The fact that I was once the CEO of a health insurer may cause you to read this with some skepticism.
I invite and challenge your skepticism. And I will do my very best to keep this piece strictly factual and not stray into the ambiguities that necessarily accompany complicated matters.
So bear with me.
Health insurers are not popular. No one wants to go to the prom with us. We have been vilified by no less than the President of the United States. Heady stuff. Let us see if this vilification and what I call the cartoonization of insurers has served us well in the healthcare debate. I think it has not, because for reasons I hope to make clearer, it has taken the focus away from the real causes of our cost and quality nightmares.
Health insurance started in the Depression with the Blues, although they were not at first called that. They typically were formed by hospitals (the Blue Crosses) and physicians (the Blue Shields), so that some payment for services rendered might be, well, “insured.” Provider self interest cloaked in the public interest. Perhaps there was alignment. And there was a Depression going on after all.
At first, the role of the health insurer was strictly financial. The insurer financed all or a portion of covered health services, and far, far fewer services were covered then than today. That’s all an insurer did or was expected to do. It was not there to manage doctors or hospitals or patients or anything else. Originally, this financing was done through“indemnity” plans, which allowed patients to see anyone they wanted, and paid a set dollar amount per service or per day of hospitalization (e.g., $50/day of hospitalization). Thus, if you chose a more expensive provider, the difference was on you. Insurers back in the day did not negotiate reduced fees with providers (“fee discounts”). It was much more civil then.
Nonetheless, up to World War II, a very small percentage of Americans had health insurance. One reason for this is that Americans spent very little on healthcare. In 1929, Americans spent about 1% of GDP on healthcare; by 1966 when Medicare and Medicaid were adopted, it was 6%; today it is 20%.
By virtue of political accident, the employer-based system of health insurance came about through a confluence of two things:
- During WWII, FDR’s National War Labor Board (which enforced wartime wage and price controls) ruled that fringe benefits, which included health insurance, were not subject to wage controls. Exactly how this happened is unknown, but the result was that although wages were frozen, employers could spend more on health insurance, and the unions were all over that like white on rice.
- The 1954 Internal Revenue Service codified that while the cost of health insurance could be deducted by employers, it was not income to employees. A huge incentive that continues to today and has embedded employer based coverage in America as the norm rather than governmental coverage, which is the norm everywhere else.
After WWII, healthcare services predictably became more sophisticated and comprehensive. Coverage also started to change away from strict dollar indemnity, to a percentage of charges and even more comprehensive coverage. And as coverage increased, the provider market grew exponentially. This was a symbiosis that fed upon itself because the use of employer-financed coverage disintermediated the user of services (patients) from its payment.
By the mid 1970’s, almost a decade after Medicare and Medicaid were enacted, we started experiencing a health insurance cost crisis. The public outcry was fierce, state legislatures responded, and health insurance regulators were statutorily empowered to control premiums and health insurers.
Health insurers were called in on the carpet about the premium increases. Why were they paying doctors and hospitals whatever they wanted? We were accused of getting too cozy with providers. The public and regulators and legislators demanded that insurers negotiate harder bargains with physicians, hospitals, and other providers. And in response, insurers started doing just that, slowly at first, and then more and more aggressively, to the point that today, the once friendly relationship between insurers and providers is downright toxic.
A quick (and true) story illustrates today’s circumstances: My company, Blue Cross & Blue Shield of RI, was and still is the primary (some would say dominant) insurer of Rhode Islanders. It negotiated hard bargains with physicians and hospitals, in part using its size as leverage. After all, that is what legislators, the public, and regulators demanded. Occasionally, in negotiations, we would reach impasse with say a hospital. The disagreement would get public, “top of the fold” news in the Providence Journal, and the media and politicians would be quick to side with the hospital and against the insurer. Hospitals are, after all, warm and fuzzy and they save lives. We were castigated for using our leverage to strike hard bargains on behalf of our subscribers and employers. [Wasn’t that our job?] Pressure mounted on us to cave in. The hospital might even send postcards to patients with warning of dire consequences should Blue Cross not give the hospital what it was asking for. And if I tried to garner support from said employers, what do you think happened? They bailed, saying, “Just fix it.” No one goes to the prom with the health insurer.
My story illustrates the total lack of logic-integrity when it comes to reactions by the public or elected officials about health insurance or insurers. The employers knew why we were taking a hard line with that hospital. It was for their benefit. Why else would we endure such unpleasantries? It would have been far more pleasant to give them what they wanted, shake hands, and go golfing.
