Insurance Insider News, February 24 2010
CALIFORNIA l ANNUITIES l HEALTHCARE l NEW PRODUCTS
EMPLOYEE BENEFITS l FINANCIAL PLANNING
In California
Doctors and Hospitals Are Driving Up Insurance Rates
A major driver of higher insurance premiums is the growing power that hospitals and physicians have to negotiate higher payment rates, according to a report by the Center for Studying Health System Change (HSC). In California, providers are using various strategies to negotiate significantly higher payment rates from private insurers. One tactic is to create tighter alignments among hospitals and physician groups.
“Provider market power is the elephant in the room that no one wants to talk about in the national healthcare reform debate. Health insurers have been...blamed for the high cost of private insurance, while the role of growing hospital and physician market power has escaped scrutiny,” said HSC senior consulting researcher Robert A. Berenson, M.D., of the Urban Institute, a coauthor of the study.
Encouraging hospitals and physicians to integrate could improve quality and increase efficiency, but the savings may not be passed on to private payers if the power of providers to command higher prices goes unchecked, according to the study.
The authors conclude that, unless market mechanisms can be found to discipline providers' use of their growing market power, it seems inevitable that policy makers will need to turn to regulatory approaches, such as putting price caps on negotiated private-sector rates and adopting all-payer rate setting.
The study identified three key factors in California that are driving the shift of negotiating power from private insurers to hospitals and physicians:
• Consumer demand for broader provider networks following the managed care backlash.
• Consolidation of hospitals into larger, powerful systems and tighter alignment with physicians.
• Growing hospital and physician capacity constraints.
California was in the vanguard of managed care in the 1980s and early 1990s when large purchasers moved employees into HMOs in response to a string of double-digit annual premium increases. Health plans used their growing market power to exclude providers from plan networks in order to severely limit rate increases. Excess hospital and physician capacity also put providers at a negotiating disadvantage.
Providers responded in a number of ways in the late-1990s and early 2000s. Hospitals got out of risk-based payment contracts, formed larger hospital systems through mergers and acquisitions, and attempted to form tighter physician alliances. Medical groups and independent practice associations consolidated, with the weaker ones going out of business.
Moreover, certain providers-especially hospitals-have achieved must-have status, meaning they must be included in a plan's provider network to make the plan acceptable to customers. Must-have hospitals have market leverage over health plans because plans cannot plausibly threaten to exclude them.
However, some providers may balance their desire for high prices with the fragility of employer-sponsored insurance and the competitive threat posed by Kaiser Permanente, which typically offers lower premiums. For more information, visit http://www.healthaffairs.org.
Annuities
Variable Annuities Recover Slowly
Variable annuities were down only 18% for the year after a 26% decline in the first six months of 2009. Variable annuity sales improved slowly from the first quarter, according to LIMRA's U.S. Individual Annuities quarterly sales survey.
Variable annuity sales improved slightly in the fourth quarter compared to the third quarter – up three percent to $32.6 billion. But sales were down 3% compared to the fourth quarter of 2008. Variable annuity sales totaled $127 billion.
LIMRA expects fixed annuities to remain depressed as long as interest rates remain at current levels because CDs are just too attractive in this environment.
“The recovery is slower than expected. We attribute this partly to a decline in 1035 exchanges. The last time variable annuity sales were at this level was in 2003, at the end of the last financial crisis,” said Joe Montminy, assistant vice president and research director for LIMRA's annuity research.
Variable annuity sales experienced significant losses from the third quarter of 2008 through first quarter 2009. Individual annuity sales fell in the fourth quarter, down 2% compared to the prior quarter. This is a 22% decline from the fourth quarter of 2008. Total individual annuity sales declined 11% in 2009.
In the fourth quarter of 2009, fixed annuity sales continued to decline, down 10% compared to the prior quarter and down 40% from the fourth quarter of 2008, when fixed annuities experienced incredible growth. Fixed annuity sales totaled $20.7 billion in the fourth quarter and $107.9 billion for the year, which was a 1% decline from 2008.
