A Fork in the Road

When I travel and speak to Council member firms and other insurance audiences, I have a standard shtick when it comes to my political prognostications: “Don’t count on a thing I have to tell you, because inside-the-Beltway lobbyists almost always get it wrong.” Maybe I say that out of insecurity, maybe it’s being cautious, maybe it’s modesty. But it’s pretty much the truth.

Ronald Reagan beating Jimmy Carter? Carter may have been damaged goods, but Reagan was way too conservative, too washed up, too old, and a two-time loser at that. No way.

George H. W. Bush becoming the first sitting vice president since Martin Van Buren to win the presidency in his own right? After being down 17 points after the Democratic convention in 1988? Unlikely.

The ethically challenged former governor of Arkansas taking on President Bush as his approval rating soared to 90% following the Persian Gulf War, after all seven of the top Democrats (from Mario Cuomo on down) declined to run? You gotta be kidding me.

And a blank-slate, freshman senator defeating the Hillary Clinton juggernaut? As Bill Clinton noted, that’s a “fairy tale.”

I’ve spent 28 years working in and around Capitol Hill. Since finding myself enamored of the Nixon campaign and sporting a “Nixon Now” bumper sticker on my school lunch box (I’m still not so sure why, given the fact that my dad was a politically independent federal civil servant), I’ve been a student of government and politics. I know a thing or two about the political pulse of the nation, all the way down to most of the 435 individual congressional districts.

I’ve spent the last couple of months reliving a prediction gone bad. About six weeks before Mitt Romney chose Rep. Paul Ryan, R-Wis., to be his running mate, I was at a very small dinner for the congressman, whom I’d known and considered a friend since his first election. On this, the last time I saw Paul before he was selected, we went around the table and gave our predictions. Bolstered by two (or maybe it was five) glasses of wine, I was highly confident of my views. The next vice president, I said emphatically, would be…Sen. Rob Portman of Ohio. That assertion would be the last impression Paul Ryan would have of his old friend Joel before he became The Pick.

Whoops.

So it is with humility (and a caveat-emptor warning) that your lobbyist in Washington is going to make some predictions. Not about who’s going to win and lose the election. You can turn on MSNBC or Fox or CNN and find a hundred fools spouting in every which way on that. My purpose here is to play out the various possibilities of legislative and executive control and the specific implications of those scenarios on the commercial insurance brokerage industry. I’m going to break these into two obvious categories: benefits and property-casualty regulation.

For almost 20 years straight, Council members have heard Charlie Cook of the Cook Political Report speak about trends and scenarios. To my mind, Cook is the nation’s best political analyst, notwithstanding his miscall on Ryan as Romney’s VP choice. Cook called the Democratic wave years in 2006 and 2008, and he was among the first to assert that 2010 would be a wipeout year for Republicans. He doesn’t see a “wave” year in 2012, but control of both chambers of Congress will be tight. Republicans have a 25-vote margin in the House of Representatives, and the GOP would have to gain four seats (or three seats and the presidency) to regain control of the Senate. Even aside from the “fiscal cliff” and the future of the Republic, the insurance industry’s stake alone is sufficient to bite nails on election night.

HEALTHCARE REFORM (OR UN-REFORM)

Even the most uneducated among us knows that the enactment of “Obamacare” is wholly dependent on the presidential election. Reelect Obama, and the Patient Protection and Affordable Care Act moves forward, albeit with a lot of challenges. Elect Romney, and he’ll “repeal and replace.” No view about the future of American healthcare can fail to take into account the politics of the 2012 election.

If Obama wins, he will move to implement the exchanges even though most states are purposely and woefully behind schedule. His Department of Health and Human Services will be prepared to move in with a national exchange, even though there will be legal challenges on the question of whether subsidies can be extended to participants in the federal program. (The legislation was sloppily written. My bet is that subsidies will be fine for those in the “state-federal partnership” scenario—wherein a state welcomes federal management of its exchange—but where the states fight the feds on this score, they may well win.)

The president has three other big things to worry about, even if he’s reelected. The first is the new Medicaid “doughnut hole” created when the Supreme Court invalidated the federal mandate that states cover citizens up to 133% of the poverty line. It’s at that level that the subsidies for exchange participants kick in, all the way up to 400%. Lots of red states have no intention of covering the spread between their current benefits (as low as 37% of poverty) and 133%. This is a very big problem that the media have largely ignored.

