Epitomizing these crises, Florida Hurricane Catastrophe Fund leadership has testified to the governor and the Legislature that, because of changes in the bond market, the CAT Fund faces a financing hole of $3 billion or more, leaving it unable to keep all of its promises, threatening numerous insurers with insolvency and consumers with new costs increases.

The CAT Fund Chief Operating Officer Jack Nicholson has described the current fund as “dangerously overexposed.” However, without financial solvency, what good is your insurance policy?

Despite these alarms, Florida’s consumers finally have some reasons to feel encouraged. After years of relying on luck rather than responsible action, Senate Bill 1372, sponsored by state Sen. J.D. Alexander, R-Lake Wales, and House Bill 833, sponsored by Rep. Bill Hager, R-Boca Raton, will help to reform the CAT Fund, reduce the risk of financial calamity because of the structure of the fund and benefit consumers statewide. Both bills are based on a proposal from CAT Fund Chief Operating Officer and are necessary for consumer protection.

Businesses and many consumers statewide have suffered from the risk of insurer insolvency, with roughly a dozen insurers facing liquidation in recent years, despite the absence of hurricanes. Also, Floridians have been burdened with the formerly hidden “hurricane taxes” — policyholder assessments, which have been as high as 8 percent and have been levied on most Floridians, even those who do not benefit from the state’s broken system.

These risks have been hard to communicate, but Floridians are catching on. A survey the American Consumer Institute conducted recently found that 70 percent of Floridians fear being assessed these hurricane taxes, including those that would result if the CAT Fund runs out of money to meet its obligations.

In addition, 80 percent of the consumers surveyed did not want the state to sell more insurance coverage than it could pay in claims, and nearly half of consumers were willing to pay more if it would help avoid insolvencies and taxes.

When it comes to protecting insurance consumers, solvency means everything. In this case, the proposed bills will increase private capital in the market and increase market solvency, thereby protecting homeowners from potential financial losses.

Moreover, these proposals protect consumers from unnecessary cost increases and they put our state on firmer financial footing.

As a consumer, you should know that fixing the CAT fund is necessary and that these proposals deserve immediate legislative attention.

http://www.theledger.com/article/20120130/COLUMNISTS03/120129257?p=2&tc=pg

Joint Legislative Study Committee on Automobile Insurance

Statement of Steve Pociask

President of the American Consumer Institute, Center for Citizen Research

January 25, 2012

Raleigh, North Carolina

Today I will talk about a number of problems with the current regulatory system in North Carolina, including the existence of hidden fees and the lack of price competition – both of which lead to higher consumer prices.  Let’s look at the facts.

An American Consumer Institute survey found that 64% of North Carolina drivers did not know that they pay a surcharge on their auto insurance bill so that risky drivers can pay less.  How could they know?  After all, state law prohibits insurance companies from disclosing these surcharges on consumer bills.  Also troubling, according to the same survey, 80% of drivers in the state oppose the idea of having good drivers pay more in order to help risky drivers pay less.  In other words, North Carolinians object to the idea of subsidizing risky drivers, which explains why some want to keep these surcharges a secret, and one reason why reforms are needed.

Encouraging risky drivers to get behind the wheel is not without adverse consequences.  These drivers are more likely to have accidents and file claims for losses, which pushes up everyone’s auto rates.  It also contributes to fatal crashes, which may explain, in part, why North Carolina has higher fatalities per miles driven, compared to the U.S. average.   

The biggest opposition to fixing the current regulatory system is that that reform would somehow be anti-consumer and will help insurance companies enrich themselves.  Think again.  Another big secret is that the state’s system of auto insurance regulation works like a system of cartel, and it is costly.  Rates are set by an industry rate bureau that gathers together auto insurance companies (think collusion), shares cost data and sets an industry price.  It is price-fixing, but it’s perfectly legal and the largest insurance companies love it, because the process allows for nice profits, limits direct price competition and protects market share.  Without price competition, consumers always pay more.

Some claim that North Carolina has among the lowest insurance rates in the country.  Actually – and here’s another secret – it doesn’t.  If you factor in the hidden fee, the mix or urban/rural driving and adjust for cost-of-living, North Carolina is more expensive than most states.  That is the cost of encouraging risky driving.   

The current regulations are anti-consumer – they protect insurance competitors instead of encouraging price competition.  Let’s end the secrets, require government transparency, lower the size of the residual market and encourage price competition for the benefit of consumers.

To read the entire piece, please visit the Daily Caller.

(Published January 24, 2012)

…To Read more, visit Pociask’s DailyCaller.Com blog by clicking on this link. 

He points to 70-years of “fluid” antitrust rules as providing regulators more flexibility in decision-making, which ironically means that regulators have more freedom to approve or oppose mergers not based on clearly codified rules but at the whim and mood of regulators.  That flexibility gives competitors less certainty about regulations and antitrust laws, and it puts government officials in a position to decide market winners and losers—which long term could freeze investment and infrastructure development.  The idea that government provides market benefits to consumers is nonsensical, and it represents what Consumer Electronics Association president Gary Shapiro called “the power of government.” 

