A Health Insurance Insider Blows the Whistle on the Industry's Abusive Practices

“My name is Wendell Potter and for 20 years, I worked as a senior executive at health insurance companies, and I saw how they confuse their customers and dump the sick—all so they can satisfy their Wall Street investors.”

With that powerful indictment, Mr. Potter began his testimony [1] on “Consumer Choices and Transparency in the Health Insurance Industry” before the U.S. Senate Committee on Commerce, Science and Transportation on June 24, 2009.

His testimony made clear that for all the health insurance industry's claims of wanting to provide people with good care, an insurance company's bottom line is always its most important consideration:

“The average family doesn’t understand how Wall Street’s dictates determine whether they will be offered coverage, whether they can keep it, and how much they’ll be charged for it. But, in fact, Wall Street plays a powerful role. The top priority of for-profit companies is to drive up the value of their stock. Stocks fluctuate based on companies’ quarterly reports, which are discussed every three months in conference calls with investors and analysts. On these calls, Wall Street looks investors and analysts look for two key figures: earnings per share and the medical-loss ratio, or medical “benefit” ratio, as the industry now terms it. That is the ratio between what the company actually pays out in claims and what it has left over to cover sales, marketing, underwriting and other administrative expenses and, of course, profits.

“To win the favor of powerful analysts, for-profit insurers must prove that they made more money during the previous quarter than a year earlier and that the portion of the premium going to medical costs is falling... I have seen an insurer’s stock price fall 20 percent or more in a single day after executives disclosed that the company had to spend a slightly higher percentage of premiums on medical claims during the quarter than it did during a previous period.”

So how do health insurers strive to meet Wall Street’s expectations? By providing better care and service to attract members? Not exactly, as Mr. Potter explains:

“To help meet Wall Street’s relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick. Insurers have several ways to cull the sick from their rolls. One is policy rescission. They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as justification to cancel the policy, even if the enrollee has never missed a premium payment.”

Rescission is devastating to people when they need care the most (watch [2] how this ‘rescission’ policy has affected one Texas woman suffering from breast cancer), and it is a very common practice. In fact, the Senate Energy and Commerce Committee released a report [3] on its investigation into three insurers, which found that the insurers had canceled the coverage of roughly 20,000 people in a five-year period, allowing the companies to avoid paying $300 million in claims.

Yet outright cancellation of policies is not the only way health insurance companies cull their rolls of less fortunate and less profitable clients, as Mr. Potter made clear:

“They also 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 employer has to cut benefits, shop for another carrier, or stop offering coverage altogether leaving workers uninsured. The practice is known in the industry as “purging.” The purging of less profitable accounts through intentionally unrealistic rate increases helps explain why the number of small businesses offering coverage to their employees has fallen from 61 percent to 38 percent since 1993, according to the National Small Business Association. Once an insurer purges a business, there are often no other viable choices in the health insurance market because of rampant industry consolidation.

“An account purge so eye-popping that it caught the attention of reporters occurred in October 2006 when CIGNA notified the Entertainment Industry Group Insurance Trust that many of the Trust’s members in California and New Jersey would have to pay more than some of them earned in a year if they wanted to continue their coverage. The rate increase CIGNA planned to implement, according to USA Today, would have meant that some family-plan premiums would exceed $44,000 a year. CIGNA gave the enrollees less than three months to pay the new premiums or go elsewhere.”

While health insurance companies decry the rising cost of medical care as the reason for their skyrocketing premiums, Mr. Potter’s testimony illuminates the truth:

“A study conducted last year by PricewaterhouseCoopers revealed just how successful the insurers’ expense management and purging actions have been over the last decade in meeting Wall Street’s expectations. The accounting firm found that the collective medical-loss ratios of the seven largest for-profit insurers fell from an average of 85.3 percent in 1998 to 81.6 percent in 2008. That translates into a difference of several billion dollars in favor of insurance company shareholders and executives and at the expense of health care providers and their patients.”

So what does this health insurance insider think we need to combat the industry's abuses? Mr. Potter ended his testimony with a ringing endorsement of a public health insurance plan option [4]:

“Thank you, Mr. Chairman, for beginning this conversation on transparency and for making this such a priority. S. 1050, your legislation to require insurance companies to be more honest and transparent in how they communicate with consumers, is essential. So, too, is S. 1278, the Consumers Choice Health Plan, which would create a strong public health insurance option as a benchmark in transparency and quality. Americans need and overwhelmingly support the option of obtaining coverage from a public plan. The industry and its backers are using fear tactics, as they did in 1994, to tar a transparent, publicly-accountable health care option as a ‘government-run system.’ But what we have today, Mr. Chairman, is a Wall Street-run system that has proven itself an untrustworthy partner to its customers, to the doctors and hospitals who deliver care, and to the state and federal governments that attempt to regulate it.”

The other two experts testifying before the Committee discussed the problems consumers have understanding their coverage and making informed decisions when buying health insurance because of the industry’s lack of transparency. (You can watch the full hearing and read all the testimony presented on the Committee’s web site [5].)

We should all thank Mr. Potter for sharing his insider knowledge with us, shining the bright light of public scrutiny on this very secretive industry. The best way to thank him is to act on his disclosure by not allowing the Senate to give in to the special interests by ripping the heart out of Obama’s health care plan!

Stand with President Obama and Dr. Howard Dean to demand the choice of public health insurance by writing your Senator today [6]!