Tag Archives: Nick Gerhart

10 Ways to Fix Obamacare

After a Sunday church service, fellow parishioners approached me with empathy about the prospect of dealing with healthcare after Tuesday’s election. I know this is just the beginning of what state insurance regulators will face as consumers bring us an array of questions regarding the future of the Affordable Care Act (ACA).

  • Will it be repealed?
  • Will it be replaced?
  • Will it be amended?

The answer to each question is the same: No one today knows what will occur with the ACA. However, it’s important for people to understand that it will not be possible to make any changes quickly — and any changes that do occur will happen over time. This means that, because the law is still in effect today, people should take steps to obtain or maintain health coverage that meets their family’s needs.

There are mounting challenges in America’s healthcare system. It’s clear to me that we need a modern-day Manhattan Project to address healthcare — a focused initiative where the brightest minds come together to address the many deficiencies of the ACA and recommend changes to healthcare financing and delivery systems. This type of project would lead to a more affordable and ultimately sustainable healthcare system, something that the ACA was never going to provide.

See also: What Trump Means for Health System  

The ACA did not address what is driving healthcare spending. To “fix” healthcare, we must transform the entire healthcare economy with a focus on what is driving spending. Rising healthcare costs have an impact on all Americans, not just the small percentage that purchase their own coverage through the ACA. Without structural changes to our healthcare system and a focus on costs, healthcare may squeeze out all other government programs and cause employers footing a large percentage of healthcare premiums for employees to drag down wages, which stunts America’s GDP growth. President-elect Trump needs to take a holistic look at healthcare. The ACA should be his starting point as it is currently on life support and needs changes as soon as possible.

If the new Congress passes a bill to repeal all of the ACA, I hope that a replacement for the ACA is stapled to that bill. An immediate repeal would lead to devastating consequences in the disruption of people’s care and would create even more uncertainty for millions of Americans. To ease the uncertainty, a transition time is required for any whole or partial suggested change.

To offer immediate predictability, President-elect Trump could consider keeping transitional (grandmothered) plans in place for another 24 months. At least one state has requested CMS to allow for an extension of the transitional plans because of a severe lack of choice in the market in that state. The request was rejected. Millions of Americans are in grandmothered and grandfathered plans that they like and that are working for them. President Obama allowed the transitional plans to continue, and the new administration should consider keeping the individual and small group transitional plans. In Iowa, we have nearly 117,000 people in these plans today.

To be clear, there are no easy fixes. The existence and reach of the ACA are contentious issues. Issues related to the ACA have been litigated in court and evaluated by public opinion for years now. Some parts of the ACA have merit and should be kept, in my opinion, but, on a whole, with skyrocketing premiums and insurers leaving markets, it is clear the ACA needs a lot of work. To make the individual insurance market work, it is imperative to build sustainable risk pools for individuals.

Rates for 2017 are rising 25%, on average. Affordability is a major issue for Iowans purchasing their own coverage. Premium tax credits may offset and assist with affordability for those who qualify. However, for the nearly 125,000 Iowans who are above 400% of the federal poverty level that did not have access to employer coverage prior to the ACA, affordability is a major issue. The ACA exempts certain people from the requirements of the individual mandate. One of the exemptions is an affordability hardship exemption. If a person cannot secure health insurance for less than 8.16% of their modified adjusted gross income for 2017, they may qualify for the hardship exemption. This would be net of any premium tax credits. Therefore, a significant number of people will be able to “opt out” of the ACA’s insurance mandate today; as the rates continue to rise, however, those individuals will not have health insurance coverage.

Many have stated that the ACA took a sledgehammer to healthcare when it was more appropriate to use a scalpel. Healthcare issues differ by state, but no matter what tool is needed to improve access to healthcare, it is clear that a number of changes should be considered immediately to help ensure that consumers have choices as they seek out coverage.

Ten Points to help improve the ACA:

