As the deadline looms when Illinois’ insurance exchange must be up and running under the Affordable Care Act, Illinois continues to see an exit of major health insurance providers.
Although Illinois recently predicted as many as 16 carriers would be participating in its health insurance exchange, as of press time that number had dwindled to only six. On July 15, UnitedHealth Group - the second-largest insurance company in Illinois’ non-group market - had dropped out.
Steve Klingel, an employee benefits specialist with Cassens Insurance Agency in Edwardsville, says the reason for the exodus of major health providers is simple: the new healthcare law eliminates competition rather than fostering it.
“This law (the Affordable Care Act) that they said was designed to increase competition is doing exactly the opposite, because no one wants to be the cheapest,” said Klingel. “If you wind up being the cheapest carrier, you’re going to get everybody’s bad health risks. That’s why you’re seeing these companies saying, ‘We’re not going to take part in these exchanges.’ That’s the opposite of what real competition in any marketplace should be. Competition should be providing the best product for the least amount of money. But the provisions of the ACA prevent this from occurring.”
Klingel compares it to an analogy wherein the federal government would write a law to govern the sales of automobiles, but with the same competitive restrictions as the Affordable Care Act.
“Let’s say you had Mercedes, BMW, Cadillac and Yugo dealerships,” Klingel said. “Under the same logic as the Affordable Care Act, the government is saying, ‘Mercedes, BMW and Cadillac, you’ve got to get rid of all that fluff and offer the same thing that the Yugo has, and you have to sell your models at the Yugo price.’ That eliminates benefit and quality competition right there. Just as in this example, we’re going to see some very strong niche players in the health insurance market who can’t hang in there anymore or who simply choose not to.” Assurant is one example of a solid player in the Illinois market, says Klingel. The health provider currently still offers maternity care for small groups. Blue Cross Blue Shield had offered maternity coverage as a rider on individual health insurance policies, but made the recent decision to drop it for new and existing policies in Illinois effective July 15.
Klingel says there’s no telling how many - or how few - health providers will choose to remain in the exchange. “I don’t know where the bottom is going to be,” he said. “Some are fighting back. They’re telling clients to reapply by the December (2013) renewal date to get them through all of 2014 in the hopes that this thing (ACA) will blow up on itself.”
According to the Illinois Dept. of Insurance at press time, no major players have left Illinois’ individual healthcare marketplace; Kimberly Parker, communications manager for the IDI, says the department sees “vigorous competition here.”
Illinois has yet to disclose premiums for plans offered on the exchange, which is scheduled to begin enrolling individuals in just two months; under the new healthcare law, the exchange must be established and operational by Oct. 1.
“There will be no adverse impact on the citizens of Illinois,” said Parker. “The Health Insurance Marketplace, previously known as the Exchange, will provide robust options for small businesses and individuals. No major carriers are leaving the marketplace, so there will be no adverse impact on small businesses,” she added.
Where does the traditional insurance agent fit into this new national healthcare dynamic? One thing’s for sure: proponents and opponents of the ACA agree that this role is changing dramatically.
“Before this law, as agents we could design a health plan to suit our individual client,” said Klingel. “Someone could say to me, ‘I take blood pressure medication and need a policy with prescription coverage,’ or ‘I only need catastrophic coverage.’ But we can no longer help our clients in that way. The very nature of our role has changed.”
Under the ACA, a new occupation known as an “in-person assister” or “navigator” is coming into being. According to federal government sources, these positions are currently being filled by individuals and small businesses that are being trained to guide applicants through the mandatory online ACA registration process. Mark Brown, a certified financial planner, accredited investment fiduciary and president/owner of M. Brown & Associates, says among other duties, navigators will be tasked with helping the public review and choose a health insurance plan in states like Illinois that have elected to participate in an insurance exchange.
“These are government employees who will be earning approximately $48,000 a year,” Brown said. “Many of them are being trained now as we speak. They will be responsible for explaining to you, your parents and your neighbors across town how to use your computer, how to navigate the health exchange Web site and how to enroll online - which is required. Illinois alone is hiring thousands of them. Medicare is probably the simplest thing in the world to do (enrolling online), but a lot of people don’t understand how to do it. This enrollment process is going to be much more complicated.”
Brown tested the theory on his under 26-year-old daughter, who works for one of the major hospitals in Chicago. “She’s got all these wonderful coverages from which to choose. It’s not easy,” he said. “There are four to five medical plans. It took the experience of my 26 years in the industry to make sure I knew what I was looking for. Now imagine what it will be like if you’ve never even had health insurance and aren’t familiar with the difference between a deductible and a co-pay?”
One type of insurer who could be positioned to fare well in the new, nationalized healthcare environment is the voluntary or indemnity insurance provider, says Klingel. These companies - one example is Aflac - pay a flat amount of money directly to the insured individual for a specific occurrence that would not be covered under his health insurance plan. Aflac has been offering its products in Japan for four decades, according to Mark Barbier, the company’s Illinois state sales coordinator.
