Well, a look at my insurance policy indicated that, sure enough, New York Life was entitled to raise my fees. My bad. I should have read the fine print. Even so, any rate increase had to be approved by Virginia’s Bureau of Insurance, and I wondered — as I suppose an estimated 80,000 other long-term care insurance policy holders are wondering — what is the justification for jacking up our rates?

The letter referred vaguely to “longer life expectancies and an increased need for long-term care benefits.” Did the insurer mean to tell me that the people who are the world’s experts in demographic trends failed to anticipate that life expectancies would increase? And they miscalculated what percentage of the population would need long-term care? Really? That sounded lame to me, and I wondered if there was more to the story. In particular, I wondered if years of Quantitative Easing and low interest rates had depressed New York Life returns on insurance premiums below what the company had anticipated when it formulated the rates ten years ago. Could my higher insurance fee represent another $300 a year in tribute to Uncle Sam, just one of many ways in which low interest rates are invisibly transferring wealth from American citizens to its grotesquely swollen and indebted government?

One of the advantages of being a blogger is the ability to pick up the phone and call anyone with a decent chance that someone actually will answer. When I called New York Life to find out what the heck was going on, company spokesperson Terri Wolcott put me in touch with Aaron Ball, vice president and head of the Long Term Care business, who, as coincidence had it, lives in good ol’ Richmond, Va.

Low interest rates were a factor in the rate increases, Ball says, but not a decisive one. He candidly admits that the industry screwed up key underwriting assumptions.

We Underpriced the Policy. Sorry about That.

“When you apply for coverage, it can be 20, 30 or 40 years before you make a claim,” says Ball. “We set up reserves to pay claims 20 to 40 years in the future. We’re earning interest on those investments, and we assume what those interest rates will be.” Ten years ago, carriers were assuming earnings in the 5% to 6% range (conservative assumptions that were lower than what most pension funds were assuming at the time). “Today, they’re assuming in the 3% to 4% range. The low interest rates have put pressure on the portfolios.”

Higher returns on the company’s investment portfolios might have offset the negative experience, tempering the need for a rate increase, Ball says, but the bulk of the blame goes to actuarial miscalculations regarding other key variables.

Morbidity. The first the key variables is morbidity — how sick will policy holders get, and what will be the appropriate venue for treating them? When projecting 40 years into the future, getting this assumption correct can be harder than it looks. The things that put people into long-term care change over time. Ten years ago, frailty issues predominated — hip fractures, cardiovascular problems, and the like. Today, the driver is cognitive claims — Alzheimers and other forms of dementia. Also hard to predict is the setting in which people will be given long-term care. “Back in 1988, there was no such thing as an assisted living facility,” says Ball. As it turned out, New York Life’s morbidity assumptions were close to the mark. Other insurers got these assumptions wrong, and they’ve had to make upward adjustments in their premiums.

Voluntary lapse. When people buy policies, some continue to own the policy and eventually collect benefits, while others let their policies lapse voluntarily. The “lapsers” pay premiums that don’t get refunded, effectively underwriting the cost of the policy for others. When long-term insurance was getting off the ground about 20 years ago, there was no basis for determining how many policy holders would let their policies lapse, so carriers made the best guess they could. In most cases, those guesses were wrong.

New York Life assumed in pricing its premiums that policies would lapse at an annual rate of 2% after four years, but actual experience showed that the rate trended downward to about 0.5%. More people hung onto their long-term care insurance policies than the company expected.

Mortality. The rate at which policies lapse due to the policy holder’s death is another major variable. “We now expect twice as many people to be alive at age 90 compared to what was assumed when the product was priced,” says Wolcott. “Longer life expectancies generally result in additional claims because more people utilize long-term care services at older ages.”

The explanation made sense. I didn’t like it, but it made sense.  New York Life blew two of its key assumptions (though not as badly as many other insurers did) and low interest rates depressed investment turns. Accordingly, to maintain the actuarial viability of the policies, the company had to jack up rates.