The reality is that the FCC has harmed wireless consumers.  The AT&T proposed merger was solely for one purpose – to get precious and scarce spectrum that would permit it to provide high-speed wireless Internet services to consumers.  True, the deal would have eliminated one competitor, but that competitor was sitting on underutilized spectrum, as well as losing both money and customers in a fast growing market.  The alternative to better utilizing the spectrum means slower service for consumers and a greater reliance on usage-based pricing to ration demand.  Neither of these outcomes benefits consumers.  Ironically, the current shortage in spectrum is the direct fault of the FCC and Congress by not freeing up spectrum for auction.

Failure of the merger means that network expansion becomes more costly, deterring investment.  In addition, it means that AT&T will owe $4 billion to the German parent company of T-Mobile.  It is hard to understand how moving potential investment overseas will help American consumers or how it will speed up wireless broadband services. 

What the lack of clarity in antitrust rules has accomplished is not a demonstration of the power of competition, but the power of government.   

Steve Pociask is president of the American Consumer Institute

January 11, 2012

Chairman Jon Leibowitz

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

Dear Chairman Leibowitz:

The American Consumer Institute Center for Citizen Research is strongly opposed to the proposed merger between pharmacy benefit managers (PBM) Express Scripts, Inc. and Medco Health Solutions, which is currently before your Commission.  Approving this mega-PBM merger would only exacerbate the conflicts of interest and concentration of market power that already exist in the PBM industry, and would in no way benefit consumers.  Given this, we urge the Commission to carefully review the anticompetitive risks posed by the merger. 

Multiple Conflicts Of Interest Already Exist In The PBM Market

PBMs broker agreements on multiple sides – and profit from each.  Because they always have better and more complete information on costs and prices than other involved parties involved parties, PBMs have a lop-sided advantage in dealings with the other parties which enables them to profit from managing the health plans sponsored by corporations, governments and unions as well as by funneling sales to preferred drug manufacturers and squeezing concessions from pharmacies for each prescription filled.

For example, PBMs work with drug manufacturers, promising higher volumes of sales in return for discounts and rebates.  They derive profit from dealings with manufacturers that are unknown to plan sponsors or pharmacies.  They also work with drug manufacturers to change which drugs they offer to patients (formularies) in exchange for higher discounts and kickbacks.

An economist would tell you this asymmetric information represents a market failure, and many would say it requires corrective regulatory and legal remedies.  Perhaps more alarming is that the asymmetric information leads to a lack of transparency between the PBM and the party on whose behalf it is working – which means that it is not  always clear to consumers who PBMs represent and, therefore, whose interests they work on behalf of.  For example, the aforementioned formulary changes increase profits for PBMs, but do not necessarily bring down costs, which shows a clear conflict of interest between what is best for the plan and consumers and what will increase the PBMs’ profits.

Yet another conflict of interest arises from PBMs’ self-dealings.  PBMs like ESI and Medco own their own mail-order prescription services (and if combined, ESI and Medco would represent 60 percent of this business sector).  PBMs can easily capture consumers who regularly obtain the same drug, force them into a mail-order program for that medication, and thus bypass the pharmacy altogether.

PBMs Enjoy Overwhelming Market Power

Profitability is the easiest and most acceptable means of testing market power – and all indications are that the PBM market is very profitable.  According to financial reports, between 2005 and 2010, PBMs’ earnings before interest and taxes grew at about twice the average rate of its peers in other health care industries.  Specifically, data on Medco and Express Scripts show pre-tax profits far exceeding retail pharmacies, wholesalers, pharmaceutical and medical device companies, and managed care organizations.  Express Scripts’ own company reports show that profits have grown 400 percent in just the past decade.  By several measures, PBMs in general – and the merging companies in particular – are highly profitable.

This suggests that, even today, market entry and subsequent competition is insufficient in the PBM market.  It indicates existing anti-competitive risks in which incumbents lock up deals and lock out others to the detriment of the consumer.

The Proposed Merger Will Only Exacerbate Existing Market Problems

Today, Express Scripts and Medco are the third and first largest PBMs in the market.  A merger between the two would eliminate a large competitor from an already-concentrated market.  The combined company would be able to leverage its size to further squeeze pharmacies and drug manufacturers.

In this way, approving the merger would facilitate legal collusion, through which the combined Medco-Express Scripts company could force pharmacies to concede further discounts or risk losing access to an even greater portion of the market.

It is clear what would result: some number of pharmacies would be driven out of the market altogether; additional prescriptions would be forced into the PBMs’ mail-order only programs; and consumer choice and access to pharmacies would be diminished. There are no obvious benefits to consumers from this merger, but there are clear risks and likely damages.

For these reasons, the American Consumer Institute Center for Citizen Research is strongly opposed to the proposed Express Scripts-Medco merger, and we urge the Commission to dedicate adequate resources in thoroughly reviewing these anticompetitive consumer risks. 

