You hate your health insurance company for the same reason you hate your cable company

It’s not all their fault.

According to a recent Harris Poll, health and life insurance companies are among the least-trusted companies in the US. Just 7% of the surveyed 2,250 adults told Harris they trusted their health insurance company, while 10% said the same of life insurance companies…

…The health and life insurance sectors narrowly beat out telemarketing and social media companies, with a 6% approval rating; oil companies with 4%; and tobacco companies with an abysmal 3%.

Insurance Business America, June 16, 2015


I spent four years working at Anthem Blue Cross and Blue Shield, most of which was spent answering calls from members. As the face of the company, I felt that mistrust directed right at me. I was often the bearer of bad news, and people tend to shoot the messenger. And, in a way, that’s also what health insurance companies are: the messengers of bad news about our healthcare system.

(Side note: Please be kind to the people answering the phone. They are at the bottom of the totem pole, and they’re not the ones making the decisions. They have highly stressful jobs, and they’re really trying to help you as much as they possibly can.)

Is that mistrust of the health insurance industry justified? Yes and no.

Running a health insurance company is an endless series of tradeoffs and competing priorities. There’s no way to please all of the people all of the time, and that holds especially true in this industry.

So, here are a few things to consider that you might not have thought about.

1) Health insurance plans and premiums are tightly regulated. Each state has a department of insurance that must approve all health plan premiums based on their actuarial value and claims experience. Setting these amounts is really just a question of math, and that’s why actuaries are so valuable. Not only that, but insurers are required by law to keep a large amount of cash reserves on hand to pay claims. Different insurance companies offer different sets of plans, but the fundamental rules remain the same. And, with the Patient Protection and Affordable Care Act, insurers must pay out at least 80 percent of their premiums out in claims or send their customers a refund for the difference. So, that leaves the other 20 percent for shareholder profits, buildings, technology, marketing, employees, and everything else. Note that these ratios are based on the premiums and claims for an entire group and not just you as an individual.

2) You’re probably not the primary customer. If you have an employer-sponsored health plan, your employer chooses your plan. They have many health plans competing for their business, and one of the primary concerns (if not the primary concern) is price. Health insurers offer a variety of plans that are more and less comprehensive, but employers will understandably gravitate toward plans that cost less. The plans that cost less are going to be less generous with benefits because of what I mentioned before about actuarial value. So, if you are dissatisfied with your benefits, it’s not because the health plan didn’t offer a more generous plan; it’s that your employer didn’t want to pay for it. Even if you buy your own health insurance, you undoubtedly face these same cost pressures and need to strike the right balance between paying premiums and paying potential medical bills that the insurance doesn’t.

3) Your health insurance company is kind of like a TV provider. You have probably seen TV networks or local stations getting dropped from cable (or satellite or streaming) subscriptions or warning you that they are about to be dropped. Ultimately, the TV network is having a contract dispute with the cable provider. In order to keep carrying the channels you want to watch, your cable provider has to pay up to the networks. When contracts are up for renewal, there are often disputes about how much the provider has to pay. And it’s exactly the same thing with health insurance companies getting into contract disputes with physicians and hospitals over reimbursement rates. If the health insurance company has to pay higher reimbursement rates to physicians and hospitals in order to keep them in the network, they have to pass that increased cost along to its customers in terms of premiums. I had to answer a lot of questions about these network disputes with people worrying that their doctor or hospital was about to go out of network, and the only thing I could explain was that they’re having a dispute about money. As long as there are multiple sources of revenue, physicians and hospitals can play them off each other as they seek higher reimbursement rates.

At the top of this post, I said the mistrust wasn’t all their fault. With perhaps a few exceptions, they are following the law, and they have lawyers and compliance officers to make sure of it.

Yet some of the mistrust by consumers is well-deserved, and that mistrust should be directed at their political activities. Private health insurance companies simply can’t fix the medical arms race and skyrocketing reimbursements on their own, and that’s because there are multiple insurers. Health insurance companies spend large amounts of money on lobbying and advertising to resist regulations unfavorable to them or being legislated out of existence altogether.

There is one solution that really can help, and that’s a single-payer system. If the government were the sole source of revenue for healthcare providers, then that would be a monopsony. And monopsony power can drive down costs. They would have to accept what the government reimbursed or stop practicing altogether. (Yes, shortages are a real danger of monopsonies that we would have to consider.)

It’s already rare to hear about providers no longer accepting Medicare, even though the reimbursement is lower than from private insurance, because so many patients are on Medicare. If every patient of every age were on Medicare, then that would decrease physicians’ and hospitals’ leverage even more.

Only a single-payer system can truly address the exorbitant prices for medical services in the USA. Insurers have been unable to contain these costs for the reasons I described earlier, and the result is that even insured patients are paying higher and higher medical bills while their employers pay higher and higher premiums.

