Sometimes with something so egregious gets written that, even if it’s in the Wall Street Journal, you have to notice it. Angela Braly, the CEO of Wellpoint—compensation a hair under $10m in 2009—ought to be happy, even though Joseph Rago in the WSJ is surprised about that. It looks like the health reform bill which put much of Wellpoint’s highly profitable individual and small group business at risk is dead, and this week Wellpoint started putting up rates between 35% and 80% in the California market (where it’s Anthem Blue Cross).

But the WSJ quotes her as calling health reform a “wasted opportunity”. Funnily enough Wellpoint and the trade association it funds, AHIP, were on both sides of the debate. Pushing Congress to give it 30 million more customers as part of the bill, and then surreptitiously funding the Chamber of Commerce to oppose health reform (and putting pressure on the Blue Dogs, and the DINOs in the Senate) when some of the terms of the House Bill started to look less favorable (85% Med loss ratios limits among them).

I’d had some semi-decent hopes for Braly and her team.

In 2007 Braly had replaced the reprehensible Larry Glasscock as CEO and seemed to have a longer term view to establish real system value. The high point of this was the 2007 announcement that Wellpoint would pay staff bonuses on the health status of its members, but it’s also funding the Health Care X Prize. Then Wellpoint’s stock value collapsed at the start of 2008 when it became apparent that they were going to be losing members in the recession and Medicare Advantage dollars from the Democratic Congress. I had vague concept that this might mean a real change in the way the company would behave. But realistically that was never going to happen.

Instead, as usual short-termism is in. Health reform that creates a stable long-term private insurance market is opposed—whether proposed by a California Republican or a moderate Democratic President. And with Wellpoint’s stock price up double from its late 2008 low, I suspect Braly is looking forward to cashing in rather more stock options when the profits from this year’s premium increases add to the stock price.

Wellpoint

But that’s all understandable. It’s just business and who cares if, after this collapse of health reform, next time around it’s very likely to be a single payer system that does away with health insurers altogether. Braly will be long gone by then—even if some of her colleagues in the non-profit world would like their organizations to stay around.

But what is really weak is the feeble attempt Wellpoint has made, using what the WSJ calls its tools as “an industry leader in data analytics” to actually do anything to improve its members’ health status. Later this week I’m going to give you a visceral example of that using a member I know very well (yes, me). But for now I remind you of these words from an article I wrote about Braly’s two-ago predecessor, which was called Too much Fawning about Len Schaeffer

So there you have it. Being really smart about pricing and risk is how you run a successful insurance company…..But this just goes to show that what Schaeffer is good at — running a lean mean ultra-competitive pricing business — has little if anything to do with solving the wider problems of the health care system that he’s so eloquent about

It appears that a decade on little has changed.

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47 Responses for “Wellpoint’s wasted opportunity”

  1. tcoyote says:

    They are running a business, Matthew. Ultra competitive pricing and managing risk is what well run businesses do. Ultimately, they’ll be better at reaching out to members and helping manage their own risks, which is what all the privates are trying to figure out now that they are convinced their provider networks are just about running up the tab.
    I guess your problem is that you think illness, unlike other hazards, shouldn’t be insured against any longer. Our societal problem is that we can’t afford to manage those risks with a feckless, irresponsible political system that nobody trusts. SIngle payer run by Nancy Pelosi and Henry Waxman?? You’ll be on Medicare before that happens. It’s why we’re not getting health “reform”; nobody trusts our government to do it. We need to reform Congress first . . .
    And for the record, Wellpoint would be a distant third to United’s beloved Ingenix and Humana in data analytics.

  2. Peter says:

    tcoyote, the other aspect to healthcare business is their obligation to wall street which adds another perversion and the, “Ultimately, they’ll be better at reaching out to members and helping manage their own risks” would put them into the social engineering business, which businesses don’t want to do and I would argue are less successful at than government would or could be. No, I don’t think illness is like other hazards, being virtually unavoidable and should not be treated the same. It might be interesting how education failure insurance might be risked? However as you stated, “We need to reform Congress first . . .”, but that would mean a different political funding mechanism than now exists, which the Supreme Court has just given it’s blessing to continue and even expand. Another “not in my lifetime” problem to fix.

