When it comes to health insurance, entrepreneurs are in a state of sticker shock. And it's not just the initial quote that has the power to astound. It's the wild premium increases that can accompany a single employee's unfortunate diagnosis. Wendell Potter, the retired director of media relations for Cigna, says those increases aren't always meant merely to cover insurers' costs. Instead, he says, they're sometimes levied with the aim of forcing a small company to drop its health insurance policy. This practice is known in the industry as "purging," and while it may seem shocking that an insurer would raise premiums in order to get rid of a client, industry insiders say it's common practice. Purging, says Len Nichols, who directs the health policy program at the Washington nonpartisan think tank New America Foundation, "[has] always gone on. It's the way business is conducted."
But it's only recently that purging has attracted the attention of Congress. Both the House and the Senate are launching investigations to find out more about the way health insurance for small companies is sold and priced. In a statement, U.S. House Energy & Commerce Committee Chair Henry Waxman (D-Calif.) said: "We need to understand how insurance companies set premiums and to what extent insurance companies are 'purging' small businesses when their employees become ill or their medical claims increase." At the end of August, his committee sent letters of inquiry to six insurers. That same month, Senator John D. ("Jay") Rockefeller IV sent a letter to Cigna Chairman and CEO H. Edward Hanway requesting an explanation of the use of the word "purging" by Cigna President David Cordani in a February conference call with analysts.
IT ONLY TAKES ONEThat February conference call, together with Potter's testimony, has done much to fuel the current interest in purging. In the call, Cordani said: "In 2008 we were essentially actively decreasing our posture in several markets, particularly the under-50 book of business [companies with fewer than 50 employees]. You could use the term 'purge' if you'd like. You could also use the term 'hard harvests' or 'soft exits.' "
And in June testimony before U.S. Senate Committee on Commerce, Science & Transportation, Potter said insurers "dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that the company has to cut benefits, shop for another carrier, or stop offering coverage altogether—leaving workers uninsured."
Cigna spokesperson Chris Curran says that, for small employers, "Rates are often based on claims experience. While we try to work with all our customers, when medical costs are higher than premiums, we may need to requote."
In response to Rockefeller's inquiry, Cigna's statement says that companies with 2 to 50 employees have "historically been less than 1% of Cigna's total medical membership," and that the company has decreased its presence there to focus on other businesses. Cigna says it has done this "by limiting the number of plans offered and by reducing marketing activities in specific small group markets, and not by focusing on any particular customer or employer group."
"REQUOTED" PREMIUMSJoy Mosley, COO of Biotest Laboratories, a medical testing company in Minneapolis, is one business owner whose premiums rose drastically after an employee was diagnosed with pancreatic cancer. Her insurer, Medica, covered the million-dollar treatment, but the following year said nearly $156,000 in additional premiums were justified—an increase of 72%. "I felt angry that the health-care system left us unprotected," says Mosley. The official renewal letter proposed a 60% increase. After getting a quote from another insurer, Mosley was able to bargain Medica down to 39.6%. Larry Bussey, a spokesperson for Medica, says: "We don't purge. We try to keep our customers."
Not all entrepreneurs are equally vulnerable. In about a dozen states, where some form of community rating prevails, regulations prohibit insurers from setting premiums for companies with 50 or fewer employees based on workers' health status. But elsewhere, so-called ratings bands allow for considerable flexibility in pricing. In states with loose ratings bands, such as Texas and Nevada, one small business can be charged nearly 70% more than another. In Pennsylvania and Virginia, there are no ratings restrictions at all. No matter what state you're in, ratings bands don't apply to companies with more than 50 employees.
Compounding the problem, entrepreneurs slapped with big premium rises often have few options. According to a 2008 survey by the Government Accounting Office, the median market share of the largest carrier in the small group market is 47%. As Olympia Snowe (R-Me.), the ranking member of the Senate Committee on Small Business & Entrepreneurship, which commissioned this study, notes: "Such consolidation is an alarming trend."
When UnitedHealthcare hit Raymond Arth, CEO of Phoenix Products, a faucet maker in Avon Lake, Ohio, with a 22% increase after an employee came down with Gaucher's disease, Arth found that competing insurers offered premium quotes more than twice as high. Ohio forbids insurers to boost rates on an existing client more than 15% based on claims experience, but does allow additional increases based on age and medical inflation. Arth kept his premiums flat by doubling deductibles, which now stand at a stratospheric $5,900 for individuals and $10,400 for families. "We used booby wire and duct tape to patch something together," says Arth.
In the absence of major policy changes, small companies have little leverage. "All any individual entrepreneur can do is to become more knowledgeable and to take the time to shop around for coverage," advises Amanda Austin, director of federal public policy at the National Federation of Independent Business. The bills now bouncing around Congress call for the creation of a health insurance exchange, which might provide protection against sudden rate hikes. But the bills have different thresholds for how big a company may still grow and participate. Says Nichols: "It will leave a lot of small businesses unprotected. The size really should go up to protect all firms that are not big enough to self-insure"—a number he pegs at about 300 employees. That leaves a lot of companies out in the cold.
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