In 2009, indexed annuities had a record year, increasing 9% over 2008
Indexed annuities performed very well throughout the year, with a record high in the second quarter. Indexed annuities fourth quarter sales were down 5% from the third quarter, totaling $6.9 billion.
For the third consecutive quarter, book value declined compared to the prior quarter, down 10 % from the third quarter and 43 % compared to the fourth quarter of 2008. For 2009, sales of book value annuities are up 2% benefiting from a very strong first quarter. For more information, visit www.limra.com.
Healthcare
AHIP Defends the Insurance Industry
President and CEO America’s Health Insurance Plans (AHIP), Karen Ignagni, issued a defense of the insurance industry after the bashing that Anthem Blue Cross has been taking over its proposed individual plan rate increases. The following is a summary:
A weak economy is causing younger, healthier individuals to drop their insurance. As healthy people forego health insurance, the rates for those Americans who need coverage increases. That is why going into 2009 we advocated for robust insurance market reforms, including guaranteed coverage with no pre-existing condition exclusions or health status rating paired with an effective personal coverage requirement to get everyone covered.
To suggest that cost containment can be achieved by singling out health plans ignores the very inconvenient truth that premium increases reflect increases in the underlying cost of medical services.
Regulating premiums won’t do anything to reduce the soaring costs of medical care. This would be like capping the prices auto makers can charge consumers, but letting the steel, rubber, and technology manufacturers charge the auto makers whatever they want.
There is also a lot of attention on health plans’ profits. The track record shows that this is an efficient, low-margin industry whose margins are consistently lower than other sectors in healthcare. According to Yahoo! Finance’s latest analysis of quarterly financial data, the net profit margin for the entire healthcare sector is 11%, while health plans’ net profit margin is 3.4%.
A preliminary report by the Massachusetts Attorney General finds that some Massachusetts hospitals and doctors are paid twice as much as others for essentially the same patient care. The report points to the market clout of the best-paid providers as a main driver of the state’s spiraling healthcare costs.
Forbes magazine just released the list of its most expensive drugs, including one drug that cost $409,500 for a year’s supply – meaning it costs more than $1,000 per day, every day, all year. And three more that each cost more than $350,000 for one year. The article notes that ‘biotech companies can charge pretty much whatever they want.’
According to the International Federation of Health Plans, on a unit-cost basis the American people pay 50% to 60 % more than every other industrialized nation for medicines, technology, and professional services. In other words, we are paying more – far more – for every doctor visit, every procedure, and every diagnostic test than our global competitors.
The nation needs a systematic, comprehensive process to ensure that healthcare costs are brought under control and that coverage becomes and remains affordable for all Americans. That means looking closely and continually at all of the areas that make our healthcare system unaffordable:
• Sky-high unit costs for medical services;
• Lack of transparency – which leaves patients and their physicians in the dark about which treatments are safest, best and most cost effective;
• Payment systems that reward volume rather than value;
• System-wide administrative costs;
• Inadequate support for prevention, wellness and chronic care management; and
• Out-of-control medical liability system.
Humana to Cut 1,400 Employees in 2010
Humana Inc. announced that it intends to reduce its workforce by approximately 1,400 positions or 5%, over the course of 2010, balancing 2,500 position reductions with 1,100 additional jobs in areas of growth such as medical-cost containment capabilities, pharmacy management, and specialty products. Michael B. McCallister, Humana's president and CEO said, “This regrettable, but necessary reduction in our workforce is a direct result of Humana's need to align the size of our company with that of our membership.” McCallister said the workforce reduction will not impair the company's ability to serve its 10.3 million medical members and 7.2 million specialty-benefit members. He said that the reduction is intended to help the company create a more efficient, agile infrastructure while providing the resources required to invest in growth opportunities. For more information, visit http://www.humana.com.