  3. Peter says:

    I’ll add that it’ll have to be an outside non-healthcare crisis that will force change. Maybe this is the start of one:
    http://www.thestar.com/news/article/761755–olive-will-greece-set-off-global-debt-bomb?bn=1

  4. Margalit Gur-Arie says:

    There is something I never understood. Why should any private insurer “actually do anything to improve its members’ health status”?
    I assume that the answer to that is some cost reduction due to a decrease in medical claims. I’m not sure how much it costs to run wellness and prevention programs, but it must cost something.
    So considering that insureds move around between insurers, and considering that when they turn 65, and are most likely to experience health problems due to lack of preventive and wellness care, all insureds are dumped on Medicare, why should private payers give a damn about the wellness of their transient customers?

  5. rcpdoc says:

    I found the Rago write-up of the Braly interview summarized the problem and potential solutions well. Now that 75% of commercial insurance is self-funded and the typical benefit plans have rather high deductibles, maybe consumerism can finally start to kick in. I’d love to start seeing provider contracts apportion the claim against the deductible or co-insurance when above Medicare rates or if the provider refuses to profile quality and cost measures. This will engage the consumer and help drive down provider costs. Over 80% of annual medical cost is below $1,000 to the individual. The problem in the U.S. is that both providers and consumers have been detached from the basic value proposition. This is the problem ObamaCare did not address and is the problem still to be solved in order to reform health care.

  6. archon41 says:

    rcpdoc, might you be able to point one to a fuller discussion of that 75% figure for self-funded commercial insurance?

  7. archon41 says:

    Splendid.

  8. Matthew Holt says:

    You’re all smoking stuff if you think that either:
    “80% of annual medical cost is below $1,000 to the individual”
    OR that Obabmacare (or more accurately Baucus care) didnt put people into high deductible plans–it explicitly did–with all that was needed being a cap on overall out of pocket costs of $10K per family
    You’re all also smoking stuff if you think that putting consumers at risk for the first $1,000 of their care will do jack squat to overall costs. It’s the costs of the 20% that cost 90% of the dollars that need to be addressed. And that can only be addressed by new forms of payment.
    Something private plans cannot or will not do. (Although I agree with tcoyote that Medicare isnt exactly rushing in with its own fix)

  9. MarkS says:

    The problem is that private insurance companies are not suited to provide health insurance. They only want to insure healthy people and people don’t want to buy insurance until they get sick. No manner of incentives or mandates will change this situation.
    We must have national health insurance where everyone is covered all of the time. This can be paid for using the current pool of money that individuals and companies spend on health insurance plus government spending (government currently funds over half of all health care in the US).
    Eliminating the excessive overhead and profits of the insurance companies will in itself lead to significant savings. Other savings can come from rationally managed care.
    Now… how likely is this to happen given our current corrupt corporate financed political system? I think you know the answer.

  10. archon41 says:

    Odious, the cunning strategies these insurers have developed for remaining solvent. Tout a fait odieux!

  11. Margalit Gur-Arie says:

    Hey archon, since you seem to think that the French language is more authoritative than plain ol’ English, maybe you should give French healthcare a whirl too…..bet ya it would be much appreciated by your butt slapping, truck driving, commodities trading, real men in the flyover…..

  12. archon41 says:

    French for expressing moral outrage, health care no. But I’ve got to get in my truck and get down to the coathouse, soon as I finish this mess of turnip greens and conebread.

  13. Ms. Braly’s comments and the fawning questions directed at her by the WSJ editorialist are about as reprehensible as are possible.
    I still cannot understand whether executives such as Ms. Braly are simply too dense and limited to right-wing ideology to have even the slightest clue about the broad picture of society and how policies beneficial to the people should be pursued or whether those executives are fully aware of all issues but choose to lie about them solely for personal and professional gain.
    My own personal experience with corporate executives is the former – too dense and utterly incapable of gaining any relevant knowledge outside of their specific work demands – so I suspect that Ms. Braly is mainly dense and self-deluded.
    Interestingly, the opinion piece by Ms. Braly in the WSJ has been reset and the commentary to the piece – which contained a mix of critical and praising commentary on her opinions – has been completely removed.
    It may reappear as it was, but who knows. By and large until the last few weeks it has seemed to me that the WSJ has maintained its high standard of news reporting and writing, but the emphasis on a few article the last few weeks have made me start to doubt whether that policy will be pursued. The editorial pages are as abysmal as always of course.
    Doesn’t archon have anything better to do than write utter nonsense?

