IS THE HEALTH INSURANCE INDUSTRY DYING?

As part of his last-ditch effort to revive the Senate’s undead health reform bill, President Obama has proposed a federal board to veto health insurance premiums it finds “unreasonable and unjustified.” In case you’re wondering, all 50 states already do this, albeit with the countervailing requirement that premiums must also be “adequate” to assure insurance carrier solvency—a key requirement the President ignores.

His proposal is the obvious result of his Administration’s high dudgeon over Wellpoint’s 39% individual premium hikes in California (where it has lost millions). The argument is that such increases are unconscionable from an industry that earned “$12 billion in profits last year.” Please note the inapt comparison of percentages with dollars, a diversionary, demagogic tactic often used to enrage the innumerate while failing to note Wellpoint’s 2009 operating profit margin of 4.8% or the entire industry’s hopelessly pedestrian 2.2%. Even more absurd was one congresswoman’s snarky suggestion that the real reason for the increases was to maintain WellPoint CEO Angela Braly’s $9 million annual compensation—equal to twenty-eight cents per member per year. The cause of premium increases is not profits or executive compensation. To paraphrase President Clinton, “It’s rising medical costs, stupid!”

But there’s a much deeper problem inside the insurance industry. Obscured by its record profits is the stark reality that it’s stuck with an unsustainable business model. If it doesn’t fundamentally change, it’s going to die.

The problem began a decade ago with the widespread collapse of managed care and the abandonment of utilization and cost controls that had so effectively moderated costs during the previous two decades. It has continued as merger-driven concentrations of hospitals and single-specialty medical groups have created market-dominant powerhouses able to dictate their own reimbursement rates—like the California hospitals now demanding 40% increases from WellPoint (220% in one case).

Ultimately, though, the fatal blow will come from the insurers’ own slavish dedication to employer-based group insurance. Having long since lost the large employers to self-insurance, they’re now stuck with a rapidly shrinking small-employer market and an individual market that too often loses money and gets headlines for “unjustifiable” premium hikes and for denying or dropping coverage for the sick. And the small employers that still offer insurance are rushing to high-deductible plans with lower premiums and, thus, lower profits because of insurer’s cost-plus pricing models.

To cope, many insurers have merged to increase their own market power and economies of scale, but that strategy is rapidly playing out. Currently, 24 states now have only two insurers controlling 70% of the market (last year it was 18). On another front, carriers have begun experimenting with pay-for-performance arrangements to encourage doctors and hospitals to improve medical quality and lower costs. The problem is that they’re rewarding provider efforts rather than patient outcomes, effectively reprising the old saw, “The operation was a success, but the patient died.”

Health insurers have commoditized themselves into a low-margin, increasing-cost, price-constrained, shrinking-market business model almost devoid of real innovation. And virtually everything in Mr. Obama’s “health reform” proposal will make their lives worse: higher regulatory costs, unrealistic premium restraints, increased benefit mandates, and serious adverse selection. Any carrier that participates in the government’s insurance exchange will likely do so only as a politically motivated loss-leader to forestall imposition of the dread public option as a camel’s-nose-in-the-tent precursor to single-payer.

The Administration’s poll-driven demonization of the industry is beating a dying horse—perhaps with an intent to accelerate its demise, although they’re probably neither that smart nor that stupid. While the industry’s strategic decline is mostly a consequence of its own actions and innovational lassitude, all is not hopeless. Herewith, a few policy recommendations for the industry to get its act together to help lead us out of the mess that is the American health care financing and delivery system.

1.    Return to provider accountability with risk-sharing and locally based health plans. Capitation became a dirty word when you abused and misused it last decade. Do it right this time.

2.    Reinstitute medical prices by rationalizing the dysfunctional provider billing-and-collection system to signal real consumer prices and to cut transaction costs by three or four hundred billion dollars per year.

3.    Engage consumer markets as the only way to get quality up and costs down. Help consumers demand and use providers with the best quality and lowest prices to flush out waste that now consumes half of every medical dollar. Push for tax equity with super-HSAs.

4.   Institute adjusted community rating based on natural demographic risk classes unrelated to individual health status, along with financial incentives for individuals to control their own preventable health risk factors that lead to 75% of all medical spending.