But the explanation raises a new set of questions. If policy holders sign a contract with an insurance carrier to provide a certain set of benefits for a certain price, why isn’t the carrier obligated to eat the difference when they make bad decisions? I’ve never heard of carriers filing to reduce premiums if their assumptions turn out to be too optimistic. Maybe it happens, but I haven’t heard of it. No, they keep the profit. Given the way the incentives are structured, aren’t insurance companies encouraged to low ball premiums, knowing that they can come back later and jack up rates? Continue reading

The Rise of the New Artisan Class

Botanical etching made by oak and mimosa leaves

Botanical etching made from oak and mimosa leaves. Photo credit: Tracery 157

Cathy Vaughn took the big leap a couple of years ago of going into business for herself as an artisan working in copper. While fabricating trellises, tryptics, candelabras and chinoiserie, she developed a new technique, which, as far as she knows, is a first — creating images upon copper plate from the chemicals found in leaves. The result has been a series of extraordinary images, as seen above, that look as if they could have been lifted from a modernist New York art gallery.

She arranges leaves upon the copper, wraps them in cellophane and sets them aside for about two weeks. Leaves from different species of trees have different chemical signatures, which interact with the copper to leave a wide array of colors. Art meets science as Vaughn arranges different species of leaves in varying patterns to create novel effects.

cathy_vaughn

Vaughn in her studio. Photo credit: Tracery 157

It’s too early to tell if the “botanical etchings” will become a big moneymaker, Vaughn told me at a recent arts and crafts exhibit in Richmond, but early signs are encouraging. I’m no art critic, and I’m not even a fan of modernist art, but I found many of her creations visually arresting, even beautiful. Given the fascinating narrative behind her creations, I would venture to predict that she will enjoy considerable success — not just in Richmond but far beyond.

Richmond is hardly unique in having a vibrant arts community — Charlottesville and Staunton craftsmen were well represented at the particular event I attended — but the arts and crafts movement is growing. Many Richmond-area artists have a connection with Virginia Commonwealth University’s school of the arts, while others with a graphic arts background come from the advertising/ marketing sector. Budding artists are supported by a soft infrastructure: numerous art galleries, an artists’ guild, the Art Works and Plant Zero artists’ studios and the Richmond Visual Arts Center.

It’s easy to be dismissive of arts & crafts as an engine of economic growth — the term “artsy fartsy” suggests eccentricity and dilettantism — but a fundamental shift in consumer preference to “mass customization” suggests that artists, craftsmen and the so-called “makers” are a rising economic force. Not only will the revival of artisan create employment opportunities in a slow-growth economy, there is an inherently egalitarian aspect to the movement. Artists, craftsmen and makers are self-employed. They could become the new yeoman class of the post-industrial economy.

An analogy that I draw, and other observers readily accept, is with the beer industry. A couple of decades ago, three or four monster brewing companies dominated the U.S. beer market. The main competition came from major foreign brands. Then the micro-brewery phenomenon took off as consumers revolted against the sameness of the national brands and embraced the individuality of home brews, with their novel tastes, feisty branding and personal connection with consumers. The Brewers Association counted 1,871 microbreweries, 1,412 brewpubs and 135 regional craft breweries in 2014. That year saw the opening of 615 new breweries and only 46 closings. Craft brewers provided 115,469 jobs, an increase of almost 5,000 from the previous year.

The efflorescence of the beer industry is matched, in Virginia at least, with a veritable explosion in the number of wineries, not to mention artisinal producers of meats, cheeses, breads, seafoods, pastas, dressings, sauces, and confections. The Virginia’s Finest website lists 43 categories of made-in-Virginia products from herbs and honeys to soups and nuts.

The revolt against mass standardization is nothing new. The so-called “arts and crafts” movement originated in the late 1800s in reaction to machine production, and it never disappeared. But arts and crafts appear to be undergoing a resurgence, fueled by the growing hunger for unique, hand-crafted products and the rise of the Internet as an inexpensive distribution and marketing channel. In the future, inexpensive 3-D manufacturing will open up new fields for creative expression and the invention of entirely new products.