  14. Peter says:

    “Odious, the cunning strategies these insurers have developed for remaining solvent.”
    Yes, being able to dump 65+ onto government plan and to lobby government subsidies as a the “reform” solution to growing unaffordability of healthcare. I guess it’s the, “whatever reform you want just don’t include me in any of the pain” strategy.

  15. Michael Lurie says:

    Matthew, I agree with your take on the Braly “fluff piece”. I was disgusted by it. For me it again begs the question, “what value do insurance companies truly bring to the equation?” More fundamentally, and going to the issue raised by MarkS, why do we have a healthcare financing system based on an insurance model, when most healthcare costs are predictable? But the problem for Anthem (and the rest) is that as we move to high deductible plans, such that the individual self insurers for most routine costs, premiums are still going up (Matthew points out the recently announced gigantic rate hikes) and people begin to question even more the worth of private insurance. Then there’s the underwriting–don’t get me started.
    Braly’s solution–strong rules that require all to have insurance (or government subsidies)–was not likely popular to most WSJ readers. And complaining about providers holding up Blue Cross for big reimbursement hikes–come on!! Again, if that’s true, then what good are private insurance companies? By the way, ask any doctor in California what they think about Blue Cross–if they are in solo or small group practice, they will not have anything good to say. In fact, most would probably prefer a government financed system because at least you’d squeeze out the overhead costs that don’t go to patient care.
    Finally, I agree with Matthew about the need for Medicare to restructure reimbursement to deal with the 20% of people who account for 80% of the cost. Medicare can do this, and we have not seen the private payers do it, and probably won’t.

  16. archon41 says:

    The ground trembles, and the skies grow dark, as Prometheus ponderously frowns.

  17. rcpdoc says:

    Studies of cost variation tend to show about 75% of the variation is associated with unit price, the remaining about unit frequency. Hence, to address the 80% cost issue, unit price standardization is certainly important. But benefit design has become central as well and this issue has in part caused the commercial sector to gravitate toward self-funded benefit platforms where there is much more freedom to experiment with what works without government mandates dictating the rule of the day. As an example, many self-funded plans do not offer infertility benefits, which cost about $35,000 per year for the Mom and often many hundreds of thousands of dollars for the care of pre-term multiple births. Standardization of benefit design in a government run program will almost assuredly put such expenditures in the benefit design, making it impossible to reduce medical spend based on only price controls. We got a glimpse of what can happen on the other end of the spectrum…end of life benefits. Baly is correct; engaging and empowering the consumer with information and clear financial choice will help drive down medical spend. And non-standardized benefit programs allow people to engage the social questions of what should and should not be covered in an insurance pool. ObamaCare was more concerned with access to insurance and standardized benefits than cost control. This is where he went wrong.

  18. Peter says:

    “More fundamentally, and going to the issue raised by MarkS, why do we have a healthcare financing system based on an insurance model,”
    Exactly, and that is the first problem to be solved. The cost problems cannot be solved if we continue to rely on the insurance industry to “manage” the dollars in the system.
    “Standardization of benefit design in a government run program will almost assuredly put such expenditures
    (infertility benefits) in the benefit design, making it impossible to reduce medical spend based on only price controls.”
    Not necessarily: http://www.infertilitynetwork.org/insurance
    “infertility benefits, which cost about $35,000 per year for the Mom and often many hundreds of thousands of dollars for the care of pre-term multiple births.”
    Only in the U.S. with it’s private/for-profit system.
    http://www.longwoods.com/product.php?productid=21121&cat=609&page=2

  19. archon41 says:

    Actually, I doubt that Wellpoint would contest the charge that it is not operating as a governmentally funded agency with a mandate to dedicate its assets and resources to the greater good. If you covet those resources and assets, aquire them–don’t expropriate them under cover of these frivolous accusations that there is something evil about traditional underwriting practices.
    I do hope, Wendell, that your critical WSJ commentary is retrieved and preserved for the edification of posterity.