“Aflac has an opportunity to emerge from the evolving healthcare system more vibrant than ever before due to the niche we fulfill in the marketplace,” Barbier said. “As we’ve seen for 40 years in Japan, which has a universal healthcare system, healthcare reform and increasing healthcare costs continue to drive demand for voluntary benefits - and for good reason. As the cost of health insurance rises, employers continue to struggle to control their company’s healthcare expenses. Many have already passed more of the premium costs to employees and have increased deductibles, copayments or out-of-pocket limits. For many organizations, voluntary benefits may help solve a number of concerns and challenges that have surfaced during this time of health care financial insecurity,” he added.
Companies like Aflac who sell voluntary insurance policies- including critical illness, short-term disability, accident, dental, life insurance and more - pay the policyholder directly for unexpected costs associated with serious illness, injury or loss.
Thanks to an outcry from 2,500 community banks and trade associations across the nation, regulators - in a rare move - agreed to change the rules that will ultimately impact the type of residential mortgages banks are able to offer, their capital levels and how they weigh the risk of the assets on their books.
David Schroeder, vice president of federal governmental relations at the Community Bankers Association of Illinois, says it was highly unusual to see the feds - the Boards of the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of Comptroller of the Currency - react to public input in this way. In addition, early last month, the three agencies granted a one-year reprieve on two key rules that would have otherwise taken effect Jan. 1, 2014.
“I am delighted to say the regulators changed and we got an additional year on these two rules,” said Schroeder. “The banking industry put forth an unprecedented response. Basel III and the Standardized Approach NPR (Notice of Proposed Rulemaking) will not become effective for banks until Jan. 1, 2015.”
Regulators changing the proposed rules regarding balloon mortgages was a sigh of relief for community banks, particularly those serving rural communities, whose residential mortgage loan product mainstay has long been the balloon note. This longstanding, stable lending product differs from a traditional residential mortgage in that it is not resold on the secondary market. The bank keeps the note on its books, issuing the debt for a shorter period such as five years on a 20-year adjustable term.
Regulators had originally proposed big increases in risk weights (banks’ off-balance-sheet exposures) for balloons and other residential mortgage loans, in some cases from 50 to 150 percent. Schroeder says the original proposal discounted the community bank business model of fair dealing and soundly underwriting these types of loans. Fortunately, he says, this proposal did not survive. The final NPR includes retaining the existing risk weight of 50 percent for high-quality, seasoned residential mortgage loans and 100 percent for all other residential mortgage loans.
Banks with customers who live in rural communities have relied greatly upon balloon mortgages - as have their lenders, for years, says Brad Rench, regional president at First Mid-Illinois Bank & Trust. “A balloon mortgage, by its very nature, is typically a community bank product,” said Rench. “If we all had our choice, we’d put 30-year secondary market loans out. But they don’t fit everyone, and that’s why this alternative exists in the product mix. If you’re selling into the secondary market and you’re in small-town USA, those (balloon) loans may not qualify. So you typically do a balloon note. When regulators initially announced this rule last fall, it was a huge issue for banks serving rural communities across the country, because balloon notes - which they’d been making for decades and more - could have had to be phased out by the end of this year. Now we’ve gotten a reprieve on balloons.”
As regulators continue to tweak the two rules that have been delayed until the start of 2015 which directly affect community banks, Rench says First Mid is continuing to keep balloon notes in its product offerings but preparing to embark upon additional training as to more residential loan opportunities for its clients.
“We are preparing for a change,” he said. “The easiest way to adapt is to add adjustables to our product mix. We know that some change is coming, and that it is going to affect our overall loan portfolio.”
Dennis Terry, president and chief executive officer of First Clover Leaf Bank, says the financial institution also still offers balloon mortgages and “probably always will,” although for many of FCLB’s clientele, still-low interest rates make the bank’s conventional residential mortgage products - both the in-house and external options - a better fit.
“In a more normalized rate environment, there are situations where a balloon would make sense,” Terry said. “It’s traditionally priced a little lower than a fixed-term rate. For someone whose career is in the military or is such where they know they’re going to be transferred every five years, it often makes a lot of sense. Also, there are situations - particularly so in small towns - where factors exist that could cause it to be completely out of the norm of a 15 or 30-year realm.”
One such example, says Terry, is if the properties are each served by their own well; the inspections and standards required to get a residential loan may necessitate going the route of a non-traditional mortgage such as a balloon note. Another example might be if a rural property is unusual enough that comparables cannot be found.
Of the four rules initially proposed by regulators back in June 2012, two of the four that will indeed have an impact on community banks, according to Schroeder, are Basel III and the Standardized Approach rule. Basel III applies to strengthening capital and increasing capital levels; the Standardized Approach rule deals with the risk weights or different categories of assets on a bank’s books.
As the CBAI’s federal lobbyist, Schroeder spent a great deal of time studying the interconnectivity of both of these rules.
“The difficulty in trying to get our arms around these two rules was that they have a certain amount of interplay,” he said. “If you make a change on the risk weight side, then on the Basel III side it’s really a double impact.”
