Alice Faryna's speech to STRS board, May 20, 2010

Request to divest STRS holdings in private insurance companies; (supported by Concerned Ohio Retired Educators)

Retirement benefits for public employees were severely compromised after the economic downturn devastated investments on which benefit reserves depend. Of particular concern to STRS retirees is the fact that health benefits are not mandated by Ohio law. The parallels between the flaws in the financial sector and the insurance industry are striking; top management in both industries continued to grant extravagant compensations and bonuses to themselves and capital gains to their major investors while looking to their customers and taxpayers to foot the bill. Health reform ideas centered on cost control in areas which offer only minimal cost reduction: tort reform, expanding information technology and wellness programs. Where was the call for cost control within the industry itself? We call your attention to alarms which have been sounded by 2 credible sources.

Wendell Potter, formerly a Cigna executive, has testified before Congress about how poorly the industry serves consumers of health care:

1. Wall Street investors expect ever higher earnings from health insurers, forcing measures which increase profitability at the expense of providing care. Examples are: denial of claims, denial for pre-existing conditions; and cancellation of policies when illness strikes. The percentage of premium (MLR) spent on payment of claims consequently falls. The MLR reform in the current law is inadequate for meaningful reduction of costs

2. Insurance companies have spent $1.5 million a day over the past year lobbying Congress to defeat health reform.

3. Executive compensation is no small part of their costs.

Something is wrong with these priorities.

Economist Paul Krugman sounded the 2nd alarm, after the 39% premium increase in Anthem's individual market in California. He says, "Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers. If too many healthy people decide to remain uninsured, the risk pool deteriorates, forcing insurers to raise premiums. As more healthy people drop coverage, the risk pool deteriorates even further. Now cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool; in effect, a death spiral."

Furthermore, calls for minimalist health reform that would ban discrimination on the basis of pre-existing conditions only makes the matter worse. It's a popular idea, says Krugman, "but as every health economist knows, it's also nonsense. A ban on medical discrimination would lead to higher premiums for the healthy, and would, therefore, cause more and bigger death spirals."

We are also concerned about the PBI incentive program:

While no incentives will be paid if the investment fund does not achieve a positive return, and are reduced if the fund is below $65 billion at the end of each year, PBIs will be increased by 8% if the total investment fund's absolute return exceeds +8.5% and the net relative return exceeds 60 basis points but less than 100 basis points or more.

As we have seen from the banking debacle, such incentives actually create an incentive for risky investing. We should reward prudent investing.

• Legislation at the federal level is inadequate to prevent the death spiral Krugman detailed.
• Unless this industry is restructured into a non-profit industry, this is a dangerous investment. (There is currently a proposal being made by shareholders that WellPoint return to its original non-profit status.)
• Allen Hubbard, a recent member of WellPoint's Board of Directors, predicted that we will have a single payer health care system in the US within 15 years as the people and Congress turn on health insurance companies as a way to cut costs.
• The fiduciary responsibility to make a profit for their shareholders, increases the cost of healthcare and increases costs to STRS in providing such to its members.
• A report by the American Medical Association on health insurance found that one company generally dominated the market in most areas, eliminating competition and driving up costs.
• The Centers for Medicare and Medicaid Services recently warned Aetna of possible contract revocation of Medicare Advantage Plans due to their prescription policies and not taking the appropriate measures "critical to protecting the health of its enrollees." Three other major insurance companies were sanctioned this way in two years.
• States may now reject proposed unjustified premium increases. This was recently done in Massachusetts. The insurers claim that the rejection will cause destabilizing losses for them.

We urge STRS to take note of the impending death spiral of the private insurance industry and divest its holding in these companies.

Alice Faryna, M.D.
Retired from WSU School of Medicine