Decoding Health Care

Part 6a: Health Insurance Companies (Part One)

In 2013, after more than 20 years as a practicing medical oncologist, I decided to leave practice and work as medical director at Aetna, the third largest health insurance company in the United States. My colleagues and my patients thought I had lost my mind. I had become Benedict Arnold. I had gone to the dark side. In truth, I went to work for Aetna because I actually thought I could make a difference and help shape how cancer care is delivered and paid for, and I thought that the health insurance company was the place to do it. I just didn’t realize how hard accomplishing that would be. I was more than a little bit naïve.

The reactions of my friends and colleagues were not surprising. There are lots of surveys of the general public and of physicians that document how little trust there is in the health insurance industry. In one survey sponsored by the American Board of Internal Medicine, only about 1/3 of the general population and fewer than 20% of physicians trust health insurance companies (https://www.norc.org/content/dam/norc-org/pdfs/20210514_NORC_ABIM_Foundation_Trust%20in%20Healthcare_FINAL.pdf). This is in stark contrast to the high percent of the public who are generally happy with the health care they receive. How did health insurance companies earn this distrust?

One hundred years ago there was essentially no health insurance to be found. There WAS insurance; since early in the nineteenth century, Aetna had been selling fire insurance and then life insurance. They added auto insurance just after the turn of the twentieth century. But health insurance followed much later with a hospitalization policy in 1936. In fact, insurance to cover the cost of hospitalizations really was the beginning of health insurance. In 1929, Blue Cross was born when Baylor Hospital offered Dallas public school teachers 21 days of hospitalization per year for $6. Blue Shield followed in 1939 offering outpatient care to lumber and mining employees in the Pacific Northwest. As I have previously discussed, employer sponsored health insurance took off after WWII and so did the health insurance industry.

Today there are over 900 commercial health insurance companies. About half of all health insurance plans are not for profit; in fact, Blue Cross and Blue Shield plans started exclusively as not for profit, with many individual plans transitioning to for profit. When it comes to health insurance companies, this distinction is important for only one reason. For profit plans can attract investors to obtain capital and grow. In the world of health insurance, it is important to be big. If you are small, and your insured population gets unpredictably sick and spends much more than the amount you collect in premiums, you are out of business. Being big makes it a lot easier to manage risk.

This desire to get big also explains why the biggest insurance companies have all grown by horizontal integration, that is a big company becomes a bigger company by buying another insurance company. The five biggest insurance companies are all huge in terms of covered lives. They are: United Health Care (70 million); Elevance (formerly Anthem, 47 million); CVS/Aetna (22 million); Cigna (20 million); and Humana (17 million). These five insure about 45% of Americans. Over the last 25 years, in addition to organic growth, Aetna acquired US Healthcare, Prudential Health Care, and Coventry. Elevance is unique in that it is actually composed of 14 Blue Cross Blue Shield plans. These health plans are all for profit. And they are very profitable. But recently the Department of Justice has decided that some of these mergers and acquisitions are anti-competitive and they have started to block them. As with hospitals, the regulators are a little late.

Within each specific health plan there are numerous insurance products. Within each insurance product what your insurance “covers” may vary from product to product. This is called benefit design. Before the Affordable Care Act (ACA), this was tremendously variable. However, as I discussed in the ACA post, essential health benefits greatly leveled the playing field, to the benefit of most beneficiaries. The variability in these benefit designs is reflected in a different schedule determining the financial contribution of the individual beneficiary. Just to be clear, whether the insurance company is for profit or not for profit does not matter. They all follow the same recipe.

The basic formula is this: a premium that is based on a prediction of the overall medical costs you will incur in a year as well as some sort of cost sharing that involves a deductible, copayment and sometimes coinsurance.  Also baked into the premium is the administrative cost of running the health plan, as well as profit. Insurance companies are not in the business of losing money. The calculated premium is based on expected health care costs in a given population. Since the ACA, that population is defined by geography, age, and smoking status; this is called modified community rating. Previously, medical history could be used to determine premium, so called experience rating. Experience rating is still allowed for large self insured employers. But modified community rating is a lot more fair; it spreads the expected cost of healthcare (and so the premium) across the entire group and doesn’t penalize sick people.

The deductible is the amount an individual must pay before the insurance benefit kicks in. There is an inverse relationship between the premium and the deductible. Since the ACA, the most popular benefits design involves a high deductible in exchange for a lower premium. If you are healthy this is a good deal since you won’t use your insurance. After the deductible is reached, most benefit designs involve some beneficiary contribution for any health care expenses. For example, you may need to pay $20 for a visit to your primary care physician (PCP) or $250 for an ER visit. This co-pay is partially designed to offset the expense associated with the consumption of health care services. But it is equally clear that if you are strapped for cash, it makes you think twice before going to the ER rather than your PCP. There is a deterrent effect.

This deterrent effect is even more obvious when coinsurance is part of your benefit design. Coinsurance means you pay a percent of the bill rather than a fixed amount. Let’s use your pharmacy benefit as an example. If you fill a prescription for a generic drug, you probably have a copayment of $5 or $10. But let’s say you need an expensive oral cancer drug. In that case, the insurer may charge you a coinsurance, typically 20% of the cost of the prescription, which could mean hundreds or even thousands of dollars. Why would they do that? Because they hope there is a cheaper alternative, maybe even a generic drug, that costs them (and by extension you) a lot less. The insurance company wants you to consider cost in your medical decisions and choose the cheaper alternative. And that is a perfect entry into the discussion of where health insurance companies lost people’s trust.

There is a lot more to say about health insurance companies. In fact, I could go on all day. Let’s take a break here and pick it up next week.