The new 85-15 mandate and how it will kill the health insurance industry

(Note, March 30, 3 p.m.: comments have just been added to this entry.)

Both those who contemptuously dismiss and those who fearfully credit the idea that Obamacare will destroy the private health insurance companies—indeed, that it is deliberately designed to do so, in order to bring in fully socialized health insurance—must read Rush Limbaugh’s March 23 interview with Stacy, a knowledgeable insurance executive in Atlanta. Stacy describes a further measure that has been added to the health care bill that will, in her view, lead to the end of the insurance companies in two to three years, instead of the three to five years she had previously predicted.

The whole interview can be read for free for a limited time at Limbaugh’s website.

I read a slightly abridged version of it at the website Frugal Cafe Blog Zone, and I recommend you read it there too, as it’s nicely formatted. But I’ve also copied it here for easy reference.

(Note: readers have pointed out that Stacy says that the standard industry arrangement has been a 65-45 percentage split on expenses, with 65 percent going to claims payments and 45 percent for administratoin and claims expense. But that adds up to 110 percent, an error that neither Stacy nor Limbaugh nor many others caught. I think we’re frazzled by everything that’s been happening. I assume that Stacy meant 65-35. And now that I’m looking through the interview again, I see that she and Limbaugh repeatedly refer to “65-45 percentage,” and, I admit, I didn’t notice it.)

Stacy, Our EIB Insurance Expert
Rush Limbaugh Show | EIB Network | March 23, 2010


RUSH: Stacy in hiding … is this our insurance babe? Stacy, welcome back. Great to have you here.

CALLER: Hey, Rush.

RUSH: Do you know you have gotten me into so much fun hot water?

CALLER: I know, I’ve heard!

RUSH: Do you know how you did that?

CALLER: I did by coming on about Costa Rica.

RUSH: You came on and you told me that your insurance company was setting up medical operations in Costa Rica, you’re going to take the doctors and everything down there and you’re going to sell insurance policies if this thing all happened to your customers, and included in the premium would be trips to Costa Rica for medical treatment and so forth. So after having heard you say that, another caller asked me, “What are you going to do if it passes?” “I’m going to go get treated in Costa Rica.”

And so now everybody thinks I said I’m leaving the country for Costa Rica. So I need to ask you, how soon are you going to get those clinics set up so I can go?

CALLER: Well, I’m afraid that even that’s not going to save us.

RUSH: Oh, no.

CALLER: I’ve gotta revise my estimate. We may last two to three years, tops, and let me tell you why. The 85-15 provision that has just been signed into law an hour ago –

RUSH: Yeah?

CALLER:—by definition of every state and federal insurance regulator makes us financially unsound.

RUSH: All right, now, I have to take a break here and I want to ask you if you can hold on ‘til the top of the next hour where we will get your details on this without any time constraints. Can you hang on?

CALLER: I’ll skip a bit of a meeting, sure …


RUSH: Now, we welcome back from “in hiding” in Atlanta Stacy, who works for an insurance company who’s been keeping us updated throughout this past year on the fate of her industry should this thing pass. Now it has passed. Give us the lowdown, Stacy.

CALLER: Um, we’re going to make it two years, three tops.

RUSH: Explain why and start at the beginning.

CALLER: Okay. For time immemorial, both state and federal regulation—and also just the industry standard—has been a 65-45 percentage arrangement: 65 in claims payment and 45 for administration and claims expense. Withholding that you store for, you know, a major catastrophe or something.

RUSH: This is to pay your claims?

CALLER: No, 65% is to pay the claims. Forty-five percent is for everything else.

RUSH: That means 45% is salaries, administration costs, and the offices, all the paperwork, that kind of thing?

CALLER: It’s that as well as, you know, we are required to keep a certain amount of cash on hand as a percentage of our claims exposure to pay claims.

RUSH: I got you.

CALLER: So, for example, if you have a disaster and you suddenly had 400,000 claims come in, you’ve gotta have the money to be able to pay those claims immediately.

RUSH: Now, I just want to make sure I understand here. State and federal regulations set those percentages?

CALLER: State and federal regulations, yes.