Although private insurers aren’t the primary cause of the cost problem, they need to get out of the way of a solution that could really contain costs.

The elephant (or donkey) in the room: Part 3 on the fiscal crisis facing Medicare and Medicaid

I have previously written about the fiscal crisis facing Medicare and Medicaid. In Part 1, I wrote about the extent of the trouble that the United States finds itself in when it comes to financing Medicare and the “dual eligibles” who also receive Medicaid benefits for the future. In Part 2, I wrote about the origins of the problems that these programs face as well as the inaccurate forecasts of just how much these programs would cost.

Now I’ll finish up this series by talking about where we need to go from here.

But, first, a little news to set the stage.

A marriage made in red tape

Right now, two of the nation’s largest private health insurance companies – Anthem and Cigna – are trying to merge and become the very largest private health insurance company in the nation. The merger is pending, which is akin to an engagement prior to a wedding.

As a former Anthem employee, I’m totally rooting against for this despicable lovely couple. They most certainly deserve each other. But if these two companies are getting married soon, they may want to see a counselor to talk about their issues.

Akin to learning that your fiancée has a criminal history just before the wedding, Cigna just got busted by the Centers for Medicare and Medicaid Services (CMS) for its handling of Medicare Advantage (MA) and Medicare Part D prescription drug plans for doing all the things that private insurance companies are infamous for doing: denying health care services and prescription drugs to patients who needed and should have received them and mishandling the grievance and appeal process.

Cigna has had a longstanding history of non-compliance with CMS requirements. Cigna has received numerous notices of non-compliance, warning letters, and corrective action plans from CMS over the past several years. A number of these notices were for the same violations discovered during the audit, demonstrating that Cigna has not corrected issues of non-compliance.
Centers for Medicare and Medicaid Services

As a result of this bad behavior, Cigna informed the Securities and Exchange Commission (which would be akin to the wedding officiant, I suppose) that it couldn’t sell new MA or Medicare Part D policies.

But wouldn’t it be hypocritical for Anthem to break off the wedding? After all, Anthem (which was known as WellPoint at the time) got into the exact same predicament with CMS in 2009 due to similar bad behavior. Eventually those sanctions were lifted, but there was some lost revenue in the meantime.

Considering how lucrative managing these plans has been for private insurance companies, the new restrictions on Cigna could, at the very least, put a damper on the couple’s honeymoon plans.

Private insurers worsen fiscal crisis

For all of the problems that MA and Medicare Part D enrollees have experienced due to bad behavior on the part of the private insurers who operate the plans, you would think that Medicare Advantage would be saving taxpayer dollars in the Medicare Trust Fund.

You would be wrong.

Our findings indicate that the inclusion of private plans in the Medicare program has cost taxpayers $282.6 billion, or 24.4 percent of the total amount Medicare has paid private plans since 1985. Our findings likely underestimate the magnitude of the overpayments…

…In 2012 alone, we estimate that private insurers are being overpaid $34.1 billion, or $2,526 per MA enrollee…

..Advocates of market-based Medicare reforms suggest that competition among private plans will induce greater efficiency and result in cost savings. Our findings indicate that the opposite is true. Private plans have drained more than $280 billion from Medicare since 1985, most of it in the last eight years. Increasing private enrollment through voucher-type Medicare reform (as suggested by Republicans) or through quality bonuses and financial incentives to plans to enroll dual-eligible beneficiaries (as enacted by President Barack Obama’s administration) will almost certainly raise Medicare’s costs, not lower them.

Funds wasted on overpayments to private MA plans could instead have been used to improve benefits for seniors, extend the life of the Medicare Trust Fund by more than a decade, or reduce the federal deficit. Private insurers have enriched themselves at the expense of the taxpayers.

Hellander, et al. Medicare overpayments to private plans, 1985-2012: Shifting seniors to private plans has already cost Medicare US$282.6 billion. International Journal of Health Services 2013; 43(2): 305-319. 

Just to be clear, that means overpayments have amounted to about one fourth of all the payments made from taxpayers to private health plans to cover Medicare beneficiaries. And this is estimating conservatively.

The entire health system is sick, and the Doc Fix was no cure

As I’ve written before, the entire U.S. health system is burdened by an inordinate amount of wasteful spending that doesn’t improve anyone’s health. It’s impacting all health payers, not just Medicare and Medicaid.

Whereas private insurers have responded to increased health spending by increasing premiums — which they must do in order to turn a profit, stay afloat or even maintain the cash reserves required by insurance law — the Medicare Trust Fund doesn’t even remotely work that way.

Changing any Medicare or Medicaid formula, from taxes to provider reimbursement to benefits, requires an act of Congress and a debate that most politicians of all stripes would prefer to avoid.

