Interview with Stephen D'Amato - Massachusetts Insurance Expert

Way back in January, I posted a response to a Boston Globe opinion piece written by former Massachusetts insurance regulator and current Executive Director for the Center for Insurance Research Stephen D'Amato. D'Amato's piece focused on workers compensation insurance reforms from the early 1990s. I found the article frustrating personally, because D'Amato never gave many details of how we got from workers comp disaster to the "happy ending." In the post I wrote, I tried to learn a bit about what exactly happened to get to that ending and I did a little research on the 1991 workers comp insurance reforms. Shortly after I posted, I received a phone call from none other than Stephen D'Amato to chat at length about his article and about the insurance situation in Massachusetts.

A business that sells widgets, for example, likely wants to increase their market-share until they are the dominant supplier of widgets for their consumers. An insurance company however isn't necessarily worried about their total market share. What they want is to corner the market on the individuals least likely to collect a claim. That is, a health insurance company would rather insure only healthy people than insure more total people than its competitor. This leads to inefficiencies that don't necessarily exist in other markets. When one widget-seller lowers its costs, the price of widgets in general should go down as competitors follow suit or suffer. When an insurance company lowers its cost, it does so by "finding the right people to insure" and the system-wide costs are largely unaffected.

One of the things that we talked about that unfortunately did not make the transcript below was how to reduce the system-wide costs in the health care marketplace. Two obvious ways jumped out. The first is prevention. It's a cliche that an ounce of prevention is worth a pound of cure, but in this case it's true that there is nothing more cost effective than limiting incidents. This is true especially when you take into account not only the health care costs, but also the societal costs -- lost wages, lost productivity, risk of infections spreading, etc. This can be achieved in part and right away with targeted flu shots or other vaccinations.

The second way to reduce system-wide health care costs had to do with where you received your care and how soon problems were detected. Part of this means getting people to their doctor first where care is cheaper than at the Emergency Room -- generally the most expensive, least efficient form of health care. The other part of this is early detection of health issues. Not only does identifying problems early lead to better health outcomes for the patient, but it also tends to reduce the number and severity of procedures necessary to produce those better outcomes.

Keep in mind when reading the excerpts below that this conversation occurred in late January. My intention was to post it up after the baby was born -- something I expected to happen only a week or two after this conversation, and not more than a month.

Read excerpts from the interview inside...
Q:Can you tell me a little about what you did as an insurance regulator? Did your group perform the same function that the Attorney General's office does now in setting insurance rates?

My group didn't make rates, we would actually propose rates on behalf of the consumers. In the late 90's the AG duplicated our efforts, but we were considered to be the primary litigation arm and the AG mirrored us. When I left state government, I left complaining about the fact that I thought the insurance commissioner was trying to push us to be more pro-industry and since I left, it has become much more pro-industry and the AG has picked up the slack dramatically. So, it used to be that the AG would file a few things but was mostly saying, "Yeah, we agree with the state rating bureau on this and that." Now, my two main experts at the state have now gone to work at the AG's office -- they're very talented people.

After 12 years there, I began to realize that insurers don't tend to think about containing costs. They tend to think about shifting them to consumers in particular, and my fear with heath care reform is that that's exactly what people are talking about. It looks like we're getting skimpier and skimpier plans in an attempt to have the premiums be lower. But that doesn't mean that the cost is lower, it just means that the up-front premiums are lower, and then people who are sick end up paying even more after the fact.

My experience with worker's comp was that until you had a real crisis, that no one got serious about really looking for efficiencies that took costs out of the system, but not at someone's expense. And some of the stuff did come at people's expense. You point that out in your blog, that there were some benefit cuts, but what I loved about the '91 reform is that in hindsight, we can see that the vast majority of the reforms really were targeted at reducing the number of claims.

Q: And reducing the amount of lawyer involvement?

When I say everyone won back then, everyone won but the lawyers. The main way we reduced lawyer involvement was by reducing claims dramatically. It's hard for a lawyer to argue that we shouldn't be investing in safety because it takes money out of the lawyer's pocket. They really don't have a good response to that. So when claims dropped, and they dropped dramatically, that took a lot of money out of the bar's pockets. But that kind of cost reduction is very hard to argue against.

Q: So, what do you mean by containing costs versus shifting them to consumers?