RUSH: So if you wanted to have 85% set aside for claims, you couldn’t. You had to go at 65%?

CALLER: Exactly.

RUSH: If you wanted 30% set aside for claims and the rest were administration, you couldn’t do it. It had to be 65%.

CALLER: That’s illegal, yes. It has to be 65-45, and there’s a couple of percentage either way, but generally when an insurance company falls outside of those guidelines, they are considered financially unstable.

RUSH: Well, who audits you all to make sure you are within the ratio?

CALLER: We’re audited by the state insurance departments, primarily. There are some plans that are audited both state and federally, and then you have your private auditors who will come in as part of the stock market and that kind of thing. So we’re audited often.

RUSH: How often do these audits take place?

CALLER: At least once a year, you’ll have one from the industry auditors, and every three to five perhaps for federal and state.

RUSH: Okay.

CALLER: More often if they think that you’re unstable, they’ll audit you more often. So what Obama just did an hour and a half ago is make every insurance company in the country financially unstable. Remember, the 15% that we are left has not only to pay salaries, maintenance, upkeep of buildings; it also has to pay the 40% increased taxes that we’ve got. I mean, there’s just no way. You can’t do it.

RUSH: Well, you’re getting a little bit ahead of me here. What did Obama sign that changes this 65-45 split? In what way did Obama now sign you into permanent instability?

CALLER: The provision in the Senate bill requires that all insurance companies pay 85% of premiums collected every year in claims.

RUSH: So the 65 is now 85?

CALLER: Exactly. It doesn’t matter how much we increase the premium, it won’t matter.

RUSH: And just to satisfy my own curiosity, with the mandates that are in this—such as you now being required to insure children on their parents’ policies to age 26 or 27; and now having to insure (or cover) preexisting conditions—what’s that going to do to your current premium structure starting today?

CALLER: That’s my other fear, Rush. I don’t know that November is as big a lock as we would hope and here’s why. Most group plans renew January 1st of every year. Most people won’t see the dramatic premium increases until January 1st. So what they’re going to do is all these people who voted for this—and who likely were swayed by this argument—are going to run around and say, “Well, look, nothing happened. You’re not paying any more. You know, everything’s fine. It was just a bunch of, quote, unquote, ‘fearmongering,’” and I’m afraid they’re going to be reelected.

RUSH: Well, we’ll deal with that when the time comes. I think there’s a lot more in this than just those two provisions that have people outraged and upset, and I know that your fear is that the people that supported this are going to show up in droves and vote for Democrats on the theory that none of the scare stories that were told had happened because this delayed until January, but there are other things that we can work with on this. The Democrat Party’s damaged itself in the sense. They just inflicted great harm on the country. Whenever it shows up, it will be realized. Now, I want to take you back to the first thing you said: You originally thought that your industry would survive. You’re speaking industry or just your particular company?

CALLER: I would say 99% of all insurance companies, health insurance companies in the country.

RUSH: Okay. So you originated thought you might have three to five years to stay in business under Obama. Now you said it’s two to three. Why?

CALLER: Because of the 85-15. Plus the additional expenses we’re gonna incur. Additionally, the mandates, what people don’t understand when CMS (which is the Centers for Medicaid and Medicare) push a mandate down on insurance companies, we have to pay to complement those mandates. We don’t know how many of those are in this monstrosity. So we can have our mandate budget doubled, our taxes already up 40% or whatever it is, and our cash flow immediately cut.

RUSH: Well, how can you know in advance of paying any claims? Because they’ve now shifted to 65% that you have to set aside for claims to 85%. How in the world can anybody know in advance of paying claims that it’s going to amount to 85%?

CALLER: Well –

RUSH: Of course 65%? It seems to be like this is a ridiculous dictate made by people that have no clue how your business works.

CALLER: Well, they don’t have a clue. But the way that amount of money is calculated is you look at the past year, past five years, past ten years, and you see what your claims expense have been those years. Then based on your enrollment and your demographics you project forward into what you expect to be paying in the future, in the next year and the next five years. So you can do that. It’s not precise to a dollar, but you usually get pretty close. What he’s done is by saying, for example, the preventative services now –

RUSH: Those are free. Those are, quote, unquote, “free.”

