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Friday, January 12, 2007

Don't Fear the Werewolves of Wellpoint

Catherine Seipp at PajamasMedia is complaining about her Wellpoint individual health coverage. As you probably realize, individual health insurance is expensive, as people tend to get it when they think they'll need it. For example, I am not the kind of person who would buy it, because I rarely get sick and have no chronic conditions.

Let's go over her complaints.

1. Wellpoint is making sure they aren't the victims of fraud.

Health insurance is priced based on claim expectations. If this insurance is only sold to people with five times the claim expectations, because they get the insurance and hide their preexisting conditions, then the product is not priced correctly.

2. Wellpoint is profitable.

Most people don't realize that health insurance is typically priced to a loss ratio. A certain percentage of premium is supposed to go out as claims, based on actuarial assumptions, in a filing reviewed by the state insurance department. So complain all you want about profits and executive benefits. Even if those were lowered 50%, that wouldn't impact your premiums one cent.

Also note she only speaks in terms of total profit, not profit margin. In case you don't know, Wellpoint is HUGE.

3. Her out-of-pocket cap is being raised, because that's a benefit.

Actually, that surprises me. But if that's allowed by law, she should be complaining to the state legislature, not Wellpoint. Maybe she can lobby the National Association of Insurance Commissioners for a new model regulation.

4. Wellpoint doesn't want to pay for experimental treatment. (Avastin, for her cancer, at that point not approved by the FDA for that use.)

Now, I did find the statement from a Wellpoint medical director funny.

“If I keep garlic over my bed to keep away werewolves, and there aren’t werewolf attacks for five months… well, the logic is faulty there.”

That was a stupid thing to say. Here's what he should have said.

"Many people with cancer and other terminal illnesses travel to Mexico in pursuit of miracle cures. Should we pay for one of these miracle cancer cures, even if a CT scan shows the cancer shrinking? We say no. We need to establish a threshold for what treatment is properly considered medical treatment. We have chosen FDA approval of the treatment as that threshold."

Here's an example that someone who's not an actuary could understand. As part of your mobile phone package, you may elect to get your phone upgraded automatically once a year. That's a cost that can be planned for. If the new phone typically retails for $200 and costs the company $140, perhaps they'll charge $15 a month for this benefit. Now imagine the government tells the mobile service provider "You must provide a new phone twice a year." Now, that service is no longer priced appropriately.

It's pretty hard to price a product when at any point, the legislature or Department of Insurance can demand you cover a bunch of new $100,000 treatments without changing premiums.

Take a look at this column from Contingencies that pictures auto insurance designed as if it were health insurance. Then decide if maybe, just maybe, the expectations for health insurance need to change.

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