Wednesday, July 8, 2009

The Health Insurance Exchange

This post is a bit repetitive from former posts, but I've been struggling to get my thoughts straight, and I'm hoping this is an advance in thinking. It addresses the issue of the Health Insurance Exchange (HIE), although I have deferred the question of the Public Option as being part of the HIE until later.

The theory of market capitalism is that as companies compete for profit, the public is supposed to benefit, courtesy of the “hidden hand.” That has not happened in the health insurance business. To understand why not and to understand how to fix the system, we need to understand how health insurance companies make their money.

The Current System

First, what does the current playing field look like?

One, there is no fixed price for a given policy. Instead, each policy, whether group or individual, is set by negotiation. This is called “experience rating.” If there were a single price for all comers, it would be called “community rating.” Decades ago Blue Cross/ Blue Shield had community rating. When private companies entered the field they used experience rating. The Blues then had to also do experience rating, or they would have gotten all the bad risks (“adverse selection”).

Two, health insurance is a highly concentrated industry, with only a handful of major players nationwide and few local competitors. In any local area or even a state, one company can have 80% of the business.

Three, market power among the contracting parties varies greatly according to specific situations with buyers (patients and employers) and providers (physicians, hospitals, pharmaceutical companies, and others).

So, how do the companies make money?

Vis-à-vis Patients

Negotiating prices for policies is key. The insurance companies underwrite policies for applicant groups and individuals as part of their process, assessing risks and offering prices for varying products. Because of industry concentration, any group will frequently have few and very similar choices, which typically happens with concentrated industries. Because no specific company has a mission to make sure that everyone gets covered, some groups become pariahs and are unable to find affordable policies anywhere. Individuals seeking policies find them uniformly expensive and/or lacking full coverage, especially when the companies discover “prior conditions”. In sum, the game is one of “cherry-picking.” This is probably the clearest example where the search for profit runs counter to the national interest.

The companies also make money by rejecting policies retroactively (this is called “dumping,” or “rescissions”). 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. Again, the company’s search for profit opposes the social goal of secure coverage.

They write policies cleverly, exploiting their superior knowledge of policy details. Policy purchasers are confused not only by the “small print,” but even by the basic terms of deductibles, coinsurance, and exclusions from coverage. As certain procedures and conditions are excluded from coverage, patients discover when sickness strikes that they are under-insured.

They reject specific procedures and treatments for patients. There is as yet no independent and authoritative authority to determine which treatments and procedures are valuable. Thus, practitioners make their decisions and the insurance companies get to authorize or reject. Insurance companies probably feel more defensive than offensive in trying to curtail the proliferation of tests and procedures, but the battle for authorization piles up overhead and patients are caught in the middle.

They neglect customer service. Concentrated industries offer few consumer alternatives and can get away with this.

They pay less when a patient chooses an out-of-network provider. This contract provision is rather straight-forward, but recent lawsuits have clarified that the companies have compounded their gain by illegally overestimating the amount the patient is compelled to pay by using faulty cost data.

They market their products either through brokers or directly themselves, using the usual marketing techniques. There is no reputable central source of information and evaluation of these policies for buyers to turn to, only salespeople.

Vis-à-vis Providers

The great majority of policies are now either HMO’s or PPO’s, both of which require the insurance company to assemble a roster of physicians, hospitals, laboratories, etc., that “accept” that insurance. The companies assemble their networks by contracts that specify payment rates.

Again, negotiations are key. The companies find their most vulnerable negotiating interlocutors to be physicians in independent practice, who are forbidden by law from negotiating as a group. Many hospitals hold local monopolies and can be “price-givers” instead of “price-takers,” and can make startling profits. Other local situations have competing smaller hospitals that offer a more level negotiating field.

After the contracts are established and services rendered, physicians try to maximize their billings but must adhere to detailed rules of coding their services. The insurance companies make money by delaying, denying, and down-coding (estimating a service complexity at less than the claim) payments. The physician/insurance battles are legendary; the overhead of personnel salaries on both sides funding this war is also legendary.

Administration-only Services

Large employers frequently self-insure and use insurance companies for their provider networks, policy benefit structures, and claims payments. In contrast to the above situations, this function appears to be more typical of the general business world.

The end result of these activities has been an industry that has made a lot of money with hefty profit margins, and has paid their executives handsomely. Formerly non-profit entities have become for-profit and benefited accordingly.
It is easy to see that the ways that the companies make money bear little resemblance to the “hidden hand” of the market that benefits the public. Quite the reverse.

How The Public Interest Could Be Better Served – The Health Insurance Exchange (HIE)

A major part of the evolving proposal for health reform is to establish a “Health Insurance Exchange” (HIE) similar to the current system for Federal employees. The HIE would present a menu of insurance choices to buyers. There would be Level I, Level II, Level III, and Level IV benefits, with each company offering at each level guaranteed to provide at least the benefits specified by the HIE. The costs would vary, and some offerings might have extra features above the specified level – add-ons, if you will. So at Level I you could choose company A with its network of providers, or Company B with its own, etc. The companies would be required to accept all comers at a common price (“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 – in essence, they would have a voucher. The HIE 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 solve several of the health insurance problems. It would:

• Increase insurance accessibility, and thus greatly reduce the numbers of uninsured.
• Eliminate the problem of portability.
• Reduce underinsurance.
• Increase transparency of policy provisions, and thus protect patients from exploitation.
• Eliminate patient dumping.
• Reduce costs in the insurance system by:
o Eliminating the overhead of underwriting.
o Reducing the overhead of marketing.

Attracting patients would now center on price, additional coverage offered, patient service, and choice of provider networks.

On the other hand, the HIE would not fix some of the existing insurance problems:

• The conditions of negotiating with doctors and hospitals.
• Payment wars between providers and insurance companies, with the accompanying overhead.
• Insurance company\patient wars over coverage for procedures.
• Excessive concentration in the health insurance industry.

The HIE would also not solve the greater problems in health care system of cost and quality.

Would the addition of a Public Option help solve some of these remaining problems? Would other means – rules of the marketplace – be necessary to make the HIE function well?

These are questions for another day. (I’ve been struggling hard enough to get this post together.)

Budd Shenkin

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