Because I've been focusing on cost containment, and I think it's the critical thing that insurance systems should be focusing on, I'm getting everyone to realize that this really is a mutual effort that we need to engage in. What tends to happen in all lines of insurance is that you get everyone trying to reduce their own costs, but they don't necessarily look at the entire picture and try to reduce systemwide costs. For instance, in auto insurance, what you see a lot is that if you're an insurer trying to reduce your costs, you try to find people who are better risks than others. You try to find the safest drivers. Unless everybody else is trying to charge those people too little, then you try to find the next group of safest drivers. Or sometimes you even want the lousy drivers, but then you jack up the premiums if you can get away with that. But it usually tends to be about finding the right people to insure. And this is true in all lines of insurance, that certain kinds of things you'd like to do to reduce costs just aren't cost-effective for an individual insurer to do.

The best example I have is this: if you knew there was an intersection that was terribly designed, and was causing accidents left, right, and center, if you're an insurance company you wouldn’t want to spend any significant amount of money on your own to fix that intersection because you’d be spending your own money and you’d be benefiting all your competitors at the same time you’re benefiting yourself. So, there’s a glitch -- insurance markets don’t work like other competitive markets. They’re not as efficient because they’re all trying to maximize their own bottom line, which happens in other markets, but they don’t want to take over the entire market. They don’t want to maximize their market share, necessarily. It’s a lot cheaper to hire an actuary to tell you who you want to insure than it is to go out there and get people to drive more safely. If you took over half the market but accidents were increasing, you start to find out that your bottom line gets terrible.

So that’s an underlying tension with a lot of insurance, and that’s why there are times when you really need to centralize cost containment. That’s what I was mostly interested in, in pointing out that there are areas of worker’s comp reform where there are deficiencies. We saw that there was a crisis, people got together and started looking for ways to reduce systemwide costs instead of trying to reduce their own costs or trying to shift costs from themselves to somebody else. And it took a crisis to get people into that mindset, and it took a centralization of cost containment through the legislature and through administrative agencies to get people to focus on some of the things that, if one party did it on their own it wouldn’t make sense, but getting everybody together and saying, what makes the most sense, it actually did work.

So, when you said, “Hey, what if we all get together and work really hard at it,” believe it or not, there’s more truth to that than you can imagine, because that doesn’t happen usually. One of the things I’ve loved about Governor Patrick is that he gets that, that there are times when you really do work better as a group and no area I know of do you see that more than insurance, where if you do focus on the big picture you come up with ideas that would never be attractive to any of the individual participants.

Q: How much of that working together is happening now on health care?

Not nearly as much as I think should be done. In fact, there are a couple of attempts to get that to happen as we speak. One of those attempts is called the Quality and Cost Council, which was part of the health reform law. That’s just getting off the ground, and I’m hopeful that will be an area where you’ll see some real centralized thinking about what we should be doing.

There’s also the connector, but it really hasn’t been a cost containment analysis, it’s mostly been “let’s try to get the premiums down to a low level.” They’re not the right place to lower systemwide costs – they’re trying to create a market for people who can’t get insurance through other mechanisms. There are some things they could probably do, but what you really want is for somebody to step back and say, “How can we reduce systemwide costs? Where are we being inefficient? Where do we need to spend money and invest in areas where we can actually save money?”

In worker’s comp, there are a couple of things that people realized. One was that it was hard to get employers to front the money to do the kinds of things that everyone knew were cost-effective. If you have something dangerous in your workplace, that’s an accident waiting to happen, but it costs money to fix, it’s hard to get people to spend money up front on the chance that there’s going to be an accident down the road. But then when the accident happens everyone runs around and starts fixing things.

Or, there were people who had certain experience with reducing costs in worker’s comp and one of the main things they did was to consult with the employer and say, if someone has an accident these are the procedures we want you to follow. In general, employers’ tendency when there’s an accident is to ignore the person -- the person goes to the hospital, and then they go home, and then you just hope that you don’t hear from them again. It’s very easy to do that. And these cost containment specialists said no, what you really need to do is, you need to call the person up and let them know that they’re part of the workplace team, that you want to make sure they get good-quality health care, that you want to make sure they come back to work, even if they can’t come back to the job they were in for a little while. You still want them back on the job because they’re part of the workplace and they think of themselves as being part of the team, not someone who feels ignored and wants to sue you.

The analogy that they always use is what happens when the starting quarterback goes down in a football game. He breaks his leg. The next week he’s on the sidelines, with a clipboard running plays. He’s not at home, he’s part of the team, and he’s happier that way. So, there are people who would check your workplace for safety hazards and would check to see if people were directed to quality heath care, because particularly in worker’s comp, you want to make sure there’s good quality health care. If there’s not, then you might be saving money on health care but you’re losing money on lost wages because the person isn’t coming in to work, and you’re losing productivity.