New Products
Disability Student Loan Protection
Guardian Life is offering a disability plan that enables medical and dental professionals to protect their ability to repay their student loans if they become disabled. It is designed to fund financial obligations that require periodic payments expiring at a given time. The program will insure up to 100% of monthly loan payments – up to $2,000 a month. For more information, visit www.GuardianLife.com/service_center/find_a_local_office.html.
Variable Annuity
Sun Life Financial Inc. enhanced the “Sun Income Riser,” an optional living benefit available with the Masters variable annuities. Sun Income Riser helps protect and grow retirement income and addresses the need for lifetime income. Funds use dynamic market-risk optimization strategies that reallocate regularly to help protect assets during volatile markets.
In addition, clients can increase the benefit base available with Sun Income Riser by 7% annually for each year they do not take a withdrawal. For more information, visit www.unretirementindex.com.
Flexible Universal Life
American General Life announces a universal life insurance product, “ContinUL.” It offers affordable death benefit coverage with secondary guarantees and flexible features that allow for customization. For more information, visit www.americangeneral.com.
New On-Line Producer Zone
Petersen International Underwriters has added a Producer Zone tab to its website, www.piu.org. This secure zone will allow producers to check the status of their new business, billings, paid-to-dates, in-force policy details, cancelled/lapsed policy details, and commissions or proposals any time by simply logging on to the PIU website at and typing in their user name and password. Petersen will still offer customer service by phone or e-mail.
Dental Plans
Prudential Financial’s group insurance business will offer dental coverage plans with dental administrator, Group Dental Service Inc. Prudential will initially offer PPO and indemnity dental plans to employers with plans covering fewer than 1,000 employees. The company expects to begin offering quotes to clients and producers in the second quarter of the year for new business beginning in the third quarter. Prudential plans to expand the offering to accommodate larger plans as well. For more information, visit www.news.prudential.com.
Modeling Tool for Wellness ROI
The Vitality Group developed a tool that enables employers to forecast worker engagement in the company’s incentive-based wellness program. Employers can estimate the program’s effect on cost savings and productivity and determine the return-on-investment. For more information, visit www.thevitalitygroup.com
Nonqualified Plan
Prudential Retirement enhanced its Total Retirement Solutions offering. It includes a new nonqualified product that provides a wide variety of benefits for retirement-plan sponsors and their participants. It is geared toward highly compensated executives. For more information, visit www.mullintbg.com.
Voluntary Benefits
Simply Unum, the integrated benefits solution for small to mid-sized businesses, is now available in every state in the country. It offers new voluntary disability benefits and funding options in 40 states and the District of Columbia. Simply Unum launched in California, Hawaii and Maryland – the final three states in the national rollout of the benefits platform. Enhancements include voluntary disability coverage for employees and the new Benefit Credits funding option. Benefit Credits allow employers to contribute a set dollar amount toward the purchase of coverage by their employees. For more information, visit www.unum.com
Employee Benefits
Voluntary Industry Continues to Rebound
Eighteen percent of the respondents in an Eastbridge study expect voluntary benefit sales to increase a lot, but even more importantly, only 7% expect any decreases compared to 19% last year. The Voluntary Industry Confidence Index study is conducted semi-annually and includes responses from individuals active in the market—carriers, brokers, and vendors.
“We are seeing that people are really becoming more positive about the outlook for 2010,” said Bonnie Brazzell, vice president, Eastbridge. The Confidence Index increased to 95.9, up three points from the mid-year number and up seven points from its low at year-end 2008.
Gil Lowerre, president of Eastbridge said Eighty-four percent of respondents in the survey (conducted in December and early January) believe that sales will increase in 2009 (compared to 2008 sales), up from just 66 % at year-end 2008. For more information on becoming a participant, contact the company at www.eastbridge.com.