When it comes to Congress’s action on provider reimbursement in Medicare, it’s a good news/bad news/good news scenario.

The good news: In 1997, Congress and President Bill Clinton enacted a Sustainable Growth Rate formula that indexed physician reimbursement in Medicare based on the rise (or fall) of the nation’s gross domestic product. If physician spending grew more slowly than the GDP did, physicians got a raise. If physician spending grew faster than the GDP did, physicians had to take a pay cut.

The bad news: This seemed reasonable in 1997 when GDP was growing rapidly and provided some cost control incentives to counterbalance the perverse incentives of the fee-for-service model. But, after the 9/11 attacks, the economy stagnated, and physicians felt a considerable pinch. After all, the broader economy was largely outside of each physician’s control, as were the actions of other physicians. The financial crisis of 2008 and the resulting recession would have really made things uncomfortable for physicians under the SGR…including a potential 21 percent pay cut in 2010.

So, from 2003 to 2015, the American Medical Association successfully lobbied Congress each year to bypass the SGR and give physicians a raise regardless of what happened with GDP. This was known as the “Doc Fix,” and it had to be renewed each year. As you might imagine, when you ignore the Sustainable Growth Rate formula for years, you end up with a growth rate that is not sustainable. And that’s indeed what happened – at a cost to taxpayers of $150 billion.

The good news: Just about everyone realized that this cut-and-paste formula of passing a new Doc Fix bill every year just to bypass the SGR was inefficient, expensive, and absurd.

So, in 2015, Congress and President Obama struck a deal to permanently eliminate the SGR and create a new reimbursement formula tied to quality of care and efficient use of resources. This was considered to be a permanent Doc Fix.

Without digging too far down into the weeds, suffice it to say that it sounds like we’re finally getting somewhere for reforming Medicare and reducing waste in the health care system. But I’ll believe it when I see it.







The elephant (or donkey) in the room: Part 2 on the fiscal crisis facing Medicare and Medicaid

In Part 1, I wrote about the extent of the trouble that the United States finds itself in when it comes to financing Medicare and the “dual eligibles” who also receive Medicaid benefits for the future. (Social Security is a problem too, but Medicare and Medicaid are even more pressing.)

Now that we’ve established just how deep the hole is, let’s talk about how we got in the hole in the first place.

How we got here

Medicare and Medicaid were created by the Social Security Act Amendments of 1965. Although you might understandably think of these as just do-gooder progressive programs from President Lyndon Johnson’s “Great Society,” part of the motivation for creating Medicare was a push from the business community for a bailout from their retiree health benefit plans.

For the arithmetically impaired, 1965 was 50 years ago. So, unless you’re old enough to be eligible for AARP membership (I’m not), you weren’t around for what life was like before the first enrollees joined Medicare on July 1, 1966. And, chances are even if you were around back then, you were just a kid or maybe a young adult. As of the time of this writing, there are only seven living Americans who had reached age 65 before the Medicare program took effect. So it’s a little hard for the rest of us to imagine life before Medicare.

Before Medicare, most older Americans did not have health insurance coverage. As a result, poverty rates among the elderly were high, and access to health care was poor. According to the U.S. Centers for Disease Control and Prevention (CDC), in 1960, the average life expectancy at age 65 was 14.3 years. In 2010, it was 19.1 years. Those extra 4.8 years of life can be attributed at least in part to Medicare, and those extra 4.8 years of life are also one reason why Medicare is in so much trouble.

Among the minority of the elderly who were fortunate enough to have health coverage before Medicare, most of them received that insurance as a retiree benefit through their former employers. Even then, rising health care costs and life expectancy due to technological advancements were costing these companies plenty.

Strange bedfellows

If there were any group you would think of as supportive to Medicare, it would be physicians, right? After all, they get nearly 1/3 of their income from government sources today.

Physician income by source, 2004

Take the red pill: Share of physician’s outpatient revenues from various payers, by physician specialty, 2004. Box identifying the line bars: Medicaid (blue), Medicare (red), Other Government (yellow), Private Insurance (light blue), Out-of-Pocket (purple).

Source: Lasser, K. E., Woolhandler, S., & Himmelstein, D. U. (2008). Sources of U.S. Physician Income: The Contribution of Government Payments to the Specialist–Generalist Income Gap. Journal of General Internal Medicine, 23(9), 1477–1481. doi:10.1007/s11606-008-0660-7

But this was not always the case. Indeed, the American Medical Association was so scared of Medicare (because they thought they would lose money) that they hired screen actor Ronald Reagan to record some scary speeches that demonized Medicare as “socialized medicine” in order to sway public opinion. (That’s where the phrase originated.)

Despite the opposition from the AMA, Medicare became law anyway. The program has ironically been a huge boost for the pocketbooks of physicians.

