The Truth about Insurance Companies and HMOs

Insurance Companies and the Depersonalization of Medicine

How things got started.

Although insurance began in ancient Babylon, medical insurance is a feature of the 20th century. It started in 1929, to be exact, when the forefather of what became Blue Cross decided to provide 21 days of hospitalization insurance for young healthy teachers. At an initial premium of only $6.00 per year they made a profit since young healthy teachers rarely needed hospitalization.

Hospitalization insurance was profitable. The company decided to insure for doctor bills, similar to the "medical service bureaus" which had developed in the Pacific mining camps after the turn of the century. And Blue Shield was born. They didn't do badly during the Great Depression as most of those teachers stayed employed. Other young healthy groups also signed up for insurance and the market kept growing.

During World War II, wage and price controls and a contracted work force resulted in an unstable job market since any able bodied man or woman could change jobs for more money or more opportunity. The company he or she worked for could not increase the salary because of the wage controls. So they did the next best thing. They increased the benefits. One of them was company sponsored health insurance. It became an expected benefit which persisted after the end of the war to this day.

But health insurance is only profitable as long as the insured population stays healthy. Healthy young people from the 1930s and 1940s became the not-so-healthy aging population of the 1960s. Insurance companies had to pay out more and more to settle claims. They covered these losses by increasing the premiums which were now being picked up by American industry. Industry simply passed on this added cost of doing business to their customers in the form of higher prices for goods and services. This unleashed the spector of inflation. Industry cried for relief for their pensioners who were the cause of most of those premium increases. The US government responded.

Medicare was enacted in 1965 to care for the nation's elderly. Medicaid to care for the nation's poor was thrown in as part of Lyndon Johnson's "Great Society. This took the burden of paying insurance premiums for elderly retirees off the backs of American Industry. It also helped the insurance companies because the government kindly took over the risk of insuring old folks.

How health insurance companies make money.

The goal of most health insurance companies is to make a profit. Some hide their profits and operate as "non-profit corporations" which make sure that before the end of the fiscal year they've distributed their profits in inflated executive salaries, fancy office buildings, massive marketing campaigns, cash reserves, Washington lobbyists, investments and bonuses. One of these companies is so big, that it had to break up into separate companies for each state (and in some cases companies for different geographical regions of the state). It is not publically traded and has no stockholders to answer to or who expect dividends.

Profits are made by collecting more in insurance premiums than they pay out in administrative costs, dividends and , oh yes, the settlement of claims. In insurance company parlance, the latter is referred to as "the medical loss ratio". They look at money you or your employer has faithfully paid them in monthly premiums as their money which they begrudgingly have to pay out from time to time to settle a claim.

Premiums sit as a big lump of cash in investment vehicles which earns interest. The longer the lump of cash sits there, the more interest earned. The longer they can delay paying a claim, the longer that money will draw interest which is siphoned off into the company's coffers.

Insurance and the Practice of Medicine.

Medicine used to be a "one on one" profession: the doctor and his/her patient. In the old days doctors treated patients and patients paid doctors for their time and knowledge. There was no middleman. As people do, doctors and patients developed a personal relationship. Usually, they liked each other. Services and money changed hands but so did human warmth and compassion.

Insurance (including Medicare and Medicaid), on the other hand, is not a one on one business. A healthy person (or his employer) pays the insurance company. Your taxes pay for Medicare and Medicaid. When the healthy person gets sick, the doctor treats him or her but bills the insurance company. The insurance company then pays the doctor.

Patients expect good service from the doctor. They or their employer have been paying for good service in the form of hefty insurance premiums each year while they've been healthy. Doctors expect to get paid for their time and expertise. But this has now become a hassle. Multiple forms, precertification calls, insurance company hassles and red tape are necesary to get paid. And usually there is a significant wait before that check is in the doctor's hands. During that time, while the insurance company is earning interest on the premium money pool, the doctor must pay office staff, rent, malpractice insurance premiums and other expenses.

Hassles and "Red Tape".

The basics of insurance were developed 5000 years ago and refined through the ages. Insurance is based on a simple concept: the many help the few. The many pay premiums to the company which establishes a cash reserve. The cash reserves are used to settle claims from the few. There is an administrative cost and everything left over is profit. Insurance is a mass market business.

Insurance can be a very profitable business. It becomes more profitable as the number of enrollees increase and the money expended to pay claims is reduced. Delay on the payment of claims means that reserves drawing interest or earning money in investments can earn more money for just a little bit longer. Sometimes the "red tape" involved in getting a claim settled discourages the enrollee bringing the claim altogether. That's good news for the insurance company - it's one less claim they have to pay out.

