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The Urge To Purge

One of the great ironies of the health care debate is that small business owners tend to be most wary of reform, even though they are the employers who probably stand to gain the most. To see why, consider the insurance company practice of "purging," which Senator Jay Rockefeller (along with some allies) is spotlighting this week.

Under the Health Insurance Portability and Accountability Act of 1996, insurers must renew policies for small groups from one year to the next, even if members of that group file large claims. But insurers can get around this by raising premiums to the point where smaller companies must cut benefits drastically, stop offering coverage altogether, or raise premiums to the point where employees can't afford to buy it. 

On June 24th, former CIGNA official Wendell Potter testified before the Senate Committee on Commerce, Science, and Transportation and said that "[a]ll it takes is one illness or accident among employees at a small business to prompt an insurance company" to purge a business--or to encourage what CIGNA's Chief Operating Officer David Cordani once called a "soft exit." 

To be sure, there are limits on how much insurance companies are allowed to raise premiums in a given year, but these caps are pretty lax. In most states, insurers can raise rates up to 15 percent. And that is above and beyond what people in the industry call "trend"--the average of how much the actual cost to insurers in the state has risen in a given year. 

So let's say CIGNA's cost of providing coverage rises 5 percent one year. The company could increase rates to a business by an additional 15 percent, so that coverage might cost 20 percent more. Many individuals and small employers would have to drop coverage.

Not that the risks are limited to small businesses and their employees. Mid-size companies feel the impact, too. The rate-increase limits apply only to companies with fewer than 50 employees. Once a company hires its 51st worker, it loses that protection, meaning an insurer would have unlimited ability to raise rates from one year to the next. Large companies can sustain this because they "self-insure"--that is, they pay for their employees' medical expenses out of their own funds, hiring insurers only to administer the policies. But companies that don't insure, ones with closer to 50 employees, wouldn't have that luxury. 

It's hard to pin down exactly how common purging is. But Karen Pollitz at Georgetown's Health Policy Institute, one of the nation's top experts on the private insurance market, says it's safe to assume the practice is not unusual. "It's all kind of underground, out of sight, and it's not a surprise to anyone who follows the industry what's going on," Pollitz said. "You'll make more money if you collect premiums and don't pay claims than if you collect premiums and do pay claims." Pollitz notes that, for insurers, it's "all about avoiding risk." 

Of course, the purpose of insurance is to absorb risk, so that consumers don't face it on their own. Or at least that's supposed to be the purpose.