The rise of the arts-and-crafts economy is something devoutly to be wished for. Politicians will be tempted to jump on the bandwagon and “help” by doling out subsidies of some kind or another. Arguably, the fastest way to kill the movement is to make it dependent upon government largess. However, public policy probably can contribute to the movement by enabling artists, craftsmen, artisans and makers to form co-ops and mutual assistance societies to provide for common needs such as health care, disability insurance and the like. Tax policy should cease discriminating against the self-employed by extending the same tax breaks for health care provided to corporations, labor unions and other large entities.

For the most part, though, we just need to leave the artisans alone. They are creative people, and we should trust them to figure out what’s best for themselves.

Surfing the Data Tsunami

You can either ride the wave...

You can either ride the wave…

by James A. Bacon

Data Crush is coming, and it gives us a once-in-a-lifetime opportunity to transform aging and decrepit institutions, designed for the mid-20th century. As futurist Chris Surdak argues in the previous post, the “digital trinity” — mobile computing, social media and advanced analytics — is sweeping all before it. Digital-driven innovation is outpacing the ability of our ossified structure of government, laws and regulation to keep up. Insofar as antiquated institutions are failing us, this is a good thing. But Surdak, an evangelist for the digital future, warns that every silver cloud has a dark lining.

Either you're riding the wave, or you're crushed by it.

…or be crushed by it.

Insurance companies have the capacity to collect, store and analyze unprecedented volumes of data. At present, they utilize their own data to advance limited aims such as negotiating rates with hospitals and configuring networks of low-cost providers. Soon they will supplement internal data with social media and other sources to gain insights into sociological and behaviorial  dimensions of healthcare, and then with masses of data from fitness trackers such as FitBit and Jawbone that record pulse, blood pressure, and blood chemistry metrics like glucose levels. While these technologies raise privacy concerns aplenty, consumers seem more than willing to barter away their rights in exchange for the benefits provided by these technologies. By the time politicians and lobbyists begin to grapple with these issues, Surdak argues, entire industries will be disintermediated and transformed.

Virginia can either ride the wave or let it wash over us. We can either anticipate the data crush and seek to guide it in socially positive ways, or we can accept whatever comes.

Right now Virginia’s political system is locked in a 20th-century, zero-sum debate over how to allocate the costs of health care — should Virginia expand Medicaid? Should we scrap the Certificate of Public Need regulatory process for hospitals? Almost no one is thinking about how to make the system work more efficiently to drive down costs and improve incomes in a way that would benefit everyone. (When I say “almost no one,” I have to acknowledge exceptions like Del. John O’Bannon, R-Henrico, a prime mover behind Virginia’s all-payer database, and former Virginia Secretary of Technology Aneesh Chopra, co-founder of Hunch Analytics, which applies Big Data to the educational and health care sectors.)

To my knowledge, no other state is taking the lead in thinking about the public policy implications of the Data Crush. No other state is trying to visualize the future, much less to grapple with the legal and ethical issues created by the tidal wave, much less how to ride the wave and re-shape first the insurance industry and then, leveraging the power of insurance, the health delivery system. Remember, despite the intrusion of the Affordable Care Act into the health insurance marketplace, private health insurance is still regulated by the states. Virginia still controls its destiny for private insurance.

Yes, the health care system is mired in the quicksand of subsidies, cross-subsidies and over-regulation that makes it hopelessly wasteful and unresponsive. But the Data Crush is inexorable. The potential exists to create powerful win-win-win social outcomes. Let us take advantage of this opportunity if we can.

How the Digital Trinity is Transforming Health Insurance

surdakby Christopher Surdak, JD

In his recent post, “The Politics of Big Data,” my friend and colleague Jim Bacon asked some pertinent questions regarding how our government, and our society at-large, can put data to use for the common good. In a fairly short discourse Jim hit on a range of explosive topics, from privacy, data sovereignty, property rights, Universal Service, government regulation and legislation, universal health care, Obamacare and Medicare/Medicaid, predictive analytics and preventative medicine, and more. Each of these could fill a book in their own right; I should know, as I’m working on those books right now!