The longer the company can hold off paying a claim as it waits for further information, proper documentation, internal review by the "medical director", fee negotiations, computer glitch repairs, etc., the more interest the undisturbed capital reserves earn. The more paperwork an insurance company insists on having completed prior to processing a claim, the greater number of possibilities for claim payment delay or claim denial. The fewer claims paid out, the greater the profit.

An important aspect of the insurance business is marketing and public relations. They must attract more and more enrollees. They must also set up and maintain a bureaucratic morass which will keep claims payout to the absolute minimum However, the company must have a palatable reason for delay and non-payment to avoid a public relations disaster. They must keep the vast number of enrollees happy or lose them to competitors. However, keeping enrollees happy is a statistical business and relatively easy: it relates to the overall concept of insurance - the many help the few. Only a small minority of their enrollees will actually need their benefits during any particular fiscal year. The majority of the population is usually healthy.

When enrollees get sick many are unhappy with the "red tape" and hassle in getting a claim paid and that the amount reimbursed for their claim does not cover their losses. But as the saying goes, " you can't keep everybody happy."

Disgruntled claimants can move their insurance business to one of that insurance company's competitors. But that's exactly what the insurance company wants. They want people who file claims to go to their competitors. An insurance company prospers when their enrollees do not file claims. That's why their claim forms are so complicated; they hope that a certain percentage of claimants will simply say, "forget it" and pay their bills out of their own pocket.

Few patients can decifer the modern insurance claim form. Hospitals have added huge billing departments to deal with these. The cost of these is passed on to consumers. Forms for physician's charges are deposited at the physician's office where a billing secretary completes them. The billing secretary expects a salary and the physician's overhead increases. Recently, insurance companies have insisted on "pre-authorization" before a doctor can order a test or prescribe treatment. The doctor can proceed without pre-authorization, but without it the insurance company has a good excuse to refuse to pay for it. In many doctor's offices, obtaining pre-authorization approval has become a full-time job for at least one secretary.

Insurance Companies do not want sick people

For patients and physicians alike, dealing with insurance companies is, in reality, dealing with a giant corporation. However, unlike Ford or Microsoft, their business does not revolve around keeping their customers happy; insurance companies sell their "products" to people who, they hope, will never need their services.

Those who really need their services (sick people) are discouraged from coming back to them with repeat business. Their business is all about reducing risk. They attract healthy people by offering lower premiums which are pure profit as long as their subscribers remain healthy. When the subscribers start filing claims, side-stepping and red tape only go so far in delaying and limiting payouts which erode the mounting cash reserves. Payouts are not to patients (that's why the general public is in the dark about what goes on). Payouts are made to "greedy" doctors and overpriced and inefficient hospitals. Managed care and HMOs seek to further reduce the risk of actually having to part with those huge premium cash reserves.

In managed care corporations and Health Maintainance Organizations, the "insurance companies" try to limit the amount of money paid out for the treatment of their subscribers who get sick. They try to control their "cost". They develop "panels" of physicians. These are chosen not necessarily for their skill, but by the fact that they have agreed to bill no more than a fee structure dictated by the managed care company . If there is any value to a physician's credentials it is in the marketing appeal which will bring more subscribers into the plan.

Physicians, most of whom are "specialists", now in oversupply, accept the lower fees from managed care companies in hopes of attracting patients away from other doctors. But their physician competitors are also dealing. The price war results in doctors' fees going to lower and lower levels - sometimes to a level lower than required to stay in business. As a result, physicians who can sustain a practice without participating in the managed care plans drop out of them. Physicians who cannot maintain a practice on their own stay in them as they would have no practice without them. These physicians may not be of the highest quality and many try to make up the loss of income by increasing the number of people they see every day by spending less time with each patient.

Nonetheless, the physician "price war" is a desireable situation for the Managed Care Compamy or HMO. Medical services cost less and dissatisfied patients tend to blame the doctor and visit him or her less frequently. But first the Managed Care Company must attract the subscribers. The only real stategy is to lure them away from other insurance plans.

Managed Care, Indemnity Insurance, Global Markets and the bottom line.

In spite of what the politicians tell us about the 37% of uninsured people in the USA , most people in the US have access to health insurance (or Medicare or Medicaid) when they really need it. Few people die on the streets of diseases that for want of health insurance go untreated. Public hospitals must take everybody who walks into their emergency rooms (Hill-Burton). Emergency Medicaid is available even for illegal aliens.

