Decoding Health Care
Part 6b: Health Insurance Companies (Part Two)
Uwe Reinhardt, the late prize winning health economist from Princeton, wrote extensively on health care costs in America, and he has profoundly influenced my thinking on this subject. His co-investigators, Gerard Anderson, Peter Hussey and Varduhl Petrosyan, published a posthumous summary of their work (https://www.healthaffairs.org/doi/10.1377/hlthaff.2018.05144). You can think about health care costs through the lenses of unit consumption and unit cost. Unit consumption means how many health care goods and services we use. Obviously, if you see the doctor more or go to the hospital more you spend more money. This is generally NOT the case in the US (with a couple of exceptions). We have fewer doctors, fewer hospitals, and spend fewer days in the hospital than people who live in most other high income countries. Unit cost is the issue in the US. Things just cost more. And although we don’t use goods and services more, we use goods and services that are a lot more expensive (like MRIs). What does this have to do with health insurance companies?
The ACA put significant restrictions on how commercial health insurance companies do business. The ACA required that health insurance companies spend 85% of the premium dollar on health care. This limited how much profit came from each individual’s premium. To be more profitable, you needed more beneficiaries. Voila. Horizontal integration became an absolute imperative. But in addition, the insurance companies needed to retain membership, so its premiums needed to be competitive. And the only way to keep premiums competitive is to control costs. This is why commercial insurance companies behave as they do. They wish to control unit consumption as well as unit cost. And I can guarantee you don’t like how they do it.
Controlling unit consumption is achieved through utilization management (UM). Health insurance companies spend a lot of time and money on UM. As a consumer or as a physician, you most likely have experienced UM through prior authorization. Prior authorization means that before you receive a health care good or service, you (or more precisely your physician) need to get permission from the health insurance company. Usually this means that the physician needs to provide evidence that the treatment plan is medically necessary, that is, it is supported by medical evidence. Sounds simple enough. But the process is insanely inefficient. You might think medical evidence is a scientific truth that all parties agree upon. You would be wrong. Each insurance company has their own version of “the truth” and while they may be fairly similar, every insurer has their own way to ask “Mother May I”. Asking for permission takes time, delaying care. It creates frustration. Prior auth has been identified as one of the major causes of physician burnout. Patients hate it too.
But it must work because everyone does it…except Medicare. Medicare generally does not do prior authorization (with limited exceptions, see https://www.cms.gov/files/document/opd-services-require-prior-authorization.pdf and https://www.cms.gov/data-research/monitoring-programs/medicare-fee-service-compliance-programs/prior-authorization-and-pre-claim-review-initiatives/prior-authorization-process-certain-durable-medical-equipment-prosthetics-orthotics-and-supplies.) With Medicare, the bill is either paid or it is not. You can appeal Medicare’s decision, but unless it is an administrative error you are not likely to prevail. Now you might conclude that sounds good. But I caution you that there are a lot of things in medicine that are not black and white. If you are taking care of a complicated Medicare patient, then whether Medicare is likely to pay enters into your decision making. If you have a patient with a rare tumor you are not likely to treat that patient with a chemotherapy drug that Medicare won’t cover, even if there is preliminary evidence that it might work and there are very few good conventional options. UM has a deterrent effect since prior authorization takes time and has risk, but so does Medicare’s binary coverage and payment policy. Pick your poison.
Patients experience UM in other ways. UM determines how long you stay in the hospital after having a baby. Or if you are depressed. If you have ever been “kicked out of the hospital” before you were ready, you can blame UM. In that case, a UM nurse reviewed your chart and you no longer met published criteria to justify continued hospitalization. The fact that your 95 year old mother was recuperating from a broken hip or that your husband was deployed and you had no help at home did not enter into the equation. UM also might have impacted you if you had a medical claim denied by your insurance company.