Regulators had given banks an initial expiration date of Sept. 7, 2012, which only allowed for a 90-day comment period on the new rules. The first thing banks did, says Schroeder, was to ask regulators for an extension to give them time to digest the massive amount of information presented. As a result, they received an extension until October 22. Now, bankers have been given until Jan. 1, 2015 to continue grappling with interpreting and planning for the impact, he adds.
“All in all, it was a great victory for community banks,” said Schroeder. “It really proved that community bank involvement in the rulemaking process is important. It’s very unusual, based on our experience, for the regulators to make these types of concessions. But then again, it’s unusual for them to propose these kind of misguided rules.”
Some property owners have been getting socked with huge increases in flood insurance premiums due to a federal law that was enacted in July 2012. The large rate increases have caused a backlash, and efforts are under way to amend the offending legislation, the Biggert-Waters Flood Insurance Reform Act of 2012.
One of the ways that the new, high insurance rate is triggered is when a home is sold. Al Suguitan, president and chief operating officer of the Greater Gateway Association of Realtors, says it is causing some home sales to fall through when buyers discover what the new insurance rates will be.
Since the National Flood Insurance Program began in 1968, flood insurance rates have been subsidized. The Biggert-Waters Act, signed into law by President Barack Obama on July 6, 2012, immediately eliminated subsidies for about 438,000 NFIP policies. Subsidies still exist on an estimated 715,000 policies across the nation, but those will eventually be phased out.
With large-scale natural disasters like Hurricane Katrina in 2005, the Federal Emergency Management Agency has been saddled with mounting debt. In July, the U.S. Government Accounting Office issued a report on the NFIP. The GAO found that FEMA, which administers the program, collected $3.5 billion in premiums during 2012 and FEMA estimated that about 1.1 million of 5.5 million NFIP policies - some 20 percent - were sold at highly discounted rates that did not fully reflect the actual risk of flooding.
Since 2000, the report further states, the NFIP has experienced several years with catastrophic losses - losses exceeding $1 billion - and has needed to borrow money from the U.S. Treasury to cover claims in some years. The losses resulting from Superstorm Sandy, which caused extensive damage in several states on the eastern coast of the U.S. in October 2012, also are expected to be catastrophic. As of May 2013, FEMA owed the Treasury $24 billion - up from $17.8 billion prior to Superstorm Sandy - and had not repaid any principal on its loans since 2010.
The Biggert-Waters Act aimed to put the NFIP on a sound financial footing by gradually eliminating these NFIP subsidies. It did this by removing subsidized rates for some existing polices, by increasing premiums 25 percent annually up to market rates on non-primary residential properties, severe repetitive loss properties, flood-damaged properties which have received payments equal to or exceeding fair market value, business properties and substantially damaged or substantially improved properties, while excluding such property types from future subsidized ratings. It prohibited subsidized rates for new policies, for newly purchased properties and for policies that have been allowed to lapse. And, it increased the annual limitation on premium increases from 10 percent to 20 percent.
Since the bill took effect, the National Association of Realtors, supported by its state affiliates, has been working to amend it.
“In general, we want properties to be insured and protected, but also affordable, and there is concern by the NAR (National Association of Realtors) and the IAR (Illinois Association of Realtors) that properties will no longer be affordable because of this particular implementation of the Biggert-Waters Act,” said Sharon Gorrell, housing policy adviser for the IAR.
As part of the effort to make the flood insurance program solvent, FEMA is also updating its Flood Insurance Rate Maps, says Gorrell. It is using more modern technology to draw them and more properties are falling within the flood boundaries, she says. Any mortgage backed by one of the Government-Sponsored Enterprises (Fannie Mae or Freddie Mac) requires flood insurance if the property is in a flood zone.
Flood zones are different from floodplains. Flood zones are areas where water levels can rise under certain conditions: a heavy rain or a flooding creek, for example. Suguitan says he is aware of an area in Wood River where one house is not in a flood zone but another - just six houses away - is.
In July, the NAR successfully pushed for a House amendment to the Homeland Security Appropriations Bill to delay the implementation of higher NFIP rates for “grandfathered” properties. The amended bill was passed by the House and the NAR is now working with Senators Mary Landrieu (D-LA) and David Vitter (R-LA) to include the delay in the Senate version of the Homeland Security bill.
Jamie Gregory, deputy chief lobbyist for the National Association of Realtors, says the reprieve would only be for one year but that the delay would buy time to devise a real fix. One of the odd things about the flood insurance program, says Gregory, is that it impacts mostly people on the ends of the income spectrum: wealthy people who have vacation homes along the coasts and poor people who often live in old, flood-prone communities. He says FEMA is conducting an affordability study to see who would be most negatively impacted by higher rates.
“I think it makes sense to hold off until FEMA’s affordability study is done so people can understand how people are impacted,” said Gregory. “That’s what Sen. Landrieu is trying to do. She’s trying to give FEMA an opportunity to finish the study. But it’s a real balancing act because you have people in Congress who don’t believe the program should exist at all. They’re forgetting why it was created in 1968 to begin with.”
Gregory says he was optimistic that the amendment would pass, but he expected it to go right down to the wire. Congress is currently in its summer recess and is scheduled to meet only nine more days before the session ends Sept. 30.