The second problem is the intersection between the yawning federal debt and the price of new subsidies. In its FY 2013 proposed budget, the administration upped its estimates for exchange subsidies by $111 billion, and that’s using the same assumption that only 5 million to 7 million Americans will migrate from employer coverage to subsidized exchanges in the next eight years. McKinsey says that number is more like 25 million, which not only would portend a potential death spiral for employer-based coverage, but would be a gigantic budget buster.

Third, where are the savings going to come from? The Romney campaign makes much, as it should, of the law’s purported cuts to Medicare totaling $700 billion. Much of these so-called savings are the hoped-for result of newly created Accountable Care Organizations (read: HMOs circa the 1990s) and the Independent Payment Advisory Board (aka “rationing bureau”). Who knows if any of this will work? Further, physicians are scheduled to take nearly a 30% reduction in Medicare reimbursements in 2013. No doubt, Congress and whichever president will intervene to kick that can down the road, but where’s the money going to come from? Meanwhile, the White House copped out on establishing minimum guaranteed benefits, eviscerating one of the few healthcare reforms we liked. That will undoubtedly increase costs to clients.

These are headaches.

So, too, would be the headaches for President Romney. How would he put the entitlement genie back in the bottle? What parts of Obamacare already underway would he upend? The architect of Romneycare in Massachusetts took a purposefully vague position during most of the campaign, espousing middling positions, such as support for Association Health Plans, the purchase of insurance across state lines (how does that work, exactly?), and medical malpractice reform (yup, we need it badly, but it scores at only about a $75 billion dent in the deficit over a decade).

As Joe Biden says, the Ryan pick gives definition—for better or worse—to Romney on healthcare reform, which the Obama campaign has exploited to death on the Medicare voucher issue. But Ryan also has strong healthcare views in a broader sense. He is a philosophical champion of consumer-driven healthcare—the idea that people putting up their own money will be much more likely to scrutinize the price of health services and choose accordingly. Taken to its extreme, this approach could mean the end of tax preferences for employers that offer health benefits, and all of the tax benefits would flow to individuals—arguably a more radical threat to traditional benefits brokerage practices than anything Obama has done. Under the original Ryan budget blueprint two years ago, tax breaks for employers would end and be replaced by refundable tax credits for individuals.

But I’ve put these questions directly to Ryan over the years, and he’s no radical. He understands that 162 million Americans have good health coverage through their workplace. He also understands that many elements of consumer-driven care, such as health savings accounts and flex plans, are often good for employees and employers. One in five Americans is already in a high-deductible insurance plan.

Thanks to the guidance of insurance consultants and brokers, clients’ workers already have more skin in the game of the kind that Paul Ryan thinks will help bend the cost curve. In any event, though, a Romney/Ryan administration will be inclined to favor the individual over the employer.

There is another defining characteristic that has distinguished Ryan from many of his allies in the House of Representatives. He has been a skeptic of incremental efforts to reform aspects of the healthcare law, feeling that incremental reform could diminish efforts for comprehensive repeal.

The Council has been among the advocates for legislation, for example, that would remove broker compensation from the minimum medical loss ratio (MLR) formula under the act. While Ryan has done nothing to diminish this effort and, in fact, has signed his name on as cosponsor (along with 180 colleagues), he hasn’t used his leadership position to propel it, either. The most telling meeting I had with Ryan came more than a year ago in his office with one of The Council’s leading brokerage executives from Wisconsin. We were making the case for supporting the MLR legislation. He wholly sympathized with our plight but offered no support for an agent/broker carve-out. “So,” he asked our exec, “what’s the percentage of property-casualty in your firm versus benefits?” The answer: “Oh, about 55-45.” Ryan, shaking his head:  “I hope your p-c operations do really well.” The message: We are in this together, but we’ve got to be big picture, not small.

If there had been any chance that the Democratic-led Senate would take up the MLR legislation and that we could get our fix outside of comprehensive reform, I’d be begging Ryan to help move the MLR bill to the floor of the House. But as we near the elections, it’s increasingly clear that it’s either comprehensive repeal of the MLR or no change for brokers.

So here are the predictions.

STATUS QUO (OBAMA RE-ELECTED WITH DEMOCRATIC SENATE AND REPUBLICAN HOUSE)

The administration uses every ounce of executive authority to muscle through exchange development. The White House allows red-state citizens to go without a Medicaid doughnut-hole fix as he can shift the blame to right-wing governors and legislatures and gamble that citizens will revolt when they understand they’re subsidizing liberal states and not covering themselves. The costs? They’ll worry about those once the exchanges are fully operational. Republican efforts in the House to gum up the works are ignored by the Senate and go nowhere.