  20. MG says:

    “80% of annual medical cost is below $1,000 to the individual”
    Lyin’?
    More of the same old garbage about “consumer empowerment” and transparency will profoundly transform the US medical system. This was bullcr@p when Herzlinger’s ‘Market-Driven Healthcare’ came out in 1997, when the MMA Act was passed in 2003, and remains so today. It is a piece of the puzzle at best but it won’t do anything to fundamentally address the cost curve either by itself. Results at best so far on cost transparency have been mixed. It remains no ‘silver-bullet’ solution to tame healthcare inflation.
    The funniest thing is when you ask a proponent of consumer-directed health care if the necessary infrastructure, information, and tools to truly make them work as advertised are in place today, they waffle around the subject. Heavily on the sizzle, light on the steak.
    Reality is that they weren’t in place in 2003, they aren’t in place in 2010, and they likely won’t be in place by even 2014.

  21. Margalit Gur-Arie says:

    How exactly is a consumer supposed to drive costs down if all the big insurers, representing millions of customers cannot negotiate any reductions, particularly for the “big & famous” hospitals?

  22. Actuary says:

    Margalit –
    For most large insurers, the majority of their members are ASO (administrative services only) and the (large) employers who purchase this demand that insurers keep costs down.
    Wellness and disease management programs are designed to keep people who have identifiable conditions (diabetes, high blood pressure, etc.) on their medications. Also, to give people useful tools to stay healthy, such as filling out a Health Risk Assessment.
    The small group and individual market do not yet have the level of interventions that is common in large group coverage, but insurers want to keep costs down because lower costs yield lower rate increases which mean less lapsation.
    Matt -
    The most egregious acts have been perpetrated by the Obama administration. Specifically, when they ignored the CMS actuaries’ report saying the health care scheme the dems cooked up would bend the cost curve UPWARD and his council of economic advisors concluded the opposite.
    If we want reform, let us at least all tell the truth. Obama has led by example, and a poor example at that.
    archon41 -
    Keep posting

  23. jd says:

    For the thousandth time: both the public insurance programs (Medicare, Medicaid) and the private insurance companies in the United States have failed to control costs. They have failed to control costs in large part for the same damn reasons: the public doesn’t understand how providers are driving up costs, and sides with the providers when cuts or controls are threatened by the payers, whether they be public or private.
    How hard is this to understand? And yet, ideology (from the right or left) drives so many to complain about only one side of the payer problem and excuse the other. Nonsense. Not only that, but people condemn the one side (public or private) as intrinsically unable to control costs. Nonsense on stilts.

  24. jd says:

    rcpdoc, you transposed the numbers. 57% of people with commercial insurance are in self-funded plans, not 75%.
    Archon41, take note.
    But this is indeed an increase. It wasn’t that long ago that the number was 49%.

  25. archon41 says:

    Here’s what I’m trying to get a handle on: how much are these self-funders saving by avoiding insurer profits and “administrative costs”? I haven’t been able to find anything authoritive on this, but I’m left with the impression that the savings derive mainly from avoiding state premium taxes and “mandates.” If this is true, it would seem to have consequences for the proposition that costs to the consumer can be significantly reduced by eliminating insurer profits and costs.
    Someone, Margalit, I think, suggested we create a federal agency with the power to control provider costs for both the government and the insurers. A “pricing monopoly,” as it were. I hate to even think about the firestorm of protest that would provoke from providers. On the other hand, I don’t see many objecting to trying to do something about overtreatment, fraud (what on earth are we waiting for), waste and “overutilization”.
    I really don’t see any point in further discussions about the virtues of “universal single payer” and the “public option.” They have been effectively kneecapped.

