Risky business: a decade of daredevil finance and other games plays a hidden role in the health insurance crisis - Cover Story

Common Cause Magazine, Spring, 1993 by Jeffrey Denny

Like many small-business proprietors, Jan and Phil Fenty of Washington, D.C., fret constantly about the cost of health insurance. Owners of Fleet Feet, a running shoe and clothing franchise, the Fentys pay dearly to cover themselves and their two full-time employees under the Washington-area Blue Cross/Blue Shield health plan. Just recently Blue Cross gave notice that Fleet Feet's premium would be increased 28 percent, bringing their monthly payment to $1,800.

So the Fentys were outraged to read in the Washington Post that Blue Cross had raised rates partly because of some $100 million in losses from various for-profit business ventures, many unconnected to medical coverage. for example, one of its subsidiaries reportedly now owns Cape Cod beachfront property and a rock-and-roll recording studio on a 145-acre New England farm - the unintended result of having loaned $11.1 million to a student travel agency that defaulted.

"It made me angry to see those big shots wasting our money and our rates going up and up and up," says Jan Fenty.

The Fentys are among the untold number of health insurance policyholders nationwide who may have suffered higher rates, reduced coverage, unpaid bills or cancelation because of a little explored factor in the nation's health insurance crisis: The same kind of 1980s-style go-go investment practices, questionable business dealings, lavish spending and help-yourself ethics that brought down the savings and loan industry also have undermined the insurance industry.

Under a tattered patchwork of state laws and virtually no federal oversight, health insurance underwriters have lost billions of dollars investing in high-yield, low-grade "junk" bonds, real estate and other dubious ventures. Sporadic cases of fraud have compounded the losses.

"It's been a well-told tale here," says Lester Dunlap, a consumer advocate for the Louisiana Department of Insurance. "You find this in almost every state."

Until recently, there was little concern about how health insurers invested their assets as long as they provided an efficient system for spreading out the cost of medical care. But increasingly their financial management is a matter of public policy.

"I don't think the public is aware of what could happen to their health insurance because of some of these problems," says a congressional aide who investigated life/health insurance company failures.

A review of insurance industry reports, ongoing congressional investigations, newspaper articles and pending lawsuits, as well as interviews with insurance regulators, financial analysts and other industry observers reveals a disturbing picture: GAMBLERS' MENTALITY. A 1990 paper by Investors Diversified Services (IDS) named "imprudent investment management" among the "major factors" in the failure of the 48 largely health and accident insurers it studied. "Over half ... had an investment portfolio significantly different from the industry norm," the report noted.

AILING INSURERS. The number of life/health insurer insolvencies tripled during the 1980s "and this trend appears to be continuing," the U.S. General Accounting Office (GAO) concluded in a recent report. And 14 of the 72 Blue Cross health plans nationwide, the country's largest health insurer with 94 million policyholders, are in "weak" or "very weak" financial condition, according to an independent analysis.

POLICYHOLDERS STUCK. In addition to facing higher rates or cancelation, policyholders also may be saddled with unpaid medical claims because the system of state "guaranty funds" designed to clean up after insurance company failures is full of holes, according to the GAO. And with rare exception, the guaranty funds do not cover Blue Cross policyholders, members of health maintenance organizations (HMOs) or employees of self-insured businesses - more than 120 million policyholders.

On top of that, the rash of failures has contributed to the increase in health insurance premiums because the guaranty fund system is financed by insurance rate increases, as well as tax revenues. The cost of covering unpaid life/health insurance claims from insurers that failed between 1976 and 1991 is expected to reach $4.2 billion, according to A.M. Best, an insurance rating agency.

The health insurance industry insists that it's financially stable on the whole, arguing that most of the 1,500 medical underwriters in business today are healthy and that fraudulent operators are rare. And executives with the nation's largest health insurers reject the notion that investment losses have harmed policyholders. "Absolutely nothing else contributes to [the health insurance crisis] other than...the explosion in health care costs," says John Maginn, chief investment officer at Mutual of Omaha, the nation's premier underwriter of individual health plans.

But logic dictates that when an insurance company's overall financial picture is weakened by investment losses, it leaves less room to hold back rate hikes or keep risky policyholders. "Everything that affects the bottom line" affects health policies, says a National Association of Insurance Commissioners (NAIC) official.