Of all of the issues raised by this discussion, the one that immediately came to mind was that of the use of our individual data to support the effective delivery of healthcare. As I have written and spoken of extensively in the recent past, healthcare stands to be the industry most disrupted by the application of Big Data in the coming decade. (Indeed, I’m keynoting a discussion on exactly this disruption at the American Health Information Management Association information governance conference this week.) In no other industry is so much valuable information put to so little use, for so little gain, at so much cost, thereby leading to suffering, the waste of human life, and the ineffective expenditure of so much treasure.

Why is this so? Why is our health system so sickly when compared to that of other countries? Why does healthcare seem to extract so little value from information, when compared to other industries? Is it from too much government regulation, or too little? Is it from the influence of commercial special interests such as the payers, or the professional special interests of practitioners, such as the AMA? Is it because our technologies cannot meet our needs, or is it because we are not prepared to accept the implications of those technologies? I would argue that all of these factors are at play in this discussion; that all of the ranting that accompanied Jim’s post were all equally spot on, and all completely off the mark.

All of these positions are equally accurate, and equally pointless in the real world. Whether healthcare providers put patient data to work for the common good or their own good is irrelevant; it will be put to work in any event, with significant unintended and extremely disruptive consequences. Whether special interests or patients will benefit from the use of data is not open to question. The answer is: both will. Whether or not our privacy will be sacrificed or not is also a pointless question; of course it will. And finally, whether or not we will willingly give up our privacy in order to gain these benefits from our data is a further pointless question; we already have.

Disruption in Insurance: The Canary in the Coal Mine for Healthcare

The best example I can give of what WILL happen in healthcare over the next decade, equally in Virginia as with the other 49 states, can be seen in what is rapidly taking over the insurance industry across the country. Insurance is an old-school, highly-regulated, data- and money-intensive industry. Insurers have both access to massive amounts of very private information on all of us, and intense motivation for putting that data to use. The potential for profit, and hence abuse, is exceedingly large.

But, the motivation for using our data isn’t necessarily nefarious. Insurers look at each of us to determine our risk profiles so that they can both make money (that is, remain solvent so their checks to benefactors or debt holders don’t bounce) and provide coverage to all segments of the population at affordable prices (or at least the perception of affordability).

The regulatory framework that governs the insurance industry is well over a century old. It is state-based, state-enforced, and is designed to provide universal coverage to people from all walks of life. If you drive a twenty-year-old pickup truck, you probably pay proportionately less than someone who drives a new European sports sedan. If you’re a 60-year-old who smokes a pack a day and loves Miller Time, you’re likely to pay more for your life insurance than a 24-year-old jogger and yoga nut. Our regulatory framework has been designed to try to make insurance available and fair for all, and to ensure that insurers remain profitable, but not excessively-so.

Despite all of this, insurance is going through a fundamental, massively disruptive, and permanent transformation right before our eyes. This transformation is being driven by what I call the Digital Trinity of mobility, social media and advanced analytics. These three technologies trends are completely transforming how we live, work, play, and interact with our world, and they are causing enormous unintended consequences across our entire society. These changes are comprehensive, and old-school, hard-line, heavily regulated industries such as insurance are the MOST likely to be disrupted, rather than the least likely.

To see these disruptions consider this. Car insurers have deployed smartphone apps that allow them to track the driving behaviors of their customers in real-time, turn by turn. These apps keep track of how fast you accelerate, how hard you brake, how fast you drive down the residential streets of your neighborhood, and whether or not you text or talk while driving. These apps create huge amounts of extremely sensitive data, they are massively invasive of your privacy, they provide an enormous source of information for discriminating against you in setting your insurance rates; and they are massively popular.