Managing unit cost is the other half of the equation. There are two excellent examples of how unit cost is managed. The first is by managing the health plan’s network, the doctors and facilities that the health plan has contracted with. These contracts invariably involve discounts, so if you go out of network you are costing the health plan money. And they are happy to share the pain. Most of the time when you go out of network you will be responsible for a much greater portion of the cost of care, and often this does NOT count towards your deductible. It might seem this is easy enough to navigate, all you need to do is go to the health insurance company’s web site. WRONG. These websites are notoriously inaccurate and not kept current. And sometimes you cannot even find an in network provider. The classic example is looking for an anesthesiologist. Very few anesthesiologists are in-network. They do not need to give the insurance company a discount. Their services are required for your procedures and they have exclusive agreements with the facility where you are getting your procedure done. So, tough luck for you when you receive that “surprise billing.”
What is more troubling is when you go out of network by accident. Let's say you need some lab work done so your doctor draws the blood in his or her office and sends it to the hospital lab. Problem is the hospital lab prices are insane (remember the charge master?) and the hospital lab is out of network. You get stuck with a $300 bill for a Vitamin D level. I have personal experience with this. Every time my wife goes to her doctor I remind her of her $300 Vitamin D level and urge her to use an in network lab (I tell her which ones are ok to use). This occasionally causes friction in my marriage.
Another area where out of network is a big issue is emergency care and ambulances. There are countless stories of these entities being out of network and people getting stuck with huge bills for services rendered when they were in no position to be shopping for health care. Having a massive heart attack in a rural area or a motor vehicle accident with compound fractures or internal bleeding is no time to evaluate whether an $80,000 helicopter transport to a Level I trauma center is the right choice. This “surprise billing” became so egregious that eventually Congress did something about it (the No Surprises Act). But we should not pretend it has gone away.
The second area where unit cost is aggressively managed is the pharmacy benefit. We will talk about drug costs and the role of middlemen (Pharmacy Benefits Managers, PBM’s) in a later post. But all health plans attempt to steer patients to lower cost and theoretically equivalent drugs. They can execute this by prior auth but can actually just do it at the pharmacy counter by having your copay or coinsurance adjusted up or down when you go to pick up a prescription. I am certain many of you have gone to pick up a refill of a med that you had been taking for a while and all of a sudden how much you owed was a lot more (or a lot less). Insurers (through their PBMs) negotiate contracts with pharmaceutical manufacturers that give them discounts and you may be the unwitting victim of these contracts. To be clear, this is NOT substituting what is better. It is substituting what might be as a good but what has a lower contracted price.
These price fluctuations can literally change from year to year and are different for different insurance companies. This reached new levels of absurdity with insulin. Insulin is crazy expensive even though it has been around for 100 years. And the negotiations by health plans around insulin products were out of control. Just ask any diabetic if they were forced to change insulin products by their insurance companies. I’ll bet they say yes. Again, ultimately the government stepped in and put some guard rails in on how much people must pay for their insulin, but this legislation is fairly new so we will see how it works out. There are lots of other examples of this payer pharmacy behavior.
As if this isn’t bad enough, since the ACA, health insurance companies, in an effort to maximize profit, have started to explore vertical integration. As we discussed in the last post, vertical integration is when the business entity purchases assets that are part of the supply chain. Translation: health insurance companies now employ physicians, own imaging and surgery centers, and own (or are owned by) PBMs. How does this help the health insurance company? Remember that 85% of the premium dollar must go to patient care. But what if you are paying yourself? You can unilaterally set prices paid to each of these entities for goods and services. Each has its own profitability built in and you can determine how profitable you want it to be.
Perhaps I sound like Chicken Little. Optum, a fully owned subsidiary of United HealthCare (the largest commercial health insurance plan in the US), is the single largest employer of physicians. Yes, you read that right; an insurance company employs more physicians than anyone else. Those physicians are salaried employees. Just as we discussed with hospitals, that means that Optum can tell them where to send their patients for CT scans, which hospitals to use, which surgeons to refer to and what medicines are on the formulary. I am not paranoid. This is scary.
I have laid out a pretty damning indictment of health insurance companies. This is why the general public and doctors hate insurance companies so much. And the root problem is that the health plans are so incredibly greedy. When I worked at Aetna, people expected me to somehow justify how much the CEO of Aetna was paid (it was a lot). Health insurance companies are incredibly profitable. And the paths they have chosen to profitability are downright soulless. They lack a moral compass. I am a capitalist. But something really needs to be done.