Inaccurate forecasting

It would be impossible to overstate just how disastrously wrong the initial budget forecasts were about Medicare’s costs, but it was about like predicting mostly sunny skies with a 20% chance of rain showers in New Orleans on the day Hurricane Katrina hit.

In 1965, the House Ways and Means Committee estimated that the hospital insurance program of Medicare – the federal health care program for the elderly and disabled – would cost $9 billion by 1990. The actual cost that year was $67 billion.

In 1967, the House Ways and Means Committee said the entire Medicare program would cost $12 billion in 1990. The actual cost in 1990 was $98 billion.

Editorial, The Washington Times, November 18, 2009

In Part 3, I’ll explore why Medicare has blown away its initial costs and what can be done to fix it.

The elephant (or donkey) in the room: Part 1 on the fiscal crisis facing Medicare and Medicaid

There’s a massive problem ahead that our political leaders are all dancing around: Medicare.

Sure, it comes up in broad terms from time to time…

But whenever someone proposes a plan to do something about it (or, in the case of Obama, actually passes a law that affects it), they pay a heavy political price.

Why is this such a toxic issue for politicians of all stripes? Why are they walking on eggshells? Because, unlike younger adults, a lot of senior citizens show up and vote on Election Day.

Some 61 percent of citizens age 65 and older voted in the November 2010 election, the best turnout of any age group. More than half (54 percent) of those ages 55 to 64 also cast a ballot. People under age 45 are much less likely to vote. Just 37 percent of 25- to 44-year-olds made it to the polls in November 2010. And not even a quarter (21 percent) of the youngest citizens—ages 18 to 24—entered a voting booth in 2010.

U.S. News and World Report, March 19, 2012

Medicare and Medicaid together: Dual eligibles

One thing that often goes overlooked in the discussion of Medicare is its peculiar relationship to Medicaid. Primarily because Medicare does not include room and board coverage for long-term residential care (i.e., nursing homes), elderly and disabled people who need long-term care are forced to spend their resources out of pocket. Many people are forced to sell their homes in order to pay for long-term care.

When those resources are exhausted (and they often are), Medicaid kicks in. As of 2008, there were 9 million “dual eligibles” in the United States — people who were on both Medicare and at least some level of Medicaid.

Dual eligibles

As of 2008, there were 9 million “dual eligibles” receiving both Medicare and Medicaid benefits.
Source: The Henry J. Kaiser Family Foundation.

For FY2010, Medicaid spending alone averaged $16,460 per dual-eligible beneficiary, and dual eligibles accounted for 36 percent of all Medicaid spending.

The good news from Obamacare

The Patient Protection and Affordable Care of 2010 (aka Obamacare) did make $716 billion in cuts to Medicare, especially with regard to waste, fraud and abuse as well as overpayments to private insurers that participate in the Medicare Advantage program. Yet PPACA actually enhanced benefits for Medicare beneficiaries (specifically for preventive care and prescription drugs) and extended the solvency of Medicare.

As of their most recent report, the trustees for Medicare and Social Security estimate that the Medicare Hospital Insurance (Part A) Trust Fund will remain solvent until 2030.

If there has been one consistent message from Republicans for the last several years, it’s that they want to repeal Obamacare. Doing that would actually bring the Medicare Trust Fund to insolvency much faster.

The bad news

Just looking at the far-distant insolvency date of the Medicare Trust Fund could lead to a false sense of security in the meantime. But the fact that there is an insolvency date at all means the program is unsustainable as it is currently designed.

Medicare Projections

It’s conventional wisdom that Medicare is funded entirely by the Medicare payroll tax and the premiums paid by those opting into Parts B (physician care benefits) and D (prescription drug benefits). But, in 2013, the Medicare received $237.7 billion in “general revenue,” that is, from the government’s general fund while only taking in $220.8 billion from Medicare payroll taxes. Even with that sizable extra bump, the program still spent $7.1 billion more than it took in. When people talk about the “Medicare Trust Fund,” they are specifically talking about the fund for Part A hospital insurance (HI). Part B and Part D are funded by the Supplemental Medical Insurance Trust Fund (SMI).
Source: 2014 Medicare Trustees Report

Just how big a problem is this?

CBO projections

In 1974, federal government expenditures on major health care programs accounted for 1 percent of gross domestic product. They have already ballooned to 4.8 percent and are projected to expand further to 6.1 percent by 2024 unless we change something.
Source: Congressional Budget Office. The Budget and Economic Outlook: 2014 to 2024

It’s gargantuan. It’s far bigger and more urgent than the crisis facing Social Security, defense spending or any of our other social programs.

In a future post, I will examine just how we got to this point, what solutions have been proposed, and the pros and cons of each.