When a worker at a small business becomes gravely ill, insurance providers often later dump the company, a practice reforms may not address
Purging: It's an ugly word, and it describes an ugly practice. But Wendell Potter, formerly the director of media relations for CIGNA (CI), says that's exactly what health-insurance companies do when an employee at a small business is unexpectedly hit with a sudden, and expensive, illness: The insurance company "purges" the small company from their rolls.
In June testimony before U.S. Senate Committee on Commerce, Science & Transportation, Potter said health-insurance companies "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."
Statements from Potter's former boss, CIGNA President David Cordani, bear out Potter's testimony. In a February conference call with analysts, Cordani said: "In 2008 we were essentially actively decreasing our posture in several markets, particularly the under-50 book of business. You could use the term 'purge' if you'd like. You could also use the term 'hard harvests' or 'soft exits.'"
While the practice of intentionally making health insurance unaffordable for a small company may seem shocking, Len Nichols, a health policy analyst at the Washington nonpartisan think tank New America Foundation, isn't surprised in the least. Of purging, he says, "It's always gone on. It's the way business is conducted."
When asked to comment on Cordani's statement, spokesperson Christopher Curran said that for small employers, "rates are often based on claims experience. While we try to work with all our customers, when medical costs are higher than premiums, we may need to requote."
Senator John D. ("Jay") Rockefeller IV (D-W. Va.) thinks there may be more to it than that. On Aug. 5, Rockefeller sent a letter to CIGNA Chairman and CEO E. Edward Hanway requesting an explanation of Cordani's use of the word "purging" in the conference call, as well as the specific methods the company used to "decrease its posture" in the small business market and how much money it saved by doing so. Rockefeller has requested that CIGNA respond by Aug. 19.
Joy Mosley, the chief operating officer of Biotest Laboratories, a medical testing company in Minneapolis, is one business owner whose premiums were recently "requoted" by her insurer, Medica. Two years ago, in an effort to keep premiums down for her 77-person company, she turned to a high-deductible plan, coupled with a Health Savings Account (HSA), which saved her company about 20% on health-insurance costs. But then an employee was diagnosed with pancreatic cancer. Medica, the firm's health insurer, covered the million-dollar treatment, but the following year, it requested nearly $200,000 in additional premiums—an increase of 70%. "I felt angry that the health-care system left us unprotected," says Mosley. Larry Bussey, a spokesperson for Medica, says, "We don't purge. We try to keep our customers." Still, Mosley is terrified about the prospect of opening next year's renewal letter. "We can't afford another exorbitant increase," she says.
Not all entrepreneurs are equally vulnerable to the whims of insurers. In about a dozen states, where some form of "community-rating" prevails, regulations prohibit insurance companies from setting premiums for firms with 50 or fewer employees based on workers' health status, forcing insurers to spread risk among their smaller accounts. But in roughly three-fourths of the country, "rating bands" allow for considerable flexibility in pricing. In states with "loose rating bands," such as Texas and Nevada, one small firm can be charged nearly 70% more than another. Moreover, in Pennsylvania and Virginia, there are no ratings restrictions at all, encouraging insurers to try to turn a profit on each individual business. And no matter what state you're in, ratings bands don't apply to companies with more than 50 employees, which means that those such as Biotest are left unprotected.
Little Leverage for Small Companies
Compounding the problem is that entrepreneurs slapped with hefty premium increases often have few other options. According to a 2008 survey by the Government Accounting Office, the median market share of the largest carrier in the small group market is 47%; in Alabama, one carrier insures 96% of all small businesses. As Senator Olympia Snowe (R-Me.), the ranking member of the Committee on Small Business & Entrepreneurship, which commissioned this study, notes: "Such consolidation is an alarming trend."
In the absence of major state or federal policy changes, small companies have little leverage. "All any individual entrepreneur can do is to become more knowledgeable and to take the time to shop around for coverage," advises Amanda Austin, the director of federal public policy at the National Federation of Independent Business. However, President Barack Obama's health-care initiative holds some potential to help level the playing field. The bills now bouncing around Congress all call for the creation of a health-insurance exchange, which, besides offering small businesses more affordable choices, would provide protection against sudden rate hikes. But even this measure might exclude small firms with more than 20 employees. Says Nichols: "I'm very concerned about this. It will leave a lot of small businesses unprotected. The size really should go up to protect all firms that are not big enough to self-insure"—a number Nichols pegs at about 300 employees. But the current proposals leave Biotest and thousands of other similar companies out in the cold.