  26. “They have been effectively kneecapped”
    “Kneecapped” in the sense of a criminal offense, yes.
    Various Congress members have offered bills with significant numbers of co-signers over recent decades that propose single payer/insurer schemes along with UK-type of government employment of those who deliver medical services. Those bills have generally been completely igonored by whichever political party has had the majority in either Chamber.
    I suspect that legislation will eventually be passed at some point that institutes more or less full financing through single payer/insurer. Even if a reconciled bill is passed now, many further revisions will be needed to eventually reduce medical service costs.
    Business will continue to reduce its role as the payer of premiums on behalf of employees, as well as reduce its role in the relevant cases where the business self-funds insurance. Employees now more or less insulated from the exorbitant cost of medical services will feel that cost more and more and demand resolution through their political representatives.
    “firestorm of protest that would provoke from providers”
    In fact there would be no protest. Net income to providers will never go down. There is vast room however to reduce the waste of resources that occurs in two areas under physician control: (1) handling of patients in hospital settings under physician direction and orders (2) the costs that represent the roughly 2/3 of gross payment to physicians not resulting in net income to them. Reductions in the cost will eventually result from universal or near-universal digitization of clinical data, as I note repeatedly. Digitization of clinical data will also permit a closer approximation to a competitively-determined market for physician and other medical services. That is many years away, but will eventually occur.

  27. archon41 says:

    If net income to providers isn’t significantly less “over there” and “up there,” there are certainly a lot of uninformed commentators “out there,”

  28. archon41: If you in fact had any knowledge on topic, your commentary might be worth reading, even if couched in the normal right-wing nonsense that appears to appeal to you, but unfortunately it seems clear the sole role you want to play is provocateur for some unclear reason. What you might be referring to above is apparently only understandable in your mind.
    If no provocateur then why not remove the shield of anonymity provided by your username. Based on your commentary, any level of responsibility for what you write is likely lacking, but who knows, I may be mistaken.
    At least the ever-present nate is involved directly in the insurance industry as a broker and possibly business owner, so has direct knowledge at least of his own field along with the difficulties of running a business profitably, even though the opinions on policy that he espouses fail to rely on much fact.
    The reason for the apparent disappearance of commentary to the Braly opinion piece in the WSJ is the creation of a separate URL, most likely an administrative mistake by the website administrators. Two URLs with presumably the same text, but separate commentary, now exist.

  29. Peter says:

    “Net income to providers will never go down.”
    Wendell, I’m having trouble grasping this as well. Waste breeds dollars, so even if you just remove waste some provider is going to be hit.

  30. archon41 says:

    Actually, Wendell, I spent some 40 years in insurance, and I can sincerely say that, during that interval, I rarely came across anyone quite so innocent of any real understanding of insurance as yourself.
    Since you obviously had nothing of significance to offer relative to the inquiries I raised, why didn’t you hang your talking points on another peg?

  31. archon41: 40 years doing what “in insurance”? Please provide the wisdom of those years in pinpointing my innocence.
    So far your commentary reveals nothing other than the usual idiotic propaganda so characteristic of your cohort that comments on WSJ articles. Ever think of citing any relevant statistics or facts that might buttress whatever you learned “in insurance”?
    I am sure you are fully aware from your “40 years in insurance” that any private insurer, like any profit or surplus-maximizing entity, ultimately, through its inherent structure, is forced to maximize returns to owners or the equivalent in a “non-profit” setting by keeping as many of the sick out of its enrollment, as many healthy and likely to stay healthy in its enrollment and to make every effort to limit claims.
    That is the fundamental economic characteristic of private healthcare insurers.
    And of course based on your wisdom accumulated over “40 years in insurance”, the roughly 5% overhead cost of administering Medicare cannot possibly be compared to the 22%-28% (depending on year) of overhead (i.e. expenses not going to claims) of private insurers, because well, it just isn’t the same.
    So, yes, please, present the relevant statistics that show the great efficacy of private healthcare insurers in fulfilling their societal role.
    And finally please continue to hide behind the anonymity.
    Peter: You might want to read what I wrote. Needless to say physicians are paid a gross amount by any payer. From that they pay for expenses to operate their practices. The ratio of gross payment to net income (salary basis) is roughly 3 to 1. In other words 2/3 of the payment goes to expenses, 1/3 goes to net income, i.e. salary equivalent. It is the 2/3 or so going to those expenses that can be significantly reduced.
    Few physicians practices are under the type of competitive pressure that most businesses are under. That competitive pressure forces those business to either constantly innovate to provide better value at lower cost or higher value at lower cost to the customer. This pressure is non-existent in the vast majority of medical service delivery settings.
    In addition an inordinate level of resources is allocated to billing. Simplified billing through a single payer/insurer entity would reduce that expense significantly.
    It would also reduce the unenumerated cost in terms of hassle that patients, providers and providers’ staff encounter trying to correct billing errors or claims.
    Universal implementation of EMR, PHR and EHR systems will also significantly reduce the vast waste of administrative time and energy allocated to reproducing and correcting the same data not to mention the reproduction of the same tests and similar ordered by different providers on the same case.