  1. Create a mechanism for covering catastrophic claims, separate from individual insurance pools. As a parent of a child with Type 1 diabetes, I am grateful that the ACA eliminates pre-existing conditions. I know that if I ever need to buy my own insurance, I can find coverage that will still be meaningful for my family. However, it is clear that the most chronic and catastrophic conditions are the drivers for an extraordinary amount of the rate increases. In testimony I provided before Congress, I stated that looking at high-risk pools for catastrophic claims (defined as claims that cost over a certain amount) has merit. These high-risk pools could be state-funded pools like many states had before the ACA, or it could be a large federal pool. If we can keep the most expensive claims out of the individual risk pool — while still providing coverage to those families — it will lead to predictability in pricing. In Iowa, one claimant is driving nearly 10% of the 2017 rate increase for one of the companies offering coverage to Iowans. That family needs coverage but, if the coverage was provided through a mechanism where the costs are spread to society in general and not to the small pool of individuals using a single insurance company, costs for individual health insurance could be kept more manageable and predictable.
  2. Eliminate the mandate. Instead, allow people to enroll in health insurance only once every two or three years, unless they have a proven special enrollment event. Let companies validate the special enrollment with an appeal available to a third party or the state department of insurance.
  3. Shorten the grace periods to 30 days. There are stories all over the country with people gaming the lengthy grace periods.
  4. Abandon metal tiers. There are no platinum plans in Iowa and few gold plans. Look at better ways to judge and compare plans.
  5. Review the need for prescriptive essential health benefits. Require carriers to have two or three standard plans, similar to how Medicare Supplement plans are standardized. Then carriers could also design and offer non-standard plans.
  6. Move the age band back to 5:1. At 3:1, the younger, healthy people feel penalized and are priced out of the market. Getting younger people into the pool will stabilize the rates for everyone.
  7. Encourage innovation in the market. Encouraging innovation with limited underwriting rewards healthy people, similarly to how lower-income folks are given incentives through tax credits. Allow consumers to be rewarded with healthy behaviors, and allow companies to innovate on product design.
  8. Look at health savings accounts as a means to increase consumers’ pricing awareness. If this is adopted widely, look at ways to fund health savings accounts for certain lower-income Americans.
  9. Publish healthcare prices and create objective quality benchmarks and metrics for consumers to review. This will help inform consumers about price and quality. In the current market, individuals have no clue what healthcare-related procedures and items will cost us. We are more price-aware buying a refrigerator than we are when having a heart procedure. That needs to change.
  10. Fix the 3 Rs. Abandon risk adjustment and risk corridor and continue a public reinsurance option.

Much has been written about selling insurance across state lines. I do not see that as a major factor to help drive down costs. Those insurers that would sell across state lines would have to comply with applicable state mandates and would still have to build a network of doctors for competitive pricing. New companies can enter states today with ease, and many companies sell in multiple states. The issue is the cost to contract with doctors in those states. More competition in insurance sounds good, but if those carriers cannot get enough scale to get competitive pricing arrangements with providers, they will be priced out of the market.

See also: What Trump Means for Best Practices  

This is hardly an exhaustive list, but we need to start somewhere. Many more things must be reviewed in the healthcare economy, such as the cost of prescription drugs, emerging technologies and end-of-life care. However, looking at the financing of healthcare and insurance is the logical place to start — money always is front and center. My hope is that reasonable people come together to address this challenge.

What Will Trump Mean for State Regulation?

Insurance is regulated by states, and the states’ laws are implemented and administered by state insurance commissioners. This was affirmed in 1945 by the McCarran-Ferguson Act. Under that act, states regulate the business of insurance unless the U.S. Congress decides otherwise. In the past six years, the federal government has with regularity encroached on areas previously controlled solely by state insurance commissioners, such as through the following federal actions:

  • The creation by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of the Federal Insurance Office (FIO)
  • Dodd-Frank’s creation of the Financial Stability Oversight Council (FSOC)
  • The Affordable Care Act (ACA)
  • The Department of Labor (DOL) fiduciary rule issued April 8, 2016

These federal encroachments have led to regulatory confusion. Although state insurance commissioners are the predominant regulator of licensed insurance carriers and producers, insurance companies that are deemed systemically important non-bank financial institutions are supervised both by the Federal Reserve and by their domestic state insurance regulators. This creates significant duplication and regulatory burden; the cost of that burden – as well as some of the confusion — is ultimately passed on to consumers. Under the ACA, for instance, state insurance regulators routinely must react to hundreds of pages of regulations that are published by the Centers for Medicare and Medicaid Services. Licensed insurance producers and carriers must overhaul their operations and distribution to comply with the 1,023-page DOL fiduciary rule.

See also: What Trump Means for Business  

As I see it, state legislatures have given state insurance regulators dual mandates: (1) to protect consumers from the moment of purchase through filing a claim and ultimately the payment or denial of that claim; and (2) to ensure companies are solvent and can meet their financial obligations to consumers. While insurance regulators at the state level can always improve, I do believe that collectively we do a commendable job. Insurance company failures are rare, and most states respond to consumer complaints in a very timely fashion.