There are people who spend a lot of time thinking about things you need to do, but the employers didn’t want to hire these people. They didn’t want to spend the money up front because they’re already getting killed with workers comp costs and health insurance costs. The last thing they want to do is shell out thousands of dollars for cost containment specialists. So, a large part of what we tried to do is to create a scenario where we give employers a large financial incentive to hire these people. We said we’ll give them a discount on their premiums, because we know this stuff works, and we’ll reduce their premiums by more than the cost of the cost containment firms. So if you’re paying $50K in premiums, and it costs $5K to hire these firms, if we give you $7500 off your premiums, you’re going to jump at that. Then your losses go down, and in the future you have a better safety record, and fewer losses, and your premiums go down in the future.

That kind of synergy of bringing in these specialists and funding it with the insurance system itself is essentially creating dollars out of thin air. It all depended on these people being cost effective and they were.

What I try to look for is areas in various insurance systems where you know that there’s cost-effective stuff that can be done, but there’s not the funding for it. In worker’s comp that was one big example. In auto insurance, we’re not spending a lot of time making our intersections safer. Individual cities and towns may get around to doing it, but there’s a huge insurance cost for all of us because we have some of the craziest roads and intersections, not to mention people who drive crazily too. So, if you use the insurance system to fix these things, if they’re really cost-effective, that’s a way to save a lot of money for all of us. I spent time looking at those issues and realizing that it’s not cost-effective for any individual participant to push these things, but it makes sense for everybody to do it.

Q: Can you talk a little about the recent push for auto insurance reform? I know that New Jersey enacted some reforms recently and they claimed to save consumers a lot of money.

Let me start with an example. We know that the main reason losses for insurance companies were high in Lawrence is that a very small number of people were involved in the fraud ring. Let’s say that 1% of the people are engaging in fraud and that’s why the losses are so high. That 1% is causing the losses to be twice as high as they would be otherwise. Are we really going to say the other 99% of the people are going to be charged twice as much because they live in Lawrence? And that’s what New Jersey style reforms would allow.

When you look at the so-called reductions in NJ, they said $400M in savings, and if you pushed them I think they’d say overall costs went down slightly in NJ. But costs are going down nationwide. In MA, costs are going down by much more than that. It’s not the insurance system that caused costs to go down, it’s that the costs were going down and they wanted to make the insurance system changes and justify what they had done after the fact. Similarly, you could say MA costs are going down and that means our current system is perfect.

I don’t think that’s true. There are lots of things you can change about our current system. It’s the correlation/causation problem all over again. Was it the NJ reforms that caused them to go down, or the fact that baby boomers are now in the 40-60 year old range, and as a result nationwide costs are going down? So, I’m not a big fan of the NJ reforms but that doesn’t mean we couldn’t do things in MA to make our system saner and introduce some more creative ideas.

I find myself in a weird situation because I used to be the head of the Center for Insurance Research and now I consult for them on things like auto insurance and homeowner’s insurance. But MassPIRG and I work together on lots of things, auto insurance in particular, and we found ourselves in the strange situation where we were exactly on the same side of the fence as Commerce Insurance Company, Arbella Insurance Company, these insurance companies who have terrible reputations -- I don’t want to be throwing stones at them, but we’ve found ourselves on the same side of the fence for extremely different reasons.

Q: That’s what made me skeptical about insurance debates here in MA – seemed like a battle between large out-of-state insurers and small local insurers. Consumers are almost an afterthought.

The reason that the big insurers aren’t in this state is because some of the regulations are unnecessary, but MA overall has probably the best consumer protections. It doesn’t allow people to use all these crazy rating factors, and it doesn’t all people from Lawrence or Roxbury to pay through the roof just because someone else in their town happens to be causing a lot of losses. That’s why we don’t have these other insurers in the state. They want total flexibility in rating. That explains their behavior.

What explains Commerce and Arbella and the local insurers is, they are used to our system and know how to make money in it. The last thing they want is for State Farm and Progressive to come into the state and take away market share. So they like the pro-consumer system only because it’s a barrier to the big people. If you said to them, we’ll let you do whatever you want in terms of rating but we’re not going to let these other insurers come into the market, they probably would like that. But they know that’s not feasible, so they use all of my arguments, all of MassPIRG’s arguments, and what am I supposed to say? I agree with them, but not for the same reasons. They’re not saying it because they care so much, they’re saying it because they want these other people not to come in. I want these other people to come in, but only if they come in on our terms, and they won’t. So it’s a strange position to be in, but what the heck – there’s only two sides to the issue and you have to be on one side.