Perhaps we should eliminate private health insurance. It is estimated that as much of 30% of the “waste” in the health care system is administrative. This waste is related to every health insurance company doing things their own way: negotiating their own contracts, doing their own prior auth, writing their own medical policy. Medicare has administrative overhead, but it is less than 10% of their total budget (some people claim it is as low as 2% but that claim is generally felt to be hyperbole).
So why don’t we just end private insurance as we know it? The truth is that health insurance companies actually do some good things. They accredit physicians and institutions. Anybody can bill Medicare as long as they have a medical license, accept Medicare’s fee schedule, and haven’t defrauded Medicare. You may question whether this actually matters, but at least they look. To be a Medicare provider all you need to do is apply. That is a pretty low bar.
Private insurers also have fairly thorough processes for evaluating whether goods and services are medically necessary. This tech assessment function is largely absent in a formal way in Medicare (the exception is national coverage determinations as described in my Medicare post, but this represents only a tiny fraction of medical care). For drugs, Medicare defers to FDA (more on that later, but I will suggest that is not such a great idea). Although you may not agree with what some insurance companies conclude in their medical coverage policy regarding any particular good or service, on average most physicians will agree most of the time. You might say just leave it in the hands of the doctors. I will tell you from my personal experience that that is not such a good idea. There actually are incompetent doctors and some are motivated by greed.
The administrative aspect of paying the bills is not a trivial task. Some employers have tried to do it without the aid of a health insurance company and they failed. It was too complicated. Medicare uses health insurance companies to process their claims (the Medicare Administrative Contractors). And we can look to Medicare Advantage (MA) if we need further evidence that there may be some value in how commercial health insurance companies work. Of all Medicare beneficiaries, 50% have chosen to go with MA because they get more stuff and pay less for it. It is also hypothesized that MA is so successful because people are just used to the way health insurance companies do things.
Finally, let’s not forget the elephant in the room. Medicare just doesn’t pay enough. As imperfect as it may be, without commercial health plans (and their primary customers, employers) US health care could not exist in its current form (including everything that is good about it).
But we need to do something. Here are some fixes (short of abandoning private insurance) that might help:
Although health care is highly regulated perhaps health insurance should be regulated more aggressively, like a utility. Some degree of accountability for performance with respect to beneficiary and provider satisfaction, or some yet to be defined quality measures would be a good thing. And there needs to be consequences for not performing up to par.
Transparency to the employer (the real payer), the patient, and the provider is always a plus and there is just too much about the insurance industry that is not transparent. Why were certain network decisions made? How about medical policy justification?
The DOJ needs to adequately enforce antitrust laws with respect to horizontal integration. There have been some positives on this front lately but this needs to continue. And they need to start thinking about whether to allow vertical integration. Doctors working for health insurance companies as providers gives me indigestion. It is never too late. If the DOJ decides there are anti-trust issues they can force some of these deals to unwind.
Health plans must be required to adopt tech solutions to solve for some of the more onerous UM policies. AI is going to offer great opportunities to allow for near instantaneous prior auth along with expedited appeals. There are already pilots exploring AI driven prior auth submissions. Previous attempts at web based submission failed; this cannot.
Finally, in the spirit of transparency, I really enjoyed working at Aetna. I felt that there was tremendous potential to make a difference. A big reason for this optimism was the people I worked with. When I was at Aetna, there were about 350 medical directors. I knew only a fraction but they were really good people: honest, smart, and hard working. I never felt they were making decisions to make more money for the company. And the folks that were on my team were also great people. For commercial health plans to find their moral compass we need more of those people entrusted with decision making capacity. How about more doctors in the C-suite? And I mean real doctors who touched a patient sometime this decade, not medical school graduates who got an MBA and never practiced.
Commercial health plans have a lot of problems, but I do not think they are hopeless. Like hospitals, they need to be reminded of their mission, and it isn’t making as much money as possible. Attached to each premium is a person.
In my next post we will consider the pharmaceutical industry. Since nobody likes them that should make everyone happy.