Relaxing the 50-life mandate

Behind relaxing the 50-employee mandate

By Francis M. Miller

It was Andy Grove, the president of Intel who coined the term, “Only the paranoid survive”. So call me paranoid, but I believe the recent relaxation of the 50-employee mandate has ulterior motives. It revolves around the Exchange’s desires to enroll individuals using the products and systems they have created.

There is little doubt that marketing to groups of any size is a different kettle of fish than the individual market. Individuals can be enrolled using Navigators and spreadsheet software. The group market, on the other hand, requires a consultative selling. The broker must do an assessment of the current situation, define long range requirements and analyze financial alternatives. This is definitely not what the navigators are geared up to do.  Navigators are not licensed; they cannot guide, only talk about plan designs. Individuals prefer not having a broker put the squeeze on them. Employer groups want to be consulted.

The Navigators will, by virtue of their constraints, tend to treat health insurance as a commodity and price will be the prime criteria for selection. If someone can show me how the qualitative nuances and subtleties of a policy can be communicated I might change my mind. My guess is the Exchange will be a cross between a flea market and a psychic fair.

The group market is different. A bell shaped curve of this market suggests groups with less than 10 lives dominate the market. But, certain segments such as restaurants, hotel and retail do have group sizes that can be far higher and they tend not to offer insurance. Some, such as Starbucks have traditionally offered insurance. But, others tend to skirt the issue by keeping their workforce temporary and below 30 hours a week. I believe many large big box retailers such as Wal-Mart are moving rapidly to liquefy much of their work force and make it part time.

So, how will this work? The individual mandate is not being relaxed. If an employee, part-time or non-qualified can’t get insurance at work, then he or she must buy it through the Exchange to get the subsidy. And, many employer’s plans are high deductible and have skeletal benefits, so they do not meet federal requirements. Many employees do not enroll in their employer’s health plan.

There is little doubt in my mind that the Exchange would be more than happy to have everyone buy their insurance in the individual market. Serving the group market would have to be done by brokers and consultants and the Exchange is not a friendly place.

The Insurance Industry itself has mixed feelings about all this. Some large companies have historically done very little in the individual market, except in the Medicare supplement and Medicare Advantage segments. They are tip-toeing into the individual market and are smug in their beliefs that they can retain their larger groups. If the individual market shows itself to be a profitable market,  the insurers will use the internet and call centers to sell the product through the Exchange. The mandates and subsidies may create economic deadweight loss for society but they are music to the ears of insurers.

We need to remember that insurance brokers get paid a high percentage commission on the initial sale. That commission can be 50%. But, the real value to being in insurance are the residuals paid for subsequent years that the policy is retained by the customer. This makes marketing the largest component of insurer administrative costs, right up there along with claims costs. Eliminating these commissions by the use of Navigators who are unlicensed is a major way for insurers to reduce their administrative costs and meet the new 85% medical loss ratio criteria set by the feds.

Pundits have been commenting on this mega-trend created by ObamaCare. In March, 2012,  Deloitte Touche’s Michael Raynor and Clayton Christensen wrote a piece entitled “Power to the People” in which they hypothesized the emergence of a robust individual market would be a major disruption to the health care market. It is well worth reading.

Those who seek to socialize risk are doing so in a variety of ways. Taxing the healthy and the young to pay the premiums of the old, poor and sick is age-old. A major percentage of income taxes at the federal and state level are channeled into paying the costs of Medicare, Medicaid, and Veterans. Now, the individual market will result in even more general fund dollars going to pay subsidies. The mandates will force an intergenerational transfer between young, healthy people and older, sicker people through the community-rated risk pool.

Historically, the best way to escape this community-rated “socialization process” was for an employer to remove his employee population and either do an alternative funding or self-insurance scheme. Under ERISA, a self-insured employer can design its own plan and the State of Colorado cannot interfere. These plans by and large transcend ObamaCare’s rules. This escape-out-the-back-door has been a safety release valve for a health care system experiencing cost shifting, mandated benefits and a drift towards socialization. It is the healthy groups that bail out. Now, the Exchange desperately needs those healthy individuals to keep premiums lower in the Individual market. If the healthy groups or individuals bail out for whatever reason, the pool’s health experience will deteriorate and premiums will eventually rise, creating a vicious cycle.

Most new jobs are being created by small groups. The larger groups have already escaped and are out of reach of ObamaCare. It is the middle ground, the under-100-life groups who represent the green grass on the other side of the fence for the Exchange. Should these employers abandon their plans and let their employees buy on the Exchange, so much the better. In my mind there is a fair chance that the 50- life mandate will NEVER be imposed. By the time the feds revisit the issue, those lives will be securely enrolled in Exchange-offered products and they will be receiving their subsidies. They won’t be as motivated by a day-late, dollar-short plan their employer puts together. And, if the employer can’t get a high percentage of his employees to enroll he may just scrap the whole idea.

This is just the tip of the iceberg on this matter.