CALLER: Yeah, exactly.

RUSH: What the hell is a preventative service covered by an insurance company, anyway?

CALLER: Well, that would be your colonoscopies, your mammograms, your yearly physicals, your lab work.

RUSH: Oh, so those are free now! So if I want to go get a colonoscopy today and I have an insurance policy, I’m not going to pay for it?

CALLER: Exactly.

RUSH: But you will.

CALLER: Well, we will. We’ll pay out the nose for it.

RUSH: (laughing) Well …

CALLER: I know, bad analogy. I’m sorry.

RUSH: It is Christmas!

CALLER: (giggling) But, Rush –

RUSH: Well, no, I don’t look at a colonoscopy as Christmas. Don’t misunderstand.

CALLER: (giggling)

RUSH: But it is Christmas in the sense that I’m not paying for it. I don’t know how you can stay in business even two to three years with this kind of thing happening to you this year alone.

CALLER: I don’t think we will and that’s why I am seriously considering leaving this industry. I’m updating my resume. You know, people who I work with—even people who voted for Obama and thought he was the greatest thing since sliced bread—are shell-shocked.

RUSH: That just frustrates the hell out of me. Anybody with a brain has no reason to be shell-shocked about who this guy is, but it is what it is.

CALLER: Rush, it’s not him. I didn’t think Congress would sell us down the river like this, especially given the public opinion. When have you ever seen a politician just say, “I don’t care that the public doesn’t like it and I don’t care if I’m reelected”? This is something I have never experienced. I have never seen this, and people that I work with who don’t follow politics, who don’t know what’s going on necessarily, they had no clue this was coming. At least I had an inkling! They had no idea.

RUSH: Well, it’s proof positive is that people who don’t pay attention to politics are now outraged, upset, and don’t quite understand. It’s time to make ‘em understand. This is who Democrats are. This is who liberals are. You realize, too, I’m sure, that the whole purpose of all these new requirements on you is to put you out of business.

CALLER: Oh, absolutely.

RUSH: The whole purpose is to make it unable for you to stay in business financially, and so the government can come in and say, “Okay, well, you know, these damn insurance companies! We never could depend on them. They’re nothing but a bunch of frauds and nothing but a bunch of cheats. They’re still cheating people. They’re still raping people. We’re going to have to do this ourselves.”

CALLER: And you know how many people are going to die in the interim, Rush? I say that in all sincerity, because come January 1st you’re going to see 200, 300% increases in premiums and people are going to drop their coverage. So you’ve got the woman who isn’t going to go get the mammogram or the man who’s not going to get the prostate exam.

RUSH: Wait a minute!

CALLER: People are going to die.

RUSH: I thought the mammogram was free.

CALLER: Not when you drop the coverage because you can’t afford three times the premium. Remember, the premiums are going up because of the government, and jobs are being lost because of the government. If you can’t pay it, you can’t pay it. So people are going to drop it. They’re going to drop their insurance before they drop their mortgage.

RUSH: They’re going to be clamoring to the government to fix the mean-spirited insurance companies for raising the prices so high and that’s where Obama’s going to step in and say, “You know what? We have no choice here but than to do it ourselves,” and then you get dumped on again first and foremost with Obama portraying the government as the savior …

- end of initial entry -

March 30

Matt C. writes:

I think that you have made the best decision to assume for the time being that it was intended to be 65-35. Assuming one of the numbers in the transcript is correct, this is the conservative assumption. So if it turns out that your assumption is wrong and it was actually intended to be 55-45, then Stacy’s point is only strengthened, because the change to 85-15 is made even more dramatic.

Garrick writes:

85-15 is not as bad as you think. Stacy’s insurance company may be run out of business with other smaller ones. I think the huge insurance companies are in on the 0bama-Care racket and figure they can survive it. They will be less profitable but they can survive. Please read posts #16 and #17 here:

This is post #16:

The 65% was NOT law, each state set the claims reserve ratios. It is 75% in NJ, 72% in NY, 65% in CT, etc.