5.    Sell insurance, not prepayment for normal consumer purchases. Simultaneously knock a big chunk out of premiums and create a vibrant consumer market for primary and preventive care by convincing, cajoling, and pressuring state legislators to limit required minimum insurance benefits to care that is both medically necessary and otherwise unaffordable to consumers.

6.    Abandon employer insurance. It’s a market-failure-created artifact that is leading you to ruin. Push for a rational, universally-available, voluntary, non-adversely-selected, defined-contribution, individual insurance market to cut out employer middlemen and to conjoin your interests with those of your consumers to achieve high-quality, low-cost medical care on a sustainably affordable basis.

Insurers, it’s time to get out front as innovative change-agents and stop milking a cash cow that’s heading for the slaughterhouse.

My thanks to readers who’ve noted (with apparent regret) my absence from these pages for the past couple of weeks. I took a breather to learn the Canadian National Anthem.

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5 Responses to IS THE HEALTH INSURANCE INDUSTRY DYING?

  1. Charlie Crowder says:

    I’m also seeing, frankly, excessive rate increases I believe some of it is the insurance companies shoring up their financials for the inevitable attack by the Obama administration. Whether Health Care Passes or not the Obama administration has made them the focus of evil in health care and will do anything through law or regulation to make them irrelevant and eventually disappear.

  2. Randy Dipner says:

    I’m curious about the self insurance of large companies. First don’t many of these so-called self insurers actually work with an insurance company. Second how do you define the terms small and large? How large is large? I know my company is small, but the federal government defines some companies as large as 1,000 employees as small. How large does a company really have to be to self-insure?

    On another issue, doesn’t your article actually argue in favor of a part of the Obama/Senate/House that suggests that there is very little competition among insurers. You seem to suggest that this is indeed true in 24 states.

    It seems that the only way to have the insurance industry regain some semblance of health is to reduce the underlying costs they are reimbursing and get them to stop reimbursing for what amounts to the 3,000 mile oil change for our cars (the annual check-up in the health care provider’s office. This level of care simply should not the goal of insurance.

  3. Scott Brassfield, MD says:

    Stephen and the prior blog correctly state, it’s the medical costs and payment for the 3000 mile oil changes. Fee for service reimbursement combined with a lack of incentives to improve health and decrease costs cause doctors to provide lots of “services” in order to generate fees. Some of the best and least expensive medical care occurs in the three counties with Mayo Clinics where, instead of the fee for service system, excellent doctors are salaried. They pretty much demonstrate that it’s possible to double the quality at half the cost. Of course, mandating cost effective 6000 mile oil changes would inspire a chorus of complaints about “rationing”.

    And I’d emphasize Stephen’s item 2. As a family practitioner who submits about 30 insurance claims a day plus a bunch of resubmissions due to complicated coding issues plus a bunch of rebillings of patients for their “coinsurance”, which was incalculable when they checked out because I did not know what the “contracted” rate for my services was until I got back the EOB (explanation of benefits) from the insuror a couple months later, plus patient billings because the EOB reveals the patient still has a deductable—I could continue but are you getting the picture of just how much time and expense would be saved if there actually was a price for my services and I could collect the appropriate amount from patient and insuror at my check out window? My average office visit charge equates to, say, a two thirds full cart at Walmart. If their clerk collected a $25 copay then billed a recalcitrant third party for the balance then discovered butter was a customer expense as was a $33.13 coinsurance then, a couple months later, sent the customer a bill, there would be very few savings left on any of their aisles! Stephen states 300-400 billion dollars and I’ve also heard 30% of the health care dollar is wasted on insuror plus provider billing expenses. Scott

  4. Daniel says:

    Are the costs for primary and preventive care really significant contributors to insurance premiums? Is that where our cost problems really lie?

    You might have a point about creating this market for primary and preventive care (if you give the poor money for preventive care as you mentioned in your mammogram guidelines article), but how much will solving this problem really change the true cost drivers?

    I have a loved one right now who is in the critical care unit at one of the largest, most acclaimed, highest rated hospitals in Indiana. She was on a ventilator and in a drug-induced coma for several weeks before they decided to perform surgery that could send her home much faster.

    My occasional doctor visits (and especially my annual physicals) are not what’s really driving these high costs…it’s how we treat the sickest patients near the end of their lives.

  5. Pingback: What Will Health Reform Do for (or to) Americ's Hospitals? | Stephen S. S. Hyde On Health Care Reform Topics

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