To further drive this point home, let us talk about how health insurance and premiums work, because most people cartoonize and don’t realize what’s at play here.
There is self-insurance and insurance. Employers of a sufficient size can self insure, which means they pay the actual claims of employees and dependents, and pay the insurer a fee for administering the plan (and making available to that hard bargain fee discount with providers that it was excoriated for getting).
Or employers can fully insure against healthcare costs. In that case, their premiums consist of actuarially calculated amounts to cover projected claims expense plus an administrative charge. The self-insured employer knows it pays exactly what it incurred for claims. The fully insured employer gets a fixed premium (budgetable) which may be the same, greater, or less than the actual costs in any given year.
If you take all classes of coverage, the cost components of coverage are approximately 90% claims expense and 10% administrative. While every million dollars count, it becomes immediately apparent that to put a real and lasting dent in healthcare coverage costs, something must be done on the 90% claims expense side. There’s no way around this. And yet year after year after dreary year, politicians, media and the public focus on the 10%, ignoring the 90%. While I accept that appearances count for something, reality really counts for more.
Let’s view this another way. My annual operating expense budget was about $250 Million. About 65% of that was people (salaries, fringes, etc.). Another significant portion was fixed (building, technology, pencils (how quaint), etc.). If by magic, we could cut 10% out of our operating costs, we’d reduce rates by $25 Million. At the same time, our claims expense was close to $2.5 Billion. Thus, what an employer would see as a result of our $25 Million cut is a 1% reduction of rates, for one year. This is a one time reduction. And I would have fired perhaps 100 employees, and my service would have suffered.
To further highlight the unreality, when I attempted to outsource some of our technology costs (and jobs), I got a call from the Governor’s office demanding reconsideration. I reminded the Governor’s representative that they had switched State of RI employee coverage from Blue Cross to United Healthcare because our administrative expense component was higher than United’s. It’s an unfortunate reality that to cut costs, one must impact people costs (jobs, salaries, fringes). That logic was lost on that administration.
Back to the claims expense. In addressing our cost conundrum, we have no alternative other than reducing claims expense (or at least mitigating increases of claims expense).
Claims expense consists of:
- Price (the fees or payments paid to providers);
- Use (the rate of use of services per person per year); and
- Mix (the relative expensiveness of services, e.g., PET scans rather than x-rays).
What more might we do on the price (fee) side? We’ve driven the hard bargains. We have no support for driving even harder bargains. Even Medicare, which is truly the 8000 lb gorilla and has threatened for over a decade to drastically reduce physician fees, every single year, backs down. Realistically, fees cannot be significantly reduced.
What more might we do on the mix (relative expensiveness) of services? Probably nothing short of rationing, which is so un-American. When new miracles arrive, the demand for coverage is enormous. That route avails us nothing.
What’s left? The only thing left is the rate of use of services per person per year. And what are we to do there?
Well, after politicians and regulators told insurers to keep the fees as low as possible, they then tasked insurers to do something about the rate of use of services. They focused mostly on fraud and abuse because those were safe. Sotto voce, however, the message was: “Do something about over use of services.”
[Incidentally, before we move on, I’m sure you’ve heard it said how unacceptable it is that health insurance premiums are increasing at 3-4 times the rate of inflation, right? And it does seem a terrible thing. Cartoonization again. Comparing apples and oranges. Inflation is measured by CPI, which in turn measures increases in the price of a market basket of goods and services, such as the price of a gallon of gas, loaf of bread, a new home). Price and only price. Health insurance premium increases have a price increase component (fee increases), a rate of use component, and a mix (relative expensiveness of services) component. If fees increase say 3% a year, and the rate of use increases say 10% a year (which it has), and the mix perhaps 1% a year, you can see how we get to double digit increases in premiums rather quickly, each year.]
There are two approaches to this problem:
- On the provider side: It’s called “managed care.” No one seems to like it. In the 1990’s, this was the bane of HMOs with bean counters limiting or denying care, and getting between doctors and their patients. Denzel Washington famously acted a part (John Q) of a Dad whose son was denied care by an HMO. More public outrage; more legislative backlash. Admittedly HMOs handled that poorly. We pulled back from that with a kinder gentler managed care, and the results have been near double digit increases in the rate of use of services over the last 15 years. And when insurers impose new constraints on providers, such as pre authorization, everyone howls. And I dare you to try to call something not “medically necessary,” much less win a dispute in court on that issue.