Under a President Trump, I believe the role of state insurance regulators will grow as some federal regulations are eliminated. If Dodd-Frank is reviewed, the role of the FIO and even the FSOC could change. State regulators have argued tirelessly that the FIO is not a regulator and needs to stay in its lane as authorized under Dodd-Frank. State regulators are debating with the FIO the need for a covered agreement on reinsurance collateral and are worried about state law being preempted. I think that, under a Trump administration, state regulators may be listened to much more in this debate. State commissioners and the FSOC representatives with insurance experience have also worked to ensure that the FSOC recognize that insurance is not banking and that traditional insurance is not systemic to the global financial system. A Trump administration may agree with state insurance regulators on these issues and many more. Only time will tell, of course.

State insurance commissioners need to demonstrate through the execution of states’ dual mandates that we deserve the responsibility of supervising the insurance markets in our respective states and that we do it better than it could be done from the federal level. I believe the time for state insurance commissioners to shine is now, and I hope we all continue to deliver results as our roles as the regulators of insurance carriers and producers and as the protectors of consumers become increasingly important.

See also: What Trump Means for Workplace Wellness  

The Myth of the Protection Gap

A friend and colleague, Chunka Mui, once said, “Marketing is when a company lies to its customers. Market research is when a company lies to itself.”

In the insurance industry, talk of the protection gap manages to combine both problems: It’s something of a lie to customers and is an even bigger lie to ourselves.

People routinely talk about the protection gap — the difference between losses incurred and the amount that are covered by insurance — as though the number shows how much more insurance people and organizations should be buying. We comfort ourselves with the size of that number, because we think it represents opportunity for us. We also, frankly, get a little condescending about the people and organizations that aren’t bright enough to buy our product to cover their losses.

But if you look at it from the customer standpoint, there isn’t a gap. We’re just kidding ourselves.

To make the math simple, let’s pick a country at random and make up some numbers out of whole cloth. Let’s imagine we’re Gabon, and we, as a nation, incur $1.5 billion of losses a year, while only $500 million is covered by insurance. We’re told we have a protection gap of $1 billion. We should buy $1 billion of additional coverage.

It’ll only cost us $1.3 billion.

That’s because — again, in very rough numbers — the insurer has to tack on 20% on top of the losses to cover expenses and needs its 10% profit margin to keep shareholders happy.

But why would Gabon decide to overpay by $300 million a year? The insurer’s employees and shareholders are surely nice people who could use the money, but shouldn’t Gabon take care of its citizens?

I understand about peace of mind and surely believe that insurance plays a crucial role in the world economy, but, from a certain perspective (one that many customers take), I’d be better off going to a casino and playing the slot machines rather than buy insurance. The casino might even throw in free drinks and a show.

Insurance needs some new math to replace the protection gap, and we need to stop acting as though it’s a real thing that a customer might care about.

The first step is to cut expenses radically — perhaps 50%. I use that number because a famous consultant/author with whom I have worked is going to argue in a book soon that every business needs to cut operating expenses by 50% within five years. I also see enough innovation happening around the edges in insurance that I think radical cost cuts are possible. For instance, at the Global Insurance Symposium in Des Moines last week, I met the founder of RiskGenius, whose artificial intelligence could automate the work of whole swaths of people at brokerages who review the constant stream of changes in policies.

But even that new math only shrinks the problem. Add half the previous expenses onto that $1 billion of insurance for Gabon, stir in the required profit, and you’re still asking the country to pay $1.2 billion to cover $1 billion of losses.

The real change can only happen when insurance gets out of its product mindset and shifts to a service mentality. Then someone could go to Gabon and say, “Our insurance company knows an awful lot about how losses occur. How about if we advise your government, your companies and your citizens and help you prevent as many as we can?”

Then, perhaps, you shrink those losses by a third — and keep some of that difference as profit. If you still take that whack at expenses, you could tell Gabon: “We’ll take responsibility for your $1.5 billion of losses (both the insured and the uninsured), and it’ll only cost you $1.25 billion. You’ll come out $250 million ahead, while we cover all our expenses and earn $100 million profit.”

That $250 million gain is the kind of gap a customer will believe in.

What Is Right Balance for Regulators?

As Iowa’s insurance commissioner, I meet with many innovators whose work affects the insurance industry. A major topic we discuss is the continual debate of innovation vs. regulatory oversight. This debate will be front and center during the Global Insurance Symposium in Des Moines when federal regulators, state regulators, industry leaders and leading innovators come together for discussions on the “right” way to bring innovation into the insurance industry.

