Deadly Spin

by Wendell Potter

  These personal holdings create an incentive for companies to repurchase shares of their own stock, which pump up their share prices and earnings-per-share figures by reducing the number of shares outstanding. From 2003 through 2008, the seven largest publicly traded health insurers, which cover 112 million Americans, spent $52.4 billion buying back their own shares. Companies make repurchases with excess cash on hand (drawn from billions of dollars of premium revenue flowing through their accounts each month) or borrow the money to pay for them.

  CEOs calculate that the reward for big shareholders, including themselves, will often be greater if they invest available funds in more repurchases instead of improving a company’s operations. When they repurchase shares, they are reducing the amount of money available to them to make the health system run more efficiently, improve the quality of care, or reduce customers’ premiums.

  While stock repurchasing is also common in other industries to achieve corporate goals, William Lazonick, an economist at the University of Massachusetts, says that the health insurance industry has been especially rife with share buybacks. In a February 2010 report, he wrote,

  Among the top 50 [share] repurchasers for 2000 to 2008 were the two largest corporate health insurers: UnitedHealth Group at No. 23 with $23.7 billion in buybacks, and WellPoint at No. 39, with $14.9 billion. For each of these companies, repurchases represented 104 percent of net income for 2000–2008. Over this period, repurchases by the third largest insurer, Aetna, were $9.7 billion, or 137 percent of net income, and the fifth largest, CIGNA, $9.8 billion, or 125 percent of net income. Meanwhile, the top executives of these companies typically reaped millions of dollars, and in many years tens of millions of dollars, in gains from exercising stock options. A serious attempt at health care reform would seek to eliminate the profits of these health insurers, given that these profits are used solely to manipulate stock prices and enrich a small number of people at the top.23

  From 2000 to 2008, the ten largest for-profit health insurers paid their CEOs a total of $690.7 million, according to corporate filings with the Securities and Exchange Commission. As outsized as the CEO pay is, it doesn’t capture the full extent of the health insurance industry’s wasteful overhead. In 2009, WellPoint employed thirty-nine executives who each collected total compensation exceeding $1 million, according to company documents gathered by the House Energy and Commerce Committee. And WellPoint spent more than $27 million on retreats for its staff at resorts in such destinations as Hawaii and Arizona in 2007 and 2008, the documents showed.

  Compare this lavish executive compensation to that of the administrator of the Center for Medicare and Medicaid Services, who manages the health care of forty-four million elderly and disabled Americans on Medicare and about fifty-nine million low-income and disabled recipients on Medicaid. This administrator’s pay tops out at $176,000 a year.

  BERNIE MADOFF SHOULD HAVE BEEN

  AN INSURER

  The health insurance industry’s uniquely American, profit-driven brand of corporate governance has armed senior executives with virtual monopoly power in many metropolitan areas and has encouraged them to pursue often breathtaking rate hikes. They have had little pushback from state regulators—most insurance commissioners lack the authority to intervene, and most state legislatures have taken a passive approach. In many states, health insurers are large employers, so they are even more politically potent—and in every state, insurers are among the biggest spenders on lobbying and campaign contributions. Not only are premium hikes tolerated, but insurance commissioners in most states have no idea what’s really going on inside these companies.

  Private health insurers abhor transparency and public accountability regarding claim denials, underwriting rules, payments to doctors and hospitals, death rates, racial or ethnic disparities in health status, or the health outcomes of their members. They are usually allowed to protect this important information as “trade secrets.”

  The best example of the industry’s secrecy is the medical-loss ratio, which, as I mentioned previously, is the measurement of the share of premium revenue spent on actual health care. The trend since Clinton’s plan failed has been unmistakable. In 1993, the leading insurers used about 95 percent of premium dollars on medical benefits, according to the consulting firm PricewaterhouseCoopers. The merger wave and the new philosophy about health insurance pushed MLRs down sharply, so that by 2007 the number was 81 percent.

  By contrast, Medicare has consistently had a ratio greater than 97 percent since 1993.24

  Although Wall Street constantly pressures companies to reduce their MLRs, this imperative for the first time will collide with national standards, as established by the new health care reform law. Insurers are mandated now to spend at least 80 percent of premiums on medical care for the individual and small-group market (one hundred enrollees or fewer) and at least 85 percent for the large-group market.

  One might think that these new requirements will benefit health care providers and patients, but you can count on insurers to game the system. They’ve already tried. Within days of President Obama’s signing the law, WellPoint told Wall Street analysts that it had decided to “reclassify” certain categories of costs that it had previously counted as administrative expenses and move them to the medical-spending side of the equation, effectively raising its ratios without making any actual changes in behavior.

  When low MLRs were needed to impress Wall Street investors, insurance companies excluded the cost of nurse hotlines, medical reviews, and disease-management programs from medical costs. Now that the government is demanding minimum MLRs, the insurers want regulators to consider those expenses as medical costs, a clear-cut signal to investors that they will resist efforts to get them to trim profit margins. This demonstrates how important it will be for regulators to push back against the industry’s reclassification attempts and other tricks and to consider the needs of consumers more than the profit-motivated wants of insurers.