OBAMA REELECTED (WITH A REPUBLICAN SENATE AND HOUSE)

The House and Senate work together to send bills to the president’s desk to reform small and large parts of the PPACA, but they’re easily brushed off as neither chamber comes anywhere close to having veto-override majorities. With a looming and potentially awful 2014 mid-term, Obama pushes on all cylinders to make the 2014 exchange effective dates stick.

OBAMA REELECTED (WITH A DEMOCRATIC SENATE AND HOUSE)

This ain’t 2009 anymore. Even in this worst-case scenario for Republicans, the GOP minority in the Senate will possess more than enough votes to be able to successfully filibuster any further encroachment of the feds in healthcare. It’s still play-defense time when it comes to the Affordable Care Act, with the relevant federal agencies not so much worried about Republican congressional backlash.

ROMNEY ELECTED (WITH REPUBLICAN SENATE AND HOUSE)

The healthcare law is repealed on the first day of Congress, with a corresponding provision that maintains the market reforms already implemented (no exclusions for pre-existing conditions for children, allowing adults under 26 to stay on parents’ policies), but not much else. Congress employs the reconciliation process to upend Obamacare, which requires only 51, not 60, votes in the Senate. Democrats are left sputtering about the assault on democratic processes, but that’s the way they passed the thing in the first place. Republicans are frustrated that they won’t have the votes necessary (and reconciliation won’t work for this) to impose stiff new caps on lawyers’ fees and medical malpractice reform. All the focus switches to Medicare and away from broader reform once the PPACA is flushed.

ROMNEY ELECTED (PARTIES SPLIT CONGRESSIONAL CONTROL)

Almost inconceivable, given the fact that Romney needs to thread an electoral needle that assumes broader congressional gains for his party.

PROPERTY-CASUALTY AND INSURANCE REGULATORY ISSUES

For more than a century, insurance lobbying folk like me have been paid to fight out the border wars between state and federal regulation. The McCarran-Ferguson Act may have been passed in 1945, but it’s a misunderstood and evolving law. Yes, McCarran basically established that insurance regulation is the domain of the states. But to the extent that federal law explicitly addresses insurance, there’s nothing in McCarran that stops it. The congressional skirmishes over McCarran’s antitrust immunity over the years transformed into an all-out battle over the concept of an “Optional Federal Charter” that would allow national carriers (and brokers, for that matter) to trump state-by-state insurance regulation and opt for a single national regulator. One gorilla versus 50 monkeys, as the logic (albeit unfair to many conscientious state regulators) has gone.

If one were starting from scratch, given the interstate and international nature of the commercial insurance business, who could argue that state-by-state regulation is preferable? The Council, dating to the insurer solvency inquisition of Rep. John Dingell, D-Mich., in the early 1990s, was a leader in promoting the OFC.

With the financial meltdown, Dodd-Frank, and the Obama administration, the philosophical debate remains, but the practical political support for the OFC has collapsed. In this environment no one believes that federal regulation would be a preferable substitute for state regulation or would provide underlying relief from the burdens of state-by-state laws.

Dodd-Frank spared the insurance industry. While insurers worry about systemic risk designations and corresponding federal encroachment, the truth is that we got off easy compared to banks and other financial services sectors. The insurance title of Dodd-Frank was limited to creation of a small Federal Insurance Office (a bully pulpit, mostly) at the Treasury Department, along with non-admitted and reinsurance reforms that we support.

The long and short here is that it’s always easier to beat something in Congress than it is to pass something. Given the polarization within the insurance industry over the issue of federal regulation, the congressional prospects for an OFC are nil under any election scenario. The Obama administration has been absent on the issue, and the Romney campaign has been mute.

There are, however, big looming issues. The fiscal cliff negotiations and the lame-duck session of Congress after the election will create enormous pressure for tax reforms that could affect every aspect of the financial services industry.

This is especially the case with life insurance. Many of these products depend entirely on the tax code. There have been battles, as well, within the global reinsurance industry over whether offshore-based firms have unfair advantages. It isn’t hard to envision how these could spill over.

The biggest property-casualty issue in the next session of Congress, though, will be the extension of the Terrorism Risk Insurance Act (TRIA) that is set to expire in 2014. The program remains as it was established in the aftermath of 9/11, when the global market for terrorism reinsurance disappeared.