I see three schools of thought in the debate:

  • Those who want nothing changed because insurance regulation has worked for more than 150 years
  • Those who suggest oversight by insurance regulators isn’t needed because innovations and market forces don’t require the same type of scrutiny that regulators have performed in the past
  • Those who feel that regulations and oversight are needed but that regulators should move quickly to keep up with emerging technological developments

Innovation is happening, and regulators realize it. No one, including regulators, can stop technological advances. Luckily, I have found that my colleagues who regulate the insurance industry desire to see innovation succeed because it will, generally, enhance the consumer experience. The focus of regulators is to enforce the laws in our states and to protect our consumers. It is that constant focus that ensures a healthy and robust market. And it is that focus that allows the market to work during an insolvency of a carrier, as Iowa witnessed recently during the liquidation of CoOportunity Health.

But wanting to work with innovators doesn’t mean insurance regulators are going to turn a blind eye to how innovations and new technologies within the industry are affecting consumers. I do not believe the fundamentals of the insurance business need to be disrupted. Innovations within an industry that is highly regulated, complex and vital to our economy and nation need to occur within the confines of our regulatory structure. Innovators who are attempting to disrupt the insurance industry outside the bounds of our regulatory structure and who are not following state regulations will likely face significant problems.

So, just as Goldilocks finally found the perfect fit at the home of the three bears, insurance regulators are working diligently to find the perfect fit of the proper regulation to protect consumers for innovations and the technology affecting the insurance industry.   Regulators want the insurance business to continue to innovate and adapt to meet customer needs and expectations. Improving the customer experience through technology, quicker underwriting and increasing efficiency adds to the value of insurance for consumers. I know many smart people are working on creative projects to do these types of things and much more.

The insurance business is arguably becoming less complex because technology simplifies and evens out that complexity. Many existing insurance companies will face challenges as data continues to be harvested and as digital opportunities become more obvious. The continuous innovation in the industry is both positive and exciting.

However, insurance carriers face incredible issues, and, therefore, the regulators who supervise these firms must clearly understand the complexity of the industry and the external factors that weigh upon the industry.

A few issues industry participants must deal with:

  • Perpetual low interest rates that make it difficult for insurers’ investment yields to match up with liabilities;
  • Catastrophic storms that may wipe out an entire year’s underwriting profit in a matter of hours;
  • Increasing technological demands within numerous legacy systems;
  • International regulators working toward capital standards that may not align with the business of insurance in the U.S.

I believe regulators, insurance carriers and innovators can work together to harmonize and streamline regulations in an effort to keep up with market demands. However, the heart of insurance regulation beats to protect consumers. Compromising on financial oversight and strong consumer protections is not up for negotiation. Ensuring companies are properly licensed and producers are trained and licensed is critical, and ensuring companies maintain a strong financial position is equally critical.

Innovators who wish to bear risk for a fee or distribute products to consumers will need to comply with insurance law. Additionally, innovators looking to launch a vertical play into the industry through a creative service, model or underwriting tool need to make sure they do not run afoul of legal rules and provisions that deal with discriminatory pricing and use of data. It is a lot to absorb for an entrepreneur, but it is not impossible, and the upside may very well be worth it.

I absolutely encourage companies looking to innovate in the insurance industry to proceed, but I urge them to do so both with the understanding of insurance law and the role of the regulator and with strong internal compliance and controls. Innovators and entrepreneurs who proceed down the right path are the most likely to have regulators excited to see them succeed.

Insurance is still a complex industry. Can and should it be made simpler? Yes. I believe that, through innovation and continued digital evolution, it will. Should the industry focus on how to continue to enhance consumer experience and put the consumer in the center of everything? Yes, and I know that is occurring within many new ideas and businesses that are beginning and evolving.

Insurance, at its core, is a business of promises. It is an industry that has passed the test of time, and I believe, through innovation and continual improvement, it will remain strong and vibrant for the next 100 years.

If you are an innovator or entrepreneur and are looking for a program to learn about how to address insurance regulatory issues within your business as well as the role of a state insurance regulator, I would again encourage you to attend our 3rd Global Insurance Symposium in Des Moines, Iowa. This is the first conference where innovation and regulatory issues truly converge. This is your opportunity to learn from state insurance regulators, the Federal Reserve, the U.S. Department of Commerce, seasoned insurance executives, start-up entrepreneurs (the second class of the Global Insurance Accelerator will have a demo day for the 2016 class), venture capital investors and leading innovative thought leaders. No other meeting has assembled a group like this.

Everyone will benefit from the unique learning experiences, and, more importantly, relationships will emerge. Register here today!