Moreover, health insurance never was designed to cover everything, even if medically necessary. And yet somehow, the public and elected officials seem to think it should. That begot so-called “mandated benefits,” legislative orders that insurers cover things that previously were not covered (e.g., in vitro fertilization; drug and alcohol treatment; IV Lyme Disease treatment; wigs for chemo patients; batteries for cochlear implants). Are some of these things good for people? Sure. But each mandated coverage increases premiums.
The insurer shows up at the legislative hearing opposing the mandate and is lambasted by providers, very sympathetic patients, and the legislators. Outcome almost guaranteed. And why are we opposing such mandates? The more mandates, the more business we get, and the higher the premiums. Seems at first blush to be in our interest. Hmmmm. We were trying to keep premiums down. But the public, the media and elected officials can compartmentalize those issues amazingly.
There recently has been federal recognition of the need to do something on the provider side. Obamacare introduced Accountable Care Organizations, recognizing that the historical method of paying providers (“fee for service”) that reimburses for things done is a major driver of our out of control costs. Under fee for service, providers are paid for things done. The more things done, the more paid. The result is predictable. We have a volume based production system in America because that’s how we pay.
We will over time move to a bundled payment system (to address costs, if done right) and incentives for quality of care and outcomes (to address our poor quality of care). That is good, but progress is slow, and the provider community is very slow to adapt and adopt. This is understandable given the physician culture of autonomy and volume production that has existed for decades. To move to a coordinated care model focused on patient outcome rather than volume can be scary.
Lastly it has been said by no less than the head of CMS (Medicare/Medicaid) that as much as 30% of our healthcare expenditures are useless waste and error. If we spend over $3 Trillion on healthcare, this is a $1 Trillion waste of money, perhaps the largest single untapped resource in America today. Yet the culture of physician autonomy resists quality of care and outcome measures (much less their publication) and electronic health records, but these are desperately needed to address waste and error. Insurers and the federal government are leading the move away from fee for service and toward required electronic medical record use.
- On the patient side: I testified before RI’s Joint Oversight Committee on Healthcare in 2004 that the group most responsible for our out of control healthcare costs were us, the patients. That we were living unhealthy lifestyles of rampant obesity and diabetes, and were not accessing the healthcare delivery system appropriately. Theheadlines next morning? “Blue Cross Blames Subscribers For Rate Increases.” Well…true as far as it goes, but not particularly helpful to the cause.
So what happens when, in response to unhealthy lifestyles and improper access, employers or insurers implement workplace wellness programs with penalties for non-compliance? Legislatures gear up and outlawpenalties and even water down incentives to “good faith efforts” rather than results. This by no less than Title VII, the ADA, and GINA. We react as if people are incapable of taking proper care of themselves. We fail to hold people accountable for things within their control. Again, not helpful.
Then there are the skeptics who claims that such programs do not belong in the workplace at all. That they are invasive and demeaning, and don’t result in a positive ROI.
The point is that any time anyone (usually the insurer) tries to do anything meaningful (and to be meaningful it must be disruptive), roadblocks are raised and no one supports the insurer.
Health insurance today is not really insurance. It has morphed to something different. Traditional insurance spreads a risk of the cost of a large unpredictable loss among a group of people who each share such a risk. Fire insurance is a good example, where insureds each pay a small amount (premium) to cover a small risk of a fire loss, and the insurer spreads that risk over hundreds of premium paying insureds.
Health insurance turns this on its head. With the exception of hospitalizations and a few other items, health insurance is not about paying a relatively small premium to cover the risk of a very large loss. In health insurance, we pay a very large premium to cover mostly predictable and indeed inevitable smaller expenses. Health insurers have become fiscal intermediaries between providers and subscribers—not insurers.
Someone I know once remarked that to blame health insurers for the cost of healthcare is like blaming oil delivery companies for the high cost of home heating oil. Perhaps not a perfect analogy, but you get my point.
So to summarize: the cost of health insurance is almost solely driven by the cost of healthcare. The cost of healthcare is driven by the claims actually paid out by insurers to doctors and hospitals for care given to patients. Claims increases are mostly driven by increases in the rate of use of services. When disruptive efforts to change this paradigm are successfully opposed time after time, it underscores the futility of the role of insurers.