If I told you three years ago that car insurance companies soon would be tracking all of this information on the drivers that they cover, you might think I was crazy. If I then told you that customers would sign up for such apps by the tens or hundreds of thousands, in order to gain a discount in their rates, you’d probably think I was certifiable. Americans are voluntarily giving up extremely intimate details on their behavior, surrendering their Constitutionally inalienable rights, and opening themselves up to all manner of government and commercial scrutiny in order to save 15% on their car insurance? Yes they are, in droves. You may think this sounds crazy, and you’d be right.

Yet, this is exactly what is going on right now. Innovators such as Progressive Insurance started these behavior-tracking apps, providing discounts to drivers who demonstrate good behaviors. These apps have been so successful, that now all insurers are scrambling to deploy similar apps with similar capabilities, while they still have time. Continue reading

The Politics of Big Data

big_databy James A. Bacon

Yesterday I blogged about the All-Payer Claims Database, which has the potential to provide unprecedented insight into medical outcomes and charges in Virginia. By consolidating medical claims data for hundreds of millions of health claims, the database will enable employers, insurers and hospitals to conduct analytical studies that were impossible previously.

There is a lot of maneuvering behind the scenes regarding the database, as I have learned from an informed source whom I will not quote because we were chatting informally and he might have thought we were off the record.

Participation in the database is voluntary, so it took years of coaxing and wrangling to persuade Virginia’s private insurance companies to relinquish their data. Anthem Blue Cross-Blue Shield, the state’s largest insurer, is the most ambivalent about the project. With more than one million Virginia customers, its database is big enough that it can go solo with the kind of analysis people envision for the statewide database. That ability confers it a significant competitive advantage over its smaller rivals. If Anthem dropped out, the value of the statewide database would diminish significantly. Accordingly, the General Assembly may consider legislation in 2016 to make participation mandatory.

That raises an interesting philosophical question: Is it justifiable for state government to mandate the sharing of outcomes data? In an era in which data confers tremendous marketplace power, any such mandate would penalize Anthem. The insurer could advance a plausible argument that a requisitioning of its data would amount to an uncompensated seizure of valuable property — property far more valuable than its office buildings, computer networks and other tangible assets.

But Anthem’s right to protect its property from government seizure conflicts with the public good that can be achieved through the sharing of data. The bigger and more comprehensive the database, the greater the benefits to public health that can be achieved by mining it.

Politicians comfortable with the exercise of state power will have no moral or philosophical compunction about extracting the data from Anthem against its wishes. But what of conservatives and libertarians who respect private property and distrust the arbitrary exercise of government power? Should we insist that any sharing be voluntary? Or should we compel Anthem to share?

I think there is a case to be made for mandated data sharing on conservative/ libertarian grounds that it can drive market-based reforms of Virginia’s health system. Health care in America is not a market-based system, it is a corporatist system negotiated between the federal government, hospitals, insurers, physicians and pharmaceutical companies. Prices are opaque to the patient-consumer. Accountability is so diffused throughout the system as to be meaningless. Making price and quality data available to the public, formatted in such a way that the public can understand it and act upon it, is essential to creating a market-based system.

But price and quality data are only part of the picture. Virginia has other state-level barriers to a market-based system, including the Certificate of Public Need (COPN), which restricts competition, and state-imposed insurance mandates, which force insurers to offer expensive plans with broad benefits. Price transparency cannot by itself drive the transformation to a competitive, market-based system. But as part of a bundle of reforms including the repeal of COPN and insurance mandates, data sharing could bring about a net gain in freedom, competitiveness and prosperity that would appeal to the conservative conscience.

Alpha Natural Resources: Running Wrong

Alpha miners in Southwest Virginia (Photo by Scott Elmquist)

Alpha miners in Southwest Virginia
(Photo by Scott Elmquist)

 By Peter Galuszka

Four years ago, coal titan Alpha Natural Resources, one of Virginia’s biggest political donors, was riding high.