Financial Planning
Risk Management in Today’s Pension Plans
What a difference a year makes. Against the backdrop of one of the most volatile market environments in recent memory, risk management priorities for the largest U.S. defined benefit pension plans have expanded significantly in the past 12 months. MetLife surveyed 166 corporate plan sponsors from among the 1,000 largest U.S. defined benefit pension plans.
Plan sponsors are taking a much broader view of the 18 investment, liability and business risks to which their plans are exposed. As a result, most plan sponsors believe that they're doing a better job implementing risk management measures this year than they did last.
Despite a broadened view and greater self-ascribed success, the gap between the risk factors plan sponsors identify as important and their success at managing those risk factors has widened considerably.
With a broader view of pension plan risk, plan sponsors are no longer largely concentrating on the asset side of the asset-liability equation, which is a major change from 2009. In this uncertain market environment, liability-related risks have taken on much greater importance; they were all but ignored just one year ago.
Cynthia Mallett, vice president, Product and Market Strategies, in MetLife's Corporate Benefits Funding group, said, “While clearly this shift in focus was spurred by the market environment, it also may signal an acknowledgement that traditional methods of mitigating risk by diversifying the investment portfolio may no longer be viable as a sole or primary means of pension risk management.
“As the markets recover and plan sponsors become more confident in their ability to assess the expanded range of potential risks, we expect to see the pendulum move back toward the center, where sponsors differentiate among risks to a greater degree and become better able to address these core risks. We also think it's likely that a balanced view of asset and liability related risks will become common to most sponsors,” she said. For more information, visit www.metlife.com/pensionrisk.
Life Settlement Industry Responds to ACLI
On February 3, 2010, the American Council of Life Insurers (ACLI) published a recommendation that the securitization of life settlements be prohibited by legislation or regulation. ACLI charges that securitization of life insurance settlements exposes senior citizens and investors to increased risk of fraud and the practice should be prohibited by legislation or regulation.
ACLI says that securitization will lead some settlement promoters to target senior citizens and induce them to commit fraud in connection with illegal stranger-originated life insurance (STOLI) transactions, the statement says.
In STOLI transactions, investors or middlemen approach seniors and encourage them to purchase life insurance policies they otherwise would not buy solely to sell the policies to investors. STOLI transactions have been outlawed in 28 states and most other states are considering anti-STOLI legislation. Seniors caught up in STOLI schemes face potential legal and tax liability. Because only a limited number of insured individuals are candidates for life settlements, securitization promoters would have to build their inventories through STOLI, ACLI says. Moreover, securitization exposes investors to significant risks.
The following summarizes a statement by the Life Insurance Settlement Assn.
The ACLI knowingly attempts to confuse the public and policymakers by equating legitimate life settlements with stranger-originated life insurance (STOLI) while characterizing the licensed and regulated intermediaries involved in the life settlement industry as “STOLI promoters' preying upon seniors.”
"From a secondary market perspective, stranger-originated life insurance simply does not make financial sense. A newly issued life insurance policy, which has been properly priced and underwritten, has no value as a life settlement. Nor will it have any value in two years – or five years – unless the insured undergoes a substantial change in health. The notion that the securitization of life settlements would create a pool of capital dedicated to creating worthless life insurance contracts flies in the face of economic logic.
From the standpoint of investors, a properly constructed portfolio of settled life insurance policies offers the potential for steady returns over long durations with low credit risk and relatively minimal correlation with other asset classes. Securitization of these portfolios, if done properly, would allow more long term institutional money managers to add longevity risk to their investment mix when they feel it is appropriate. LISA recognizes that there are a number of hurdles to securitization. To imply that the magnitude of risk associated with life settlements as an asset class is so overwhelming that a ban by regulatory fiat is required is nothing short of astonishing. It is a repudiation of the very techniques increasingly in use by insurers to provide for reserve capital for their policies.
For more about the association, visit www.thevoiceoftheindustry.com.