The claims reserves ARE used every day to pay out claims. This money does not sit in some bank vault for long.

Increasing the required claims reserves is (mostly) GOOD for the citizen/serf/consumer in our brave new world. When you pay $1000 a month for insurance, $850 will now go to paying out claims, instead of $650 or $720 or $750 as before. The difference between $850 and $650 is taken directly out of the insurance company’s top and bottom line earnings. That means lower earnings and dividends payouts, lowers the ability of insurance companies to sell debt on the market, and increases the long term monopoly of the existing insurance companies over the American serf population due to the new barriers to entry.

The downside is at 85% claims reserves and 15% operational overhead, there will no longer be the customer service Americans have become accustomed to in the last decades. There will be no money available for agent salaries/commissions, brokerage salaries/commissions, internal support staff, claims reviewers, call centers inside the United States, etc. Insurance companies will strip down to bare essentials, actuaries, accountants, liaisons to medical supply cos and medical facilities management, money and asset managers, lawyers, triage claims adjudicators, lobbyists.

In the future everyone will go to websites like or , and will be responsible for filing every single piece of paperwork on their own. For additional fees you can call live support or chat online with employees making base salary+incentive bonuses. Mistakes filing out forms will result in state and Federal lawsuits, fines, IRS audits and a host of other problems for business owners and individuals. This will also shift the cost of insurance compliance onto the business owners and individuals in this country. It is in effect an unfunded mandate upon every living soul in this country who is paying an health insurance premium, subsidized or unsubsidized.
[end of post #16]

I have no love for the socialized medicine of Obama-Care but it seems the smaller and less efficient insurance companies will be driven out and new companies will not be able to enter. Plus now that O-care has passed you will see many efforts to amend it, driven by those companies affected. Whether they are medical device manufacturers, hospitals, medical schools or insurers. 85-15 may be modified to 75-25.

Obama-Care will force insurers to take on all those with pre-existing conditions. This will put pressure on insurers and hurt profits. Perhaps they will have to raise rates a bit. Perhaps a large insurer will increase automobile insurance rates to make up for it.

LA replies:

Could you add a paragraph at the end summing up what your point is?

Garrick replies:

I am merely pointing you to a clarification of what the insurers have to face. It is not a 100% disaster for them and their customers. More like a 30% disaster as far as the 85-15 mandate you discussed. For Stacy on the Rush Limbaugh show, the way she described it, it is a 100% disaster for her and the insurer she works for. She said she will be working elsewhere within three years

Adam S. writes:

I’m as against Obamacare as anyone else, but is it really unreasonable for an insurance company to function on 15% of its premiums? I have a suspicion that, just like the banking industry, it is much bigger than it would be under a real free market system, and has grown to its size due to government intervention and distortions. Maybe I don’t know what I’m talking about, but fundamentally, an insurance company is just a bunch of actuaries and claims processing. They can’t do this with 15% of billions of dollars?

Of course, even if I am right, the true percentage should be set by market forces and not by government dictate.

Ran M. writes:

I think this is the key to understanding the 65-45 problem. It’s a range with a little bit of slop.

Here’s a quote from the transcript:

It has to be 65-45, and there’s a couple of percentage either way, but generally when an insurance company falls outside of those guidelines, they are considered financially unstable.

Clark Coleman writes:

I think that Rush Limbaugh’s caller, Stacy, might have confused the details of the new 85-15 rule. I read a column by a local conservative writer in our newspaper that said that the new ObamaNationCare will require that insurance pay at least 85% of your medical expenses each year. Meaning, after all the complexity of deductibles and co-pays and out of pocket limits, you will be guaranteed to pay 15% or less and insurance will pay 85% or more.

This makes sense, given leftist egalitarian desires. It means, as the local writer pointed out, that high deductible plans with Health Savings Accounts cannot survive under the new dictatorship. But it also has nothing to do with what Rush’s caller was talking about.

Maybe the 85 and 15 numbers are a coincidence, and there is more than one such pairing in the bill; otherwise I think this was a red herring.

Posted by Lawrence Auster at March 28, 2010 09:21 PM | Send

Email entry

Email this entry to:

Your email address:

Message (optional):