Sincerely,

Steve Pociask

President

American Consumer Institute

Center for Citizen Research

1701 Pennsylvania Ave., NW, Suite 300

Washington, DC  20006

(Published in THE HILL’s Congressional Blog on January 6, 2012 as

“FTC should block proposed Express Scripts-Medco merger” 

The perfect example of the law of unintended consequences can be found in the 7 million acres from Texas to Washington DC that is covered by Kudzu vines.  During the dustbowl days of the Great Depression, one of the biggest challenges facing the country was soil erosion.  In an attempt to address this problem, the Soil Conservation Service advocated the widespread planting of kudzu, an imported vine that would cover the ground quickly, preventing further soil loss.

However, while the kudzu did help stop the soil erosion, it also created another problem altogether.  Kudzu vines, which can grow up to one foot per day during the warm season, spread throughout much of the Deep South and currently inflict up to $500 million in damages annually to forests alone.

Today, another unintended consequence is happening in the healthcare industry.  Although most people have never heard of pharmacy benefit managers (PBMs), they are making health care decisions that affect the lives of well over 100 million Americans.  PBMs were initially hired by companies to manage prescription drug plans and control costs.  The entities that were originally hired to help manage prescription plans are now extracting so much profit and distorting the markets so thoroughly that they have become the kudzu of the healthcare industry.

PBMs not only manage a company’s drug plan, they also negotiate directly with pharmacies and drug manufacturers, creating conflicts of interest.  In addition to being paid by the company to manage their plan, the PBM also profits from the gap it creates between what a company is willing to pay for a prescription and what the pharmacy is willing to accept.  The PBM’s goal of getting the best deal possible for the company it represents directly conflicts with its desire to create an added profit stream from the margin it creates. 

PBMs have other profit streams as well, including promising drug manufacturers high volumes of sales in return for discounts and rebates.  As a result, a PBM can favor one manufacturer’s generic drug over another because it maximizes its own profits, instead of minimizing the prescription plan costs of the companies it supposedly represents.  These deals are made without the knowledge of either the represented companies or the pharmacies supplying the drugs.  PBMs are able to profit from the spreads it creates between drug companies and pharmacies while also being paid to manage the plan.  There is no transparency. Large PBMs also fill mail-order prescriptions so there is a natural inclination for PBMs to promote and encourage mail-order prescription plans, a form of “self-dealing.” 

These various revenue streams are lucrative and PBMs have seen profits soar.  But rather than these profits encouraging increased market entry and competition, the industry is consolidating, as evidenced by the announced merger of the two largest and most profitable PBMs — Express Scripts and Medco.  If the Federal Trade Commission (FTC) approves this merger, the merged company will manage the pharmacy plans of roughly 120 million Americans.  This will further increase the already highly concentrated PBM industry, as well as further increasing profits and leading to anti-competitive risks.   

In much the same way that Kudzu was brought in to solve a problem yet created a crisis, PBMs were brought in to control costs but have gained excessive market power, thereby posing anti-competitive risks and higher prices for consumers.  Oversight needs to review the industry’s market power, self-dealing, conflicts of interest and lack of transparency – all of which will be exacerbated if the FTC does not block the planned merger. 

Steve Pociask is the president of The American Consumer Institute Center for Citizen Research.  The Institute is a nonprofit educational and research institute.

http://thehill.com/blogs/congress-blog/healthcare/202741-ftc-should-block-proposed-express-scripts-medco-merger

Summary:

In this proceeding, the Institute comments for the purpose of assisting the FIO in formulating its recommendations to Congress as they pertain to insurance institutions and regulation of these institutions.  Our comments focus solely on the intersection of issues involving the cost and benefit of state property and casualty insurance regulation, systemic risk and consumer protection.  Solvency oversight is the single most important justification for insurance regulation.  Yet, a number of states impose price regulations on property insurance services that result in undesirable market and consumer outcomes – outcomes that directly conflict with the goal of solvency protection.  As will be discussed extensively in these comments, in Florida and other states, price regulation of homeowners insurance has led to artificially low prices that are depleting policyholder surplus and the ability of insurers to cover consumer claims.  If state regulators set insurance prices too low, under-capitalized insurers and state funds can financially collapse when faced with a major storm.  If that happens, who will bail them out?  Our conclusion is that some states are undermining their regulatory responsibility – solvency oversight – thereby exposing consumers to more risk and potentially higher costs, as these comments will explain. The FIO should be concerned with the negative impact that price controls can have on consumers and insurers.  

In the remaining portion of our comments, we cite empirical evidence and economic studies to address: 1) whether price regulation on property insurance serves any legitimate economic role for state regulators; and 2) the extent to which price regulation undermines the proper role of solvency protection.  To summarize our research, we find no evidence of market failures to justify state price insurance regulation in the states, and find no studies showing that price regulation produces more benefits for consumers than costs.  Based on these findings, we ask the FIO to discourage excessive price regulations by state regulators, particularly price regulations that often directly conflict with sound solvency oversight, and urge the FIO to recommend modernization efforts to address the negative impacts of these continuing price regulations.