Health Care Reform (9) - Insurance

HEALTH CARE REFORM – CHANGING THE INSURANCE SYSTEM

It is tempting to think that if we changed our system of health insurance, all the problems of medical care would be solved. Our medical care system problems are too profound and the system too complex for that to happen. On the other hand, it is true that insurance is central enough to the system that changing it would lead to many important solutions, if not all. How should health reform change health insurance, and would a Public Option (PO) competing with private health insurance companies be a good idea?

The Current System

As companies compete for profit in the marketplace, the public is supposed to benefit, courtesy of the “hidden hand.” That has not happened in the health insurance business. To understand why not, we need to understand how health insurance companies make their money. Let us count the ways.

They underwrite. That is, they assess the risk of individuals and groups and charge them accordingly, denying some individuals and groups coverage all together, and excluding “prior conditions” for many. This is called “cherry picking.” Some groups benefit a bit from relatively favorable ratings, but because of the cost of individual underwriting and administration, no individuals benefit.

They reject policies retroactively (this is called “dumping.”). When a patient gets sick the insurance company withdraws the policy on the grounds of an unrevealed preexisting condition. Thus, an insured patient becomes uninsured and the insurance company is not liable for the medical expenses.

They write policies cleverly, exploiting their superior knowledge of policy details. Consumers are confused by the specified deductibles, coinsurance, and exclusions from coverage, and often discover when sickness strikes that they are under-insured.

They market with advertising and extensive individual company contacts.

They use contracting prowess as they assemble provider network. Since the insurance industry is quite concentrated and physicians usually atomized into small practices and forbidden by law from bargaining collectively, the companies can exploit the power difference to extract favorable terms from the practices. Some physicians use overbilling tactics, which the insurance companies combat by delaying, denying, and downcoding payments. The practice-insurance battles are legendary; the overhead of personnel salaries on both sides funding this war is also legendary.

The insurance company – hospital game is different. Many hospitals are themselves in positions of local or regional advantage and can resist poor contracts. Nonetheless, since the insurance companies are few, their competition is muted, as they see each other as unspoken collaborators, driving up prices for all. These wars can also become legendary and entail great expense on both sides.

They reject treatments for patients. There is no national authority that definitely decides which treatments and procedures are valuable, so practitioners make their decisions and the insurance companies get to authorize or not. Insurance companies probably feel more defensive than offensive in trying to curtail the proliferation of tests and procedures, and the authorization battle again piles up overhead.

They neglect customer service. There are only a few health insurance companies and employers rather than consumers generally make the choice, so serving the public well is unnecessary.

The companies build a profit margin into their budgets and pay their executives handsomely. Formerly non-profit entities have become for-profit and benefited accordingly.

They provide administrative services and provider networks to self-insured large companies. In this pursuit they are not insurance companies at all, but network compilers, claims processors, etc.

In sum, as part of a quagmire of a system, health insurance companies have been less insurers and more administrative bodies, only sometimes providing for the public good. But one can see that within this difficult system, it is hard to do the public good.

How The Public Interest Could Be Better Served

Health reform is now set to establish a “Health Insurance Exchange” similar to the current system for Federal employees. The Exchange would basically be a menu of insurance choices, with various levels of benefits specified, and companies having their policies available for purchase at each level. The companies would be required to accept all comers at a common price (called “community rating.”) Riskier groups and individuals would be subsidized (several techniques are available, from private and public sources), so no company would suffer adverse selection. Lower income individuals would be subsidized. The Exchange would be available to individuals and small groups at first, or perhaps everyone from individuals to large groups.

Just establishing this new exchange system would be a marvelous advance. It would:
• Greatly reduce the numbers of uninsured
• Reduce underinsurance
• Protect patients from exploitation by company cleverness.
• Eliminate the overhead of underwriting.
• Eliminate patient dumping.
• Reduce marketing overhead costs.
• Transform competition for patients to price, additional coverage offered, patient service, and choice of provider networks. Competition would thus become an addition to the public good.


What Would Not Be Fixed

This step would not:

• Solve the problem of costliness of American health care. Nonetheless, overhead savings in the health insurance industry would certainly outweigh the costs of establishing and maintaining the Exchange.
• Improve the conditions of negotiating with doctors and hospitals.
• Improve insurance company\provider wars over payments.
• Eliminate insurance company\patient wars over coverage for procedures.
• Eliminate concentration in the health insurance industry.
• Improve coordination and reduce duplication within the system
• Reduce geographical variation in habits of practice
• Improve quality.

Clearly then, establishing an Exchange would be a step forward, but only a step.

What Adding the Public Option Could Do

We do not yet know what a PO – government sponsored alternative(s) in the Exchange menu – would look like. For public/private competition to be more than a sham, the playing field would have to be equal, with the rules for all entities the same, and most probably this will happen. The PO should be considered on that basis.

Advocates say a PO would “keep the health insurance companies honest.” To the extent that industry concentration now produces increased rents, this could indeed be true. On the other hand, it would seem unlikely that a PO would reduce costs by procuring volume discounts. Would a PO greatly reduce the prices of policies, and then use a large patient subscription to drive down provider costs by contract (fiat)? Most probably many providers would then simply exclude or limit their PO patients, as they do now with Medicare and Medicaid. Care would then probably become even more unequal than it is now.

It is also unlikely that a PO would compete with reduced administrative expenses. Even Medicare contracts out its administrative functions.

The medical care system needs a great deal of organizational innovation. A governmental PO would most probably not be terribly innovative in itself. It could be a great support, however, for entities that wished to innovate. If local area providers were to propose innovations with a public spirit, the PO could be their vehicle of patient insurance. If private insurance companies wished to innovate and then failed, having a PO available for patients to enroll in would be of great public benefit. This could be especially true in the high cost geographical areas that are most in need of innovation.

Prevention and health promotion have received short shrift from private companies because long-range benefits will most probably not accrue to them. A PO, with a different ethic, could well be more willing to take such projects on.

A traditional problem of public entities is a failure of incentives, since profit is not one of them, and virtue is notoriously a fleeting sentiment. A suggestion by Mark Pauly that each menu have two or more PO’s, perhaps with different sponsorship, makes sense in that context. With the Medicaid program in Alameda County in California, for instance, two competing managed care entities have kept each other honest!

What to Leave to Other Mechanisms

Changing the insurance playing field cannot cure all ills. There needs to be innovation throughout the very fat system – when a body is fat, fat lodges everywhere, and so it is with our health care system.

Insurance companies cannot increase appropriateness of care without a generally accepted official agency of some sort that makes these judgments with public and professional acceptance. Cost reduction will rely on rationalization of systems, which insurance companies can only support, not create. Quality of care must rest with the medical care system itself, perhaps with the health of insurance incentives, but insurance companies cannot be primary agents. The major work in redoing health care will need to lie with the profession, often locally, and government apart from the payment system.


In sum, the health insurance system needs to be redone, and quickly. Doing so can cure several of our most troublesome problems, and help in the cure of others. Adding a PO to the mix would most probably be a beneficial step.

Budd Shenkin