  32. jd says:

    archon41, here is a discussion several of us had on self-insurance a while back on this blog. A long discussion, but a number of good points are made there.
    Quoting myself with a few small edits:
    [self insurance is] about three things (1) improving cash flow, (2) improving profit, and (3) reducing state regulation.
    Self-funded employer health plans are regulated under ERISA, not state law. This is a huge benefit for the large national or multi-state companies that constitute the bulk of the self-insured. They don’t need to devise different benefits to conform to 20 or 30 different state regulations.
    On top of that, self-insuring companies get to control and profit from the plan reserves. Instead of going to an insurer, the interest goes to the company.
    Finally, the self-insuring company removes most of the profit others make on it when offering coverage to is employees. Not all of it, though, because almost every self-insuring company outsources core functions of the plan (like claims processing). These Third Party Administrators (TPAs) make a profit like any other company, but their margins are based on far smaller PMPM revenues since their revenue only covers admin cost and not medical claims costs as well.
    Also, don’t forget that when a company is big enough, it doesn’t really need insurance. This is because it has a large risk pool to smooth out the bumps of high-cost claims so that it isn’t in any short-term risk of having a cash flow (let alone bankruptcy) problem due to medical costs. Long term, there can still be problems, but insurance doesn’t reduce the company’s long-term risk of cost increases. Today’s claims have to be paid either by yesterday’s premiums or tomorrow’s, so long-term cost trends are felt just as much by an employer that self-insures as by one that buys insurance.

    I think the bottom line is that a large company can save a few percentage points on its medical costs from self-insuring, but very little of it comes from taxes as you guessed in an earlier post.

  33. jd says:

    Wendell, it is certainly true that reducing the gross income of physicians need not result in reducing the net income. However, with the scale of the reform we would need to get in line with other nations, it is impossible to imagine that all the savings comes out of administrative efficiencies. Our doctors do take home more money than docs in other nations (especially specialists). Why would we pay the same share of GDP as they do for healthcare, yet still pay our docs twice as much as theirs?
    That said, I do not think we’ll actually match other nations on per capita cost in our lifetimes. Perhaps it is possible for a decade to freeze the share of GDP that goes to healthcare without reducing physician incomes. There would be, of course, massive layoffs in health care among the people doing the inefficient back office work that would be rendered unecessary with HIT and a streamlined payment process.
    I do take issue with several points you make about private insurers. I’m another anonymous person who works in the industry, and the reason I’m anonymous is that I make comments that don’t fit the party line and would make life uncomfortable for me at work, and it wouldn’t be fair for the company to be dragged into this and associated with my comments. I have repeatedly said that there is no evidence that free markets work in health care, and that well-run single payer works as well for cost, quality and access as well-run universal healthcare using private payers (as in Germany or The Netherlands). David Kibbe has taken a similarly suspicious (and smug) attitude towards those of us forced to post anonymously.
    I have no idea where you get this “22-28%” going to overhead. That is not an industry average. The industry average is less than 20%, and always has been. I will cite numerous statistics if needed, but as we know Google is our friend.
    Also, you cannot make the sweeping statement that insurers are forced to make profits “by keeping as many of the sick out of its enrollment, as many healthy and likely to stay healthy in its enrollment and to make every effort to limit claims.”
    First: no sickness, no premium. No claims, no fee for processing. One of the reasons that health insurance hasn’t controlled costs very well is that as costs go up, so do premiums, and as claims get larger and more complex, so do the fees to process them for self-insuring companies. The C-Suite and actuaries get this, or at least some do.
    Second, avoiding the sick occurs only for the individual and to a much more limited extent the small-group market. It can also occur in unusual cases for a mid or large employer if they have a very sick population and the state requires universal community rating for HMOs. As you know, for experience-rated business, companies in effect pay their own way. If they have higher claims costs, it is reflected in their premiums.
    Third, as you well know from working at CIGNA, most commercial insurance is self-funded. There is ZERO incentive for the “insurer” providing administrative services only to avoid companies that have sick employees. Depending on how the contract is structured, that could actually mean more net income.
    It is true that insurers have incentives to be sticklers on interpreting rules for paying large claims. Less charitably, to deny things based on technicalities. Of course, those technicalities are usually what the contract and premium are based on, so without them the cost of coverage would go up. That doesn’t make the experience of being denied any better. It is indeed a messed up system, and far more complicated and fraught for the consumer than it should be.