  WE’RE VICTIMS, NOT VILLAINS

  As they initiated their rate hikes after the Clinton debacle, insurers professed to be the “victims” of rising health costs, and they have rejected any responsibility for America’s health care affordability crisis. But the size of premium increases has had no relationship to real health costs—or anything else except internal greed.

  From 2000 to 2008, insurers hiked premiums in employer-sponsored group health plans by 97 percent for families and 90 percent for individuals, according to the Kaiser Family Foundation. At the same time, private-insurance payments to health care providers grew by 72 percent, medical inflation increased only 39 percent, wages only 29 percent, and overall inflation 21 percent, according to government data.25

  If the industry had chosen to raise premiums at the exact pace that it increased spending on health care from 2000 to 2008, insurers would still have made substantial profits without pushing millions of people to go without health benefits. But during those years, insurers raised family premiums 2.5 times faster than the rate of medical inflation, 3.3 times faster than that of wages, and 4.6 times faster than that of general inflation.26

  This data refutes industry claims that insurers are best situated to manage care and costs efficiently—claims that, as an industry spokesman, I tried, with considerable success, to spin as indisputable truth. The reality, however, which became increasingly evident to me as I rose up through the ranks, is that Wall Street–driven financial imperatives trump the needs of millions of Americans.

  The lack of affordable, quality coverage has meant that many Americans with medical needs are driven to financial ruin. Medical debt was a key reason for 62 percent of personal bankruptcy filings in 2007. In 2008, there were 1.07 million household bankruptcies. And as I noted previously, the lack of coverage will contribute to the deaths of about 45,000 people this year, or 123 people every day, according to Harvard Medical School researchers.

  Yet in 2009, the five largest for-profit insurance companies waltzed thr
ough the worst economic downturn since the Great Depression to set records for combined profits. WellPoint, UnitedHealth Group, Aetna, CIGNA, and Humana reported total profits of $12.2 billion in 2009, up 56 percent from the previous year. It was the best year ever for big insurance.

  How did they do it? Not by insuring more people. In 2009, the five companies covered 2.7 million fewer Americans in private health plans than in 2008.27

  Throughout the health care reform debate of 2009 and 2010, top health insurance executives argued that total industry profits equal only one penny of every dollar spent in the U.S. health care system. That was a big part of the industry’s effort to make people think—erroneously—that insurers have little to do with rising health care premiums. But even using their one-penny formula, that would mean the health insurance industry collected $25 billion in profits in 2009 alone. At that rate, over a ten-year period that penny of profit could finance more than 25 percent of the $940 billion health care reform law.

  Health insurance company executives—including me when I was spinning for the industry—have consistently asserted that premium hikes of as high as 40 percent are necessary to cope with rising medical costs. They also like to complain that hospitals charge private insurers more to make up for lower Medicare rates. This all fits the industry’s self-portrait of powerlessness in controlling medical costs—despite the fact that, collectively, the large insurers have as much purchasing clout as Medicare. WellPoint alone—with 33.6 million members as of December 31, 2009—has nearly as much purchasing power as Medicare.

  A 2008 actuarial analysis commissioned by AHIP as part of the industry’s propaganda campaign argued that Medicare doesn’t pay hospitals enough, causing private insurers to pay well above hospitals’ costs to keep them solvent. Insurance companies invoke this myth frequently in their attempts to justify soaring premiums. The nonpartisan Medicare Payment Advisory Commission (MedPAC), an independent expert panel created by Congress, refuted this argument and found that a hospital’s relative market strength—not what Medicare pays—determines what a hospital is paid by private insurers.

  The history of private insurers and hospital price negotiations is telling, as MedPAC explained in its March 2009 report to Congress. From 1987 through 1992, hospital profits from private payers grew, and from 1987 through 1993 the rate of hospital cost growth was above the rate of inflation for goods and services purchased by hospitals. From 1994 through 2000, insurers restrained private-payer payment rates, and hospital cost growth fell below the rate of inflation for hospital-purchased goods and services.

  “By 2000, hospitals had regained the upper hand in price negotiations due to hospital consolidations and consumer backlash against managed care,” MedPAC reported. With the loss in leverage over many hospitals, private insurers in turn passed along these costs through higher premiums, higher deductibles, and benefit buy-downs, the industry’s euphemism for reducing benefits. “While insurers appear to be unable or unwilling to ‘push back’ and restrain payments to providers, they have been able to pass costs on to the purchasers of insurance and maintain their profit margins,” MedPAC said.28

  The United States has entrusted one of the most important societal functions, providing health care, to private health insurance companies that have consolidated into huge players with weak competition. More than one out of three Americans is now enrolled in a plan administered by one of the seven largest insurance companies—all of them listed on the New York Stock Exchange and owned primarily by big institutional investors.

  Despite the recent reform, most analysts expect consolidation to continue as the big insurers buy smaller competitors or push them out of business. Consolidation is inevitable because the government’s failure to control it has resulted in a cartel of huge insurers so influential that smaller companies will eventually have to sell out or shut down.