It was spending $7.1 billion to buy Massey Energy, a renegade coal firm based in Richmond that had compiled an extraordinary record for safety and environmental violations and fines. Its management practices culminated in a huge mine blast on April 5, 2010 that killed 29 miners in West Virginia, according to three investigations.

Bristol-based Alpha, founded in 2002, had coveted Massey’s rich troves of metallurgical and steam coal as the industry was undergoing a boom phase. It would get about 1,400 Massey workers to add to its workforce of 6,600 but would have to retrain them in safety procedures through Alpha’s “Running Right” program.

Now, four years later, Alpha is in a fight for its life. Its stock – trading at a paltry 55 cents per share — has been delisted by the New York Stock Exchange. After months of layoffs, the firm is preparing for a bankruptcy filing. It is negotiating with its loan holders and senior bondholders to help restructure its debt.

Alpha is the victim of a severe downturn in the coal industry as cheap natural gas from hydraulic fracturing drilling has flooded the market and become a favorite of electric utilities. Alpha had banked on Masset’s huge reserves of met coal to sustain it, but global economic strife, especially in China, has dramatically cut demand for steel. Some claim there is a “War on Coal” in the form of tough new regulations, although others claim the real reason is that coal can’t face competition from other fuel sources.

Alpha’s big fall has big implications for Virginia in several arenas:

(1) Alpha is one of the largest political donors in the state, favoring Republicans. In recent years, it has spent $2,256,617 on GOP politicians and PACS, notably on such influential politicians and Jerry Kilgore and Tommy Norment, according to the Virginia Public Access Project. It also has spent $626,558 on Democrats.

In 2014-2015, it was the ninth largest donor in the state. Dominion was ahead among corporations, but Alpha beat out such top drawer bankrollers as Altria, Comcast and Verizon. The question now is whether a bankruptcy trustee will allow Alpha to continue its funding efforts.

(2) How will Alpha handle its pension and other benefits for its workers? If it goes bankrupt, it will be in the same company as Patriot Coal which is in bankruptcy for the second time in the past several years. Patriot was spun off by Peabody, the nation’s largest coal producer, which wanted to get out of the troubled Central Appalachian market to concentrate on more profitable coalfields in Wyoming’s Powder River Basin and the Midwest.

Critics say that Patriot was a shell firm set up by Peabody so it could skip out of paying health, pension and other benefits to the retired workers it used to employ. The United Mine Workers of America has criticized a Patriot plan to pay its top five executives $6.4 million as it reorganizes its finances.

(3) Coal firms that have large surface mines, as Alpha does, may not be able to meet the financial requirements to clean up the pits as required by law. Alpha has used mountaintop removal practices in the Appalachians in which hundreds of feet of mountains are ripped apart by explosives and huge drag lines to get at coal. They also have mines in Wyoming that also involve removing millions of tons of overburden.

Like many coal firms, Alpha has used “self-bonding” practices to guarantee mine reclamation. In this, the companies use their finances as insurance that they will clean up. If not, they must post cash. Wyoming has given Alpha until Aug. 24 to prove it has $411 million for reclamation.

(4) The health problems of coalfield residents continue unabated. According to a Newsweek report, Kentucky has more cancer rates than any other state. Tobacco smoking as a lot to do with it, but so does exposure to carcinogenic compounds that are released into the environment by mountaintop removal. This also affects people living in Virginia and West Virginia. In 2014, Alpha was fined $27.5 million by federal regulators for illegal discharges of toxic materials into hundreds of streams. It also must pay $200 million to clean up the streams.

The trials of coal companies mean bad news for Virginia and its sister states whose residents living near shut-down mines will still be at risk from them. As more go bust or bankrupt, the bill for their destructive practices will have to borne by someone else.

After digging out the Appalachians for about 150 years, the coal firms have never left coalfield residents well off. Despite its coal riches, Kentucky ranks 45th in the country for wealth. King Coal could have helped alleviate that earlier, but is in a much more difficult position to do much now. Everyday folks with be the ones paying for their legacy.