  34. jd says:

    Just re-read my last post and realized it isn’t as clearly written as it could be. Apologies to those who waded through it.

  35. archon41 says:

    Thanks for the link, jd. Some real gems buried in the archives here. It will take me a while to digest it all. I’ll just mention a few things while they’re fresh on my mind.
    I don’t have a cite for this, but I’ve read several times that the state taxes on gross premium average about 2%. That could be a significant hunk of change, when comparing administrative costs of insurers and Medicare. Another thing I didn’t see mentioned is that it might be a little misleading, in this comparison, to focus on average administrative costs. There’s an interesting study by Ezra Klein in the WaPo where he examines the salvos directed at each other between Krugman and some fellow at Heritage. He concludes that the administrative cost arising from a large group policy is (speaking from memory) about 6%. Such costs in respect to an individual policy, however, are about 30%. For a group policy, insurers want to see the claims history. They put individuals through the underwriting wringer, which can be a drawn out process (complete with AIDS testing.) Klein concludes that Medicare’s true administrative costs are 4 to 5%. (I expect you know all this, but I mention it for the possible interest of others.)
    The learned discussion of you and your fellows confirms my suspicion that there isn’t all that much to be saved by eliminating profits and administrative costs. I appreciate your point that, be this as it may, there are things insurers could be doing to reduce costs. Perhaps an expanded system of the sort discussed by Maggie Mahar in her most recent post might have some promise in this regard.

  36. archon41: I apologize for my rampage on this. Inexcusable on my part, but nonetheless below the vituperation I still prefer to see more facts and relevant statistics and less provocateurism on these issues, such as jd’s excellent comments above.
    jd: The 22-28% figures come from consolidated financial statistics provided by the AHIP for 2006-2008. Those are the years readily available and that is the range.
    Otherwise, excellent points as I note above. You confuse me with someone else by the way.

  37. jd: One other point regarding the financial and operational dynamics of medical service providers.
    The potential for substantial cost savings is there.
    Take a look at any of the statistics collected by the MGMA, a sampling exercise done yearly by that organization. Also take a look individually at the financials/headcount/etc. of a representative sample of physicians practices you might be familiar with so that those statistics can be put in the context of a living and breathing practice.
    Oriented towards small practices, but applicable to any size practice, is a venture whose website is now http://www.idealmedicalpractices.org/ that provides insightful, practical guidelines for reducing the costs that are ancillary to providing care.
    Hospitals and many hospital systems incur even more unnecessary costs, i.e. costs that add nothing to the effective treatment of infirmity nor are needed administratively at least compared to any entity that operates in a truly competitive “business” environment.
    Fair enough on the reasons for anonymity, by the way.

  38. archon41 says:

    We are often obliged to draw inferences from incomplete data. If it is true (and I’m not certain it is) that employers haven’t been able to reduce their costs much by self-insuring, it is not immediately apparent why it should be supposed that great savings can be reaped by eliminating insurer “administrative costs,” including profits.
    I would, of course, been ejected long ago for my irreverence from Democratic Underground. But of what value is a hermetically sealed echo chamber?

  39. archon41: Okay, you have made your point and it is valid. I fully agree regarding an echo chamber.
    I prefer reading viewpoints contrary to mine in any case. Of course when facts support the viewpoint. Good means of gaining new insights as well as learning relevant facts previously unknown.
    “incomplete data”
    Sufficient data are available on the impact of self-funding by large companies or other large organizations. I have not made an effort to search for them or for good analysis based on them. I suspect Health Affairs has more than a few good articles on the topic however. I just have not looked.