In pre-Clintonian America, most Americans were covered by indemnity health insurance plans. In these plans doctors and hospitals received their usual and customary fees. This worked as long as the insured pool of subscribers consisted of young healthy people with a small percentage of older sick people (they didn't have to worry any longer about the disease ridden "over 65 crowd" which you are supporting through Medicare through your taxes).

Now managed care companies come along and lure away the youngest and healthiest by offering far lower premiums to potential subscribers and, most importantly, to employers. Managed Care's offer to employers was one they couldn't refuse.

Employers were sick and tired of paying what they considered to be huge premiums to insurance companies. These costs got passed on to the customers and resulted in higher prices for their goods and services. Detroit whined that health insurance raised the cost of a new car an additional $2,000. Higher prices, they said, made U.S. products less competitive in the global marketplace. That's the reason, they reasoned, that Americans and the rest of the world preferred Toyotas, Hondas, Mercedes, Saabs and Volvos to Plymouths and Chryslers.

Foreign goods are produced with cheaper labor having fewer benefits including lower health insurance costs. Workers in Japan, Germany, Sweden and others, health insurance costs are covered by socialized goverment-funded health insurance plans supported by tax money. US employers wanted to cut benefit costs (like health insurance) in order make their products more competitive in the world's market (and increase bottom line profits).

But American workers were "spoiled". They expected health insurance from their employer. U.S. employers were "stuck". Managed Care was the answer to their prayers. By subscribing to a Managed Care Plan, an employer can give the illusion of providing health insurance to employees while saving significant money. The employees won't know the difference until they get some serious disease. They then find out that one gets what one pays for.

The gravy train: do you really think you get something for nothing?

People left indemnity insurance plans for HMOs in droves. Many were forced by their employers to do so. Others wanted to save insurance premium money and saw no harm in this: few healthy people really consider the consequences of being sick.

The majority of people left in indemnity plans were older and sicker and, therefore, more costly. To cover projected losses, the indemnity companies had to raise premiums still further. This drove even more people into Managed care plans.

HMOs try to keep the majority of subscribers happy. They must focus on primary care health care delivery which is low cost. The HMO also gives out some crumbs. Free annual physicals. Prescription eye glasses. Maternity charges. Well baby checks. Visits to your GP are paid quickly. These are really low cost marketing gimmicks which are used to sell their services to more healthy people.

HMOs want healthy people talking up their HMO to other healthy people and to their employers who the HMO would like to have as new members. Some serve as willing dupes in TV marketing ads, telling about how great their HMO is. One rarely sees a patient with a serious disease endorsing their plans.

There are far more healthy people in the country than sick people. And healthy people are employed. The employers pay premiums. When employed people do get sick, it's usually minor, low cost and the HMO quickly pays the bill. The enrollee is convinced: that HMO is truly a great company and he or she tells more friends. However, let that enrollee need a bone marrow transplant, a brain operation or an extended stay in the ICU and watch that generous HMO turn into a skinflint. HMOs offer fees for doctors and hospitals which are frequently below the cost of doing business.

The economics of medical practice.

Few patients realize that only a small percentage of patient fees go into the doctor's pocket or hospital bottomline profit. Physicians and hospitals use a significant portion of the funds from these fees to cover "overhead". This includes office rent, malpractice insurance, secretarial and staff salaries and many other incidental expenses. Seventy-five (75) percent of the average hospital's budget is salaries and benefits for employees. Not doctors - but nurses, cleaning people, back office staff, etc. If the cost of treating a complex or demanding patient under a restricted fee schedule surpasses the cost of the amortized overhead, the doctor, the hospital or both are, in fact, paying for the care of that patient out of their own pockets. The Managed Care Company or HMO has deftly shifted the risk of taking care of sick, demanding and high cost patients on to doctors and hospitals.

Risk shifting, carried to its full extreme, is what is called market capitation. This is what all managed care companies are striving for because it subjects them to no risk at all. In a capitated market, physicians are paid a set fee for each "covered life" for which the physician or physician group is responsible. That fee is paid in advance and on the surface can represent a sizeble windfall for the physician or group. From that fee the physician must treat each patient for the length of the contract. So if the patient needs a shot of penicillin, the doctor has already been paid and no more money changes hands. If the patient needs a consultation from a specialist, the specialist is reimbursed out of the primary care physician's kitty. If the patient needs an expensive test like an MRI examination, this is paid for out of that up-front capitation fee.