What I Learned at Google (Part 2)

We didn’t intend to write a series on the symposium that Insurance Thought Leadership hosted at Google last week for C-suite executives of major companies and for regulators, but I want to build on the wonderful post yesterday by Iowa Insurance Commissioner Nick Gerhart, about the insights he picked up there. For me, the symposium underscored a crucial point about the pace of innovation — how it can be faster than we expect at times but can also be slower.

And it’s crucial to get the timing right.

The faster-than-expected part comes from a partner at one of the major Silicon Valley venture capital firms, which we visited as part of the symposium. All these firms track where entrepreneurs are seeing possibilities and where investments are happening, and the partner said that in all of 2014 the firm had been visited by exactly zero people hoping to innovate in insurance. Yet, just in the fourth quarter of 2015, the firm met with 60 companies looking to innovate in insurance.

Even as innovation has surged in fintech, in general, investment in insurtech start-ups has been minimal, about 1% of the total for fintech. But that may now be changing. Start-ups may accelerate the disruption in insurance.

You’ve been warned.

The slower-than-expected (at least for me) part comes from a consensus about driverless cars at the symposium. The group discussions at all five tables reached almost identical conclusions: that fully driverless cars will be feasible technologically in roughly four years but that it will be 10 before they are a major presence on the road.

In Silicon Valley-speak, saying something is 10 years out means it verges on science fiction. After all, 10 years at a pace set by Moore’s Law means that you have some 30 times as much computing power available to you at no increase in cost — if you need that much more power to make something happen, it’s hard to know for sure that it works 10 years ahead of time.

But the concerns of the insurance C-suiters and the regulators were more prosaic. They felt that anyone who might be left behind because of driverless technology would kick up a fuss and that state governments, likely led by the legislatures, could intervene on behalf of constituents to slow the transition.

Perhaps insurance agents would fear the shift of auto insurance from a personal responsibility to a corporate one, shouldered by the manufacturers of the driverless cars or by operators of fleets of the cars — if no person is involved in driving, how can an agent sell personal lines insurance?

Maybe car dealers, already fighting a rear guard action to prevent direct sales by manufacturers to consumers, would fear further loss of their intermediary role — why would a fleet operator need a dealer to purchase of tens of thousands of cars?

Basically, think of anyone who might lose business because of driverless cars and the promised reduction in accidents — parking garages, emergency rooms, whatever — and you can see an obstacle. Not everyone will be explicit about their complaints. It’s hard for an operator of prisons or funeral homes to demand more business. But our discussion groups were sure that opposition would surface in lots of ways and that politicians, always running for reelection, would lend support.

In fact, some technical concerns about driverless cars have surfaced in recent months. It turns out that Google cars have more accidents than human drivers do, albeit only minor accidents thus far and, most importantly, not because of any fault by Google — careless people seem to bump into Google cars a lot at stoplights. Google also acknowledges that the cars would have caused at least some accidents if not for intervention by the highly trained humans sitting in the driver’s seat. So, the technology still has a ways to go.

The pace of technical progress has still been faster than I expected when Chunka Mui and I published Driverless Cars: Trillions Are Up for Grabs nearly three years ago, and we staked out what was then a very aggressive position. The federal government recently stepped on the gas, if you will, by announcing a plan to spend $4 billion on driverless technology over the next decade and to reduce regulatory hurdles for adoption. The rationale — which we have long predicted the government would have to adopt — is that 25,000 lives could have been saved last year on U.S. highways if a mature form of the technology had been in use.

For me, then, the fundamental question from our symposium is: How do you position yourself for a technology that may be wildly important, yet whose timing is uncertain?

Two thoughts:

–A line that carries considerable currency in Silicon Valley is: “Never confuse a clear view with a short distance.” Even if you’re sure that something will happen as part of the transition to autonomous vehicles, keep in mind the issue of timing.

–Then think big, start small and learn fast — a dictum that just happens to come from another book Chunka and I wrote, The New Killer Apps: How Large Companies Can Out-Innovate Start-UpsThat means you get in the game now, with as big a vision as you can conjure up for yourself or your company. Then you start experimenting to see what works and what doesn’t — while spending extremely little money. You make sure you can kill the experiments as soon as you gather the needed information — no pilot projects allowed, at least not in the early days, and certainly no grand plans to go to market. And you keep iterating until both you and the market are ready. Then you start cashing checks.

Actually, one more thought: Consider coming to the Global Insurance Symposium that Nick and the fine folks in Des Moines (my dad’s hometown) are putting on in late April. Nick is as forward-thinking a regulator as I’ve met, and there will be lots of people there who can help you on your journey, whether that involves driverless cars or something else entirely. I’ll be there….