Part Two of a Special Report from CQ HealthBeat

In 2006, with Democrats poised to win the midterm election and gaining strength in the fight for the White House, two health insurance industry leaders came to the same conclusion about the future. A serious debate about overhauling the nation’s health care system was inevitable, they believed, and insurers would have to take a different approach than the tough stance the industry took during the last big debate, in the Clinton administration.

Karen Ignagni, the president and chief executive of America’s Health Insurance Plans (AHIP), the industry’s trade association, and George C. Halvorson, then the group’s board chairman and CEO of the insurance giant Kaiser Permanente, held a series of lengthy meetings to begin nudging their colleagues in the industry to come up with a proposal. Otherwise, they warned, they might not be able to influence a debate in Washington that could pose a serious threat to their business model.

“The message that Karen gave us was: ‘Health care reform is going to come and you have two options. You can be an innocent bystander who accepts whatever happens, or you can shape the debate,’” said another AHIP board member, J. Mario Molina, the chairman & CEO of Molina Healthcare Inc. “She made it clear that the industry can’t get away with folding its arms and saying, ‘No, we won’t budge.’ The real fear is that if we didn’t come up with solutions and fix the problem, someone else might fix it for us and come up with a solution we didn’t like.”

That pragmatism reflects a reality in the danger zone that is often at the nexus of business and government in Washington. When an industry finds itself out of favor, its leaders have a fundamental choice: either work with the policy makers to get the best deal you can, or fight until the end.

Today, with company executives in a range of industries worried enough by a government fully in Democratic hands, it is the era of playing nice. The auto industry in 2007 began showing a conciliatory approach to the issue of mileage standards and, recently, stood behind President Obama as he announced tougher standards. And a growing number of energy companies are willing to accept the regulation of greenhouse gas emissions in exchange for a flexible trading system and standards that are less stringent than some Democrats want.

So it goes with health insurers. The industry that gets credit for helping to kill the Clinton administration’s health care overhaul 15 years ago is striking a conciliatory tone as it faces the most serious attempt to overhaul the system since that effort collapsed.

Insurers know they aren’t in a good bargaining position. After a decade in which the image of managed-care companies has been marred by stories about denied coverage and hassles for patients, health insurers have a 40 percent favorability rating with the public, according to a 2008 USA Today/Kaiser Family Foundation/Harvard School of Public Health poll. That number was lower than the ratings for banks, airlines and drug companies, and about half the approval rating of doctors.

With those low approval ratings and with the election of a popular Democratic president who has made overhauling the system his top domestic priority, the industry is intent on showing that it wants to be part of any solution this time. Ignagni is now routinely calling administration officials and lawmakers with offers that would have been anathema to her group’s members just a few years ago.

Insurers say that, among other things, they’re ready to offer insurance in the individual markets to everyone, without regard to who is sick, stop charging people who are ill higher rates and cut health care costs. Currently, only a handful of states require insurance companies to take all comers regardless of pre-existing conditions or without charging sicker people more.

Insurance industry lobbyists have even started adopting some of the language their critics have used in the past, starting with statements that they don’t want to “discriminate” against people who are unhealthy. In exchange, insurers want Congress to require that everyone buy insurance and that the government provide subsidies to those with low incomes to make sure that the poor can meet that goal.

Many lawmakers give the industry credit for being open to changes to their business practices that they resisted for years. And many health insurance executives believe that a new regulatory framework could be built that would have a strong potential upside for the business and require modest sacrifice.

Writing on the Wall

At the same time that industry officials have offered concessions, they have been careful to structure their offers in such a way that appears significant but does not overpromise. The idea is to set themselves up for a win-win outcome, one that will benefit not just patients but potentially the profits of the industry as well.

While the industry would win an individual mandate that would apply to all Americans, for example, its pledges would affect a relatively small percentage of the public — the approximately 14 million people, or 5 percent of Americans, who purchase their care individually, not through an employer or other group.

Top 20 U.S. Insurers: Click here to view chart

For those patients in the individual market, insurers would no longer have to spend big sums on health screening of applicants, nor would they try to determine whose medical conditions would require the most expensive care in order to try to get out of covering those patients.

“Underwriting is expensive,” Kaiser Permanente’s Halvorson said in an interview. “It’s a much simpler business model to skip that and just enroll everyone.”

That wasn’t always the industry’s position, of course. During the George W. Bush administration, industry officials say, there really wasn’t much incentive for the industry to propose new models so long as there was little appetite for rebuilding the model.

“But knowing there was going to be a new administration, that cost pressures are increasing, that the number of uninsured is growing and that everyone including the industry is embarrassed that we’re the outlier when every other industrialized nation manages to cover everyone, I saw that there was a reason to have renewed energy,” he said. “There’s an opportunity here.”

Halvorson’s comments reflect the reality — and the industry’s growing acceptance of it — that while changes carry risks for insurance companies, so does the status quo. Over the past decade, the number of people who don’t have insurance — and therefore don’t pay premiums that can be used to spread out medical costs among a large population — has increased. Projections show the number of uninsured growing even more. Insurers say that hospitals and doctors shift costs from the uninsured to people who do have insurance, which puts more pressure on insurers. The insurance industry would clearly benefit if Congress required all Americans to buy their products, as lawmakers are considering.

As potentially tens of millions more Americans buy coverage, insurers would be better able to spread the risks — a necessary element of insurance. Healthier people would subsidize the small percentage of people who present the costliest cases. In the current system, the people who are most likely to buy insurance are often the ones who plan on using it, so that there are not enough healthy people paying into the pool and subsidizing the sick.

“Some of the change is a realization that there’s a business case to be made here” for pursuing changes, said Dean Rosen, a health industry consultant at the lobbying firm of Mehlman Vogel Castagnetti who served as a longtime GOP aide on Capitol Hill. “You have a system where the number of uninsured continues to climb.”

Insurers appreciate that Obama has proposed building on the current system, using employer-based policies that most Americans have now — a position at odds with some of the more liberal factions in his party, which would prefer the government to run the system through a program similar to Medicare. In other words, the industry may be in a better position to deal now than it might be in the future.

“There’s a feeling in health reform that there are these moments where there are alignments, and if you don’t seize this, it may be another five or 10 years before the opportunity comes again,” said Rosen. “Then the public may be more open to government involvement, and maybe single-payer folks will be in a better position to win the day.”