Unscupulous physicians or groups can make out like bandits in such a scenario. They simply don't treat the patient, don't refer them for specialist consultations and put off any major diagnostic test or surgical procedure until the next fiscal year.

The future of medicine: bleak and you'll get what you pay for.

Any business must remain profitable to stay in business. One way of retaining profitability is to dispense with unprofitable product lines. If Ford Motor Corporation launches a new car model and it's a dud in the marketplace, they cut their losses and discontinue the line. This doesn't work in the world of medicine.

In a managed care environment, an unprofitable product line is a really sick patient or an old patient or a worried patient. Sure, the managed care company is happy to take an up-front payment from these people or from the state for a Medicaid Managed Care contract or from the federal government for a Medicare "senior plan". In a capitated situation, the insurance company extracts its administrative cost and they have no risk. They have passed the risk onto physicians foolish enough or unscrupulous enough to take these contracts.

Politicians, Democrats or Republicans, love managed care. Medicare and Medicaid have become too expensive in spite of the fact that they no longer pay fees large enough to cover many doctors office expenses. Politicians would love to push the responsibilty, the cost and risk of providing care for Medicare and Medicaid "beneficiaries" on to someone else - like a managed care company. They really don't care that the managed care company will simply extract a profit and pass the financial risk of taking care of those patients onto physicians, physician groups and hospitals.

In this scenario physician groups and hospitals can make money only if services are limited. It's the patient who suffers while politicians get re-elected for their "fiscal responsibility" and managed care companies, their executives and their stockholders make a fortune. Stockholders?

Like Ford or Microsoft, insurance and managed care companies become publically traded corporations. Unlike Ford or Microsoft, their value is not judged by the quality of their products or services. Wall Street could care less about the quality of the medical care provided to its enrollees. The value of these companies is determined from assets, cash reserves and the number of enrollees ("covered lives"). Value is also set by the value investors place on the HMOs publically traded stock: the "market capitalization". Greater "profits" mean more perceived value and the price of their stocks increase.(Greater profits mean less care for you.)

HMO and insurance company executives with stock options make more in bonuses. Investor holdings expand as the market capitalization of an insurance company increases. Insurance executives, investors, stock holders, unscrupulous "for-profit" hospitals and physician groups do well as more money is sucked out of the pool reserved for taking care of patients.

And patients and doctors are left holding the bag.

What's going to happen?

It's not pretty. Managed care is like a chain letter. Remember those? Send a dollar to the name at the top of the list then send the letter to five of your friends. Add your name to the bottom of the list. You'll never see any money while the guys who started the letter have made out like bandits.

Indemnity insurance is dying if not already dead in many parts of the country. The healthy majority and American industry has gotten used to the low premiums managed care offers. But the population they cover is getting older and sicker. Sicker people means an increase in the "medical loss ratio" and less profit.

Smaller companies will drop out as consolidation of bigger companies takes place. Investors will seek opportunities elsewhere as they pull their capital out of health care. Managed care premiums will increase and the voting public will start whining about health care costs.

Medical care will be delivered by large and impersonal corporations with large marketing budgets that will tell the healthy public how much they really care about their patients. They will employ doctors just out of training programs who will be satisfied with low salaries. They will cut the frills and staffing expenses of a hospital to the bone. People won't be happy. They will be paying more for health care and become less satisfied with it. It will increasingly become a major agenda item for all political candidates.

As it did in the 1960s, the government will come to the rescue like a white knight. By this time the general public will be so fed up that they will accept socialized medicine (the "single payor system"). This will be easy. All the government will have to do is to reduce the age for medicare eligibility from 65 to zero. And we'll have medical care similar to that in the United Kingdom which is fine if you are having a baby but not be so great if you have somthing expensive to treat, like kidney failure or a brain tumor.

Typically, politicians will want the credit for "rescuing the American Health Care system". They won't want the blame for the higher taxes that funding this solution will require. They won't want to pay the bill. Year after year, politicians will campaign on schemes to reduce the cost of health care. Bureaucracy will increase and services will diminish.

The goverment's programs will serve as a "safety net" which will run as inefficiently as, say, the Veterans Hospitals. People who can afford medical care elsewhere won't go near them but they'll support them through taxes. Patients with some means will get fed up and start paying out of their own pocket for health care - which is how it was before 1929. And we'll have a "two tiered" medical system: a private system for the rich (who'll pay for it) and another bare bones, highly bureaucratic, inefficient public system - for everyone else. The latter will have the efficiency of the Postal Service with the compassion of the IRS.

But between 1929 and whenever the above scenario unfolds a lot of money will have changed hands!