The private health insurance industry is complicated, controversial and misunderstood. And with health costs going up and coverage shifting from private employers to individuals, Medicare and Medicaid, it might be time to reset the national discussion about its role and value.
It’s timely: expanded coverage to private health insurance was at the heart of efforts to pass the Affordable Care Act in 2010 and it is at the center of the Republicans’ current effort to repeal the ACA with the American Health Care Act. The GOP’s replacement law promises to lower premiums for younger enrollees by reducing restrictions on private insurers so they’ll continue to offer plans on the health exchanges and it promotes high deductible insurance as the mechanism for offering cheaper choices to consumers. Their fear, understandably, is that insurers will follow the exodus of Aetna, Humana and others who have lost money on the exchanges, thus posing an election issue in 2018 if many of the 11 million they cover go without. That’s the politics.
But the substance of the policy discussion goes deeper. The private health insurance industry has been around since 1929 when physicians started Blue Cross plans to help patients pay their hospital bills. The rest is history. Health costs have gone up as a result of increased utilization, expensive technologies and drugs, our high-priced workforce and the modern facilities we expect. Premiums increased along the way and the industry evolved into three major groups: large, investor owned plans like United, Anthem, Aetna, Humana and Cigna that offer a full range of plans and insure 45% of total premiums; 36 independent, not-for-profit or mutually owned Blue Cross Blue Shield plans that cover another 35% of the market; and the rest including 280 plans covering 18 million enrollees sponsored by medical groups or hospitals. Together, take in $170 billion in fees after they pay doctors, hospitals and others for the medical care they purchase on members’ behalf. It’s a big business.
The concept for health insurance is simple: by pooling premiums from large numbers of enrollees, the costs for those who experience big ticket medical problems from accidents or hard to treat conditions can be spread across those who are healthy or less costly. It’s basic math. Insurers design their plans around meticulous actuarial models that predict who, how many, and where these high cost populations will be, and how much they’ll pay for the hospitals, doctors, technologies and drugs they use. They amass operational expertise in member recruitment and customer service, network design and credentialing, negotiation of provider payments, medical management to address coverage and denial management, claims adjudication, providers’ disbursements, quality reporting and most important, costs. These activities add between 7-27% in admin costs (per Penn’s Mark Pauly) above their actual medical costs and regulations at the state and federal levels, like restrictions in the Affordable Care Act, add 1-4% more to premiums every year. That’s the insurance business.
The tradition in our system has been that provider organizations deliver care and private insurers finance it through the coverage they provide and the agreements they have with individuals, employers and others who pick up the rest. Some providers, like Carle Clinic, Spectrum Health, Geissinger, Intermountain and others, do both. In so doing, their strategy is to deliver care that’s both effective and efficient via continuous relationships with their patients that are maintained for several years ideally.
Today, the fundamentals of the private insurance market are changing. Notwithstanding the political noise about what constitutes accessible, affordable coverage, two trends stand out:
1-The core market, employers, is shrinking. The foundation of private coverage has always been employers who provide insurance to their employees and their dependents, receiving pre-tax treatment for their portion of the costs. But health costs have caused employers to rethink their benefits strategies. They’re pushing high deductible plans to their employees, cutting retiree and dependent coverage and self-insuring themselves or, in some industries (restaurants, hospitality, light manufacturing, and transportation) dropping coverage altogether except for a few managers. The result is the core market for private insurers, employers, is shrinking. To offset the attrition, plans are contracting with states for managed Medicaid and with CMS for Medicare Advantage plans, which means more regulation and thinner margins.
2-And consumers are disenchanted with health insurance. Seven in 10 Americans under the age of 65 are insured through a private plan vs. three in 10 covered through a public plan – Medicaid/Medicare (CDC). Their premiums increased 11% annually from 1995 to 2005, then slowed to 5% annually from 2005 thru last year (Kaiser)—still higher than their food, transportation and housing costs. But private insurers, especially investor owned plans, have lost the public’s trust: only 16% think insurers put patients’ needs before their profits (Harris), 44% who have health insurance are unable to pay their bills to hospitals and doctors (Robert Wood Johnson Foundation) and premiums are going up again as the ACA’s reinsurance pool ends and medical inflation spikes (American Academy of Actuaries). Compounding this, media attention to marketplace premiums fans the flame: premiums for those who purchase plans in the individual exchange market have gone up around 20% annually since 2015, the result of higher-than-expected medical costs not anticipated when the ACA passed (the medical loss ratio for the exchange market in 2014 was 98%, then, 103% in 2015 and 96% in 2016 per Kaiser).
Looking ahead, for private insurers the cheese has moved. For most, corporate profits have thinned prompting industry consolidation, diversification and development of new thinking about their growth strategies. In the near-term, contracting with fewer providers, paying them less and covering fewer of their medical problems is their recipe for sustainability. But their business models, with enrollment turnover high and political pressure to hold down premiums, do not reward long-term investments in chronic care and preventive health that could permanently reduce demand and bend the cost curve. It’s safer to simply cut reimbursement to providers for the bigger ticket items because the ROI is quicker.
Hospitals and physicians do not have the luxury of denying care nor do most operate in the interests of private investors. They own the issue of affordability by default. Individuals lacking insurance and those who are of meager means expect to be treated by doctors and hospitals regardless of costs. Individuals look to hospitals and physicians for clarity and precision about diagnoses and treatments.
Likewise, provider organizations own the issue of financing healthcare. They are being pulled toward the lead role in systemic cost containment in their primary care, acute and post-acute settings. Thus, they own both the delivery and financing of care. It’s inevitable, since it is providers who have the greatest impact on both.
Might the future of the private insurance industry in the U.S. evolve to be dedicated business units that operate as part of integrated health systems that operate hospitals, clinics, medical groups and their own insurance plans? Might physicians acclimate to be responsible for controlling unnecessary costs while persistent about care that’s necessary? Might claims and clinical data be merged into powerful decision-support tools that support clinician-patient shared decision-making? Is cost-containment achievable by delegating it to providers with proper oversight by regulators?
Provider-sponsored health insurance plans that are part of regional, fully integrated systems of health are likely the future for private insurance. They’ll require regulations that encourage long-term relationships with their members (continuous care coordination), incentives that promote innovation, protections against cartels that defy competition and drive up costs and the public’s understanding that the status quo is not sustainable. Not every hospital can sponsor its own plan due to market circumstances, but all will bear responsibility for financing and delivering care.
It’s time to rethink private insurance in the U.S. system, and bring it alongside the delivery of care in systems dedicated to both cost control and quality of care without diminishing either.
Paul
P.S. Last week, media attention focused heavily on the dismissal of Bill O-Reilly from Fox News by its 21st Century Fox board. It took 19 days for the New York Times story to end Mr. O’Reilly’s 21 year Fox career. Healthcare is not immune to bullies, misdeeds and narcissists: it’s a heads up for boards blessed with servant leaders and principled clinicians and a caution for those that rationalize the regrettable behaviors of the few who taint reputations and damage our cultures…