  40. archon41 says:

    Relieved to know you’re not Potter.
    Looks like my memory played a couple of
    tricks on me. The article by Ezra Klein is Administrative Costs in Health Care: A Primer, Washington Post, July 7, 2009. He pegs the administrative costs of Medicare at 5 to 6%, and such cost for an insurer, for employer groups of 1000 or more, at 7%. The latter escalate sharply, as the size of the pool declines. I would suppose that these costs might be significantly reduced by pooling small employers and individuals in “exchanges,” or whatever. Ezra also seems to think that provider costs could be reduced by adopting “standardized” billing procedures. The article contains links to recent discussions by Krugman, Mankiw and Cowen.

  41. jd says:

    Ugh, I did confuse you with Wendell Potter. Sorry. I still would like to see what table or conclusion you are citing. The numbers can’t be saying what you think they are.
    One mistake people make is to conflate the total system admin ratio (about 30%) with the insurer admin ratio (about 13%). But your numbers from AHIP don’t really gibe with that interpretation either.
    archon41, Medicare at 5-6% and very large group at 7% is about right. And don’t forget that Medicare claims are paid by private companies (largely the Blues), so the similarity of those numbers is not at all accidental.

  42. jd says:

    To restate: Medicare claims are administered by private companies. In effect, Medicare is a giant self-insurance scheme with the US government as the self-insurer for its elderly citizens. It hires TPAs (third party administrators) to handle the customer service and claims processing.

  43. archon41 says:

    “Processing” is the right word. I’ve read several times that only about 5% of Medicare claims are subject to audit. Little wonder that providers declare they get paid with less “hassle” by Medicare than insurers.

  44. jd: “I still would like to see what table or conclusion you are citing.”
    I will find it when I get a chance. I have it somewhere. The percentages I cite reflect all costs (including profit, aka cost of capital) that are not accounted for as payment for claims. If net income (i.e. after-tax income) is roughly 3-4% industry-wide – a figure I have not tried to verify, then the balance represents other costs including income tax payments to the extent that they occur. I have not looked at the the categories in the consolidated or individual financials in any detail.
    To have comparable numbers for Medicare or a hypothesized single payer/insurer financier versus the current system handled by private insurers requires a lot of detailed analysis, not least due to the issues you and archon41 raise. As mentioned above, someone must have done this analysis and published it somewhere, likely at least once in Health Affairs or perhaps elsewhere.
    “for employer groups of 1000 or more, at 7%”
    I’d like to see that data behind this. Not asserting that it is wrong, but I have only looked at various gross numbers. Details count. No question that there are economies of scale in most aspects of private insurer operations and of course in any large publicly administered system.

  45. Gary Lampman says:

    Its about hedging your bet against the demographics of the insured.Continuing to underwrite the best bet and casting off those who could drain Profits.
    Some would consider it scamming and greed.I consider it to be
    embezzlment and fraud.Although they have every right to Choose their Clients. They have no right to Gauging those who are being Charged more and getting a petence in return. Insurance needs to learn to do More for less. Instead of using it as a Entitlement Program.
    The truth is;this industry has made a abundances of money justifying actions and hiding actual profitability.
    While the majority of Americans are cutting back.Insurance fails to
    understand the concept of scaling back. Ok,Maybe one fewer trip to
    Star Buck’s or holding off on buying the fourth home.The point I’m
    making is the industry has not had to compromise for leaner years. They will always raise rates and Because their is absolutley No Ceiling.They will not have to experience lay offs or cut backs like Normal institutions would.
    However, We are the Enablers of this system and if WE ALL DROPPED OUR HEALTH INSURANCE. THey would then be pressured into REFORMS. Like a grape drying up on the vine Health Insurance would be NO MORE.

  46. You actually make it seem so easy with your presentation however I find this matter to be really something which I believe I would by no means understand. It seems too complex and very large for me. I’m taking a look forward in your subsequent post, I will attempt to get the cling of it!

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