TRIA has been a trickier issue among Republicans than Democrats. Conservative members of Congress prefer market solutions and worry that a federal backstop has inhibited the private marketplace from emerging to handle the risk of terror. Many of them also think insurers should have to pay more for the federal backstop, which they are free to price as the market will bear. The Obama administration, likewise, has proposed scaling back the stop-loss program.

If the program is reduced, insurers will be less likely to offer coverage, and it will be more expensive, causing building owners to forgo it. That will be our mantra, at least.

If Republicans maintain control of the House, it is likely that the next chairman of the Financial Services Committee will be Rep. Jeb Hensarling from Texas, a brilliant free-market advocate. If Republicans retake control of the Senate, the chairman of the Banking Committee will be Sen. Richard Shelby of Alabama. Both of these men are great friends to the insurance industry, and both have been skeptical about an unending extension of the contingent liability of the federal government when it comes to terrorism insurance coverage.

Let’s put it this way: Hensarling and Shelby supporting a straight extension of the current TRIA program is about as likely as House Minority Leader Nancy Pelosi, D-Calif., downing waffle fries at a Chick-fil-A in the Castro District of San Francisco. This will be tough.

There will be other challenges. The Obama administration’s Housing and Urban Development Department has long wanted to impose new “adverse impact” regulations on the insurance industry for perceived “redlining” of homeowners insurance. It’s highly unclear whether they can get away with it, but it is a risk.

So, here are my predictions for property-casualty and regulatory issues.

STATUS QUO (OBAMA REELECTED, DEMOCRATIC SENATE, REPUBLICAN HOUSE)

The House will pass all kinds of bills to whittle away at Dodd-Frank, none of which will be successful. The regulators become more influential than the legislators. Gridlock prevails on everything that isn’t a consensus within an industry sector, and consensus is virtually impossible within the circular firing squad of the insurance industry on federal-versus-state issues.

TRIA is extended but only for a short term and only because all the players realize they can’t agree so they choose to kick the can down the road.

OBAMA REELECTED (REPUBLICAN SENATE AND HOUSE)

Republicans don’t have the votes for a wholesale repeal of Dodd-Frank. Republicans block any efforts to create new, burdensome insurance regulations, such as redlining, through appropriation riders and bigger-picture spending compromises with the White House. TRIA is extended but only after insurers step up with higher industry deductibles.

OBAMA REELECTED (DEMOCRATIC SENATE AND HOUSE)

TRIA is reauthorized with no major changes. Emboldened trial lawyers continue to try to embed all kinds of new rights of action in every other line of legislative text, but Republicans in the Senate provide a check on them. If the administration goes aggressive on the “adverse impact” issue, there will be years of costly litigation and regulation.

ROMNEY ELECTED (REPUBLICAN SENATE AND HOUSE)

Dodd-Frank repeal is not nearly the slam-dunk as healthcare overhaul. The effort becomes piecemeal, but given the modesty of the explicit insurance provisions of Dodd-Frank, they’re not likely to change. TRIA is at great risk of being sunsetted, but this depends entirely on the quality of the commercial insurance industry’s lobbying efforts. There are few worries about new redlining laws or intrusive or novel regulations.

MAKING A DIFFERENCE

These thoughts reflect mostly on the challenges, not the opportunities, that face commercial insurance brokerage firms in the aftermath of the elections in a few weeks. Given the collapsing middle ground and increasing polarization, it’s easy to be jaundiced. But healthcare reform, in any electoral scenario, will be a debate that mandates congressional action. Brokers are way ahead of Congress in finding solutions for clients who are trying to bend the healthcare cost curve. This will present us chances to influence the debate for the better.

Likewise, on the regulatory front, there’s a good chance that we can make a difference on TRIA and more parochial issues, such as agent and broker licensing reform. The so-called “NARAB II” proposal would create an optional uniform agent and broker national licensing clearinghouse. We’ve made a lot of progress this year in negotiating this legislation with state insurance regulators. Shame on us if, after all these years of working toward uniform nonresident licensing reform, we can’t get this to the finish line in Congress during the next session, regardless of who is president and who runs either chamber.

The Council was founded and has been sustained for nearly 100 years on two basic promises:  the best possible networking among the most successful firms in the world, and the best possible advocacy. It’s a cliché, but as we look forward to the next session of Congress and the next administration, it’s truer than ever: If you’re not at the table, you’re on the menu.