  The industry itself is even suggesting that the law will lead to further consolidation. In the May 16, 2010, edition of the New York Times, WellPoint’s chief financial officer said that he believed the new law would create opportunities for WellPoint to buy many of the smaller nonprofit Blue Cross plans that were still operating in the United States, because those small plans might have difficulty competing against much larger companies like his. “We have a unique opportunity to be a Blues consolidator,” he said.29

  It will not be the new law that creates opportunities for WellPoint and other big companies; it will be the fact that the government failed the public by allowing the cartel to be formed in the first place.

  In the future, it will not be “Obamacare” that takes choice away from Americans, as the insurance industry and its allies contended during the recent debate. It will be the unfettered invisible hand of the marketplace.

  C H A P T E R V I I I

  An End Too Soon

  WHEN she was a little girl, Nataline Sarkisyan loved to dance and sing and write poetry. She was a Girl Scout. She dreamed of growing up to be a fashion designer. She was also proud to be an Armenian American and the daughter of Grigor and Hilda Sarkisyan, who had immigrated here from Armenian communities in Lebanon and Syria when they were children.

  The Sarkisyans sent Nataline to a private Armenian elementary school near their home in Los Angeles because they wanted to make sure their only daughter could speak their native language. And Nataline was so proud of her heritage that she spent part of every weekend at the Armenian Youth Federation teaching the language to other kids whose parents couldn’t afford to send them to her school.

  Nataline was also very religious. She loved Bible school and was always praying for her family and her friends. Her mother said they used to pray together every night. “Just the two of us. We never missed a night.”

  The first time I heard about Nataline was late on the Friday afternoon of December 14, 2007. I’d been traveling that day and hadn’t had a chance to check my voice mail messages. There were lots, as usual, and most of them were routine—except for one from a TV station in Los Angeles that stood out because it just didn’t make sense.

  The reporter said she’d been told that CIGNA was refusing to cover a liver transplant for a Los Angeles teenager because her family owned a second home. I replayed the message to be sure I’d heard it correctly. I couldn’t imagine why anyone at CIGNA would care if a family had a second home and, even if they did, how it would have any bearing on whether or not to cover a transplant. Nevertheless, for the sole reason that a TV reporter had called about a CIGNA health-plan member, I gave the Nataline Sarkisyan case “high profile” status.

  My staff and I took every call from reporters seriously, but we gave special attention to reporters working on “horror stories,” as I mentioned earlier. Typically, whenever any of us got such a call, we would arrange a conference call with senior managers, often including the chief medical officer, and sometimes even the CEO. This one didn’t seem to warrant such a call—at least not yet—but I telephoned my office to find out if any other reporters had called about it.

  None had, but the same TV reporter had phoned again. I asked a colleague to call her back to try to get more information and, if necessary, to e-mail her a bland statement of some kind.

  E-mail had become the most common way we communicated with reporters. It enabled us to click “send” and dispatch a statement that usually had been blessed (if not already written) by an ad hoc committee of lawyers, corporate doctors, and businesspeople. With e-mail, we were sending not just a statement but a broader message: “Here’s our response to your question. Take it or leave it. It’s all we’re going to say.” More often than not, reporters would take it and not bother us for more information. They were often on a deadline, and even if they weren’t, they knew from experience that they weren’t going to get much more out of us.

  The statement we sent to the Los Angeles TV reporter didn’t acknowledge that Nataline was a CIGNA member, much less answer any specific questions about the alleged denial: “Due to federal privacy laws we ar
e unable to confirm that this individual is a CIGNA member at this time. Cases such as this are not decided based on cost, but rather on the medical appropriateness of treatment. There is an appeals process in place whereby physicians who are not with CIGNA review a case and provide another viewpoint on the appropriateness of treatment. We always encourage our members and their physicians to make an appeal in situations where they disagree with a decision.”

  We hoped that would be enough to kill the story, but it wasn’t. On Saturday evening, December 15, KTLA-TV aired a brief report about the case. “Members of a local family say they’re living a nightmare, and they blame their insurance company,” said the station’s anchor, introducing the first of what ultimately would be thousands of stories about CIGNA’s refusal to pay for Nataline’s liver transplant.

  For the first time, I started paying close personal attention to the case. Not only did I not want CIGNA to get any more bad publicity, but I also couldn’t help thinking about the family. As the father of a daughter just three years older than Nataline, I couldn’t help putting myself in their shoes, wondering what life would be like for my wife and me if we were fighting with an insurance company to get it to cover a lifesaving transplant for our daughter, Emily. Just thinking about it caused me to ache. I tried to quickly put it out of my mind.

  Nataline had been diagnosed with leukemia on May 28, 2004, just weeks before her fourteenth birthday. After a series of chemotherapy treatments, the leukemia was in remission. “She only had two treatments left by the time of her sweet-sixteen birthday party,” her mother said. A year later, though, just as she was getting ready to go to the hospital for routine blood work, she told Hilda, “I feel weird, Mom, like something is wrong with me.” Something was: Her leukemia had come back.