At a health care forum held last year in Las Vegas, then-presidential candidate Hillary Clinton declared that she was intent on “taking money away from people who make out really well right now” in order to fund health care reform. When asked exactly which fat cats she was referring to, Clinton responded, “Well, let’s start with the insurance companies.”
Clinton’s sentiment — that private insurers are making out like bandits while our health care system crumbles — is part of the received wisdom these days, especially among progressives who believe that for-profit health insurance doesn’t add much value to our health care system. But the reality is that in recent years, private insurers haven’t been doing so well financially.
Consider United Health Care (UHC), the nation’s biggest private insurer. Joe Paduda of Managed Care Matters reports that UHC will be cutting 4,000 jobs as part of a restructuring plan that includes eliminating Uniprise, one of its major brands. Since last fall, UHC stock has plummeted from $53 to $22 a share. WellPoint, another huge private insurer, has watched its stock drop from $82 a share in 2007 to $49 a share in June.
As Robert Laszewski wrote on the Health Care Policy and Marketplace Review in April, “Wall Street finally seems to be figuring out that the health insurance business is, and has been for years, on a long walk off a short pier. What’s sustainable about a business whose costs have continually exploded at 2-3 times the growth rate of the rest of the economy or the wage rate? Just where did Wall Street think this business was headed all those years the sector has been the darling of Wall Street?”
While the insurers’ premiums have been skyrocketing, so have health care costs: the prices of everything, from a pill to the screw that holds your artificial knee in place, have been rising. Most physician’s fees haven’t been increasing, but the volume of services that doctors provide has—and so have hospital bills. Insurers, like the rest of us, have been running hard to keep up.
Worst of all, as employers bow out of the health benefits business, insurers are losing customers. “Perhaps most telling was the recent comment by one analyst in the Wall Street Journal,” Laszewski noted. ” ‘What we’re seeing is a market that’s gotten so mature and beyond its customer[s] that people can literally no longer afford to buy the product,’ said Sheryl Skolnick, an analyst with CRT Capital Group. ‘The number of uninsured is growing faster than any player in the game, and it’s getting bigger.’”
Part of the problem is that Wall Street investors have unrealistic expectations: They continue to expect double-digit growth from insurers. Another issue is that insurers can no longer keep ahead of rising medical costs by raising premiums 1 percent more than rising prices. Premiums are just too high already.
Finally, insurers know that next year they’re almost certain to lose the bonus that Medicare has been paying those who offer Medicare Advantage (MA). As Maggie explained last week, customers are beginning to realize that MA isn’t quite the bargain they thought it was. Complaints are mounting — and last week’s vote on the Medicare bill made it clear that legislators are tired of paying insurers 13 percent to 17 percent more than Medicare would spend if it was providing the coverage directly.
But don’t pity the insurers. The financial woes of the for-profit insurance industry are actually an indication that, as many of us suspect, many insurers haven’t been delivering high-quality health care. Writing about UHC’s prospects, Paduda observes: “This is not a company that invests in medical management — despite its trove of data, analytical expertise, participation in NCQA accreditation and in-house capabilities, UHC has always been about managing reimbursement, not care. Their latest move to increase premiums is the way United has always reacted to bad financial results. And it may work for a while, but over the long term the winners in the health plan business will be those who actually understand how to manage care.”
And United doesn’t.
Less is More
“Managed care” is, to many, a nasty phrase.
But the truth is that the insurer who understands that “managing care” means making sure that customers get the high-quality care they need, when they need it, will save money. When it comes to health care, low cost and high quality go hand-in-hand.
At the same time, “managing care” means avoiding ineffective care. As we’ve noted on HealthBeat in the past, wasteful spending on unnecessary procedures and over-treatment produces unhealthy patients — it increases the time they spend in hospitals where they can pick up antibiotic-resistant infections; it exposes them to the risks and side-effects that come with all treatments; and it subjects them to multiple physicians, a situation that invites miscommunication and costly medical confusion.
Enlightened self-interest would suggest that insurance companies should be turning to cutting-edge medical research to decide how to better structure their coverage. They should be pushing for best practice guidelines to develop more consistent care. They should combat waste. They should be loudly speaking up in favor of greater comparative-effectiveness and cost-effectiveness research so they can choose to cover treatments that work best. In short, insurance companies should be fighting for the same principles of quality in health care that the rest of us want. And they should think like the best doctors do, using medical science as their guide to making smart treatment decisions.
But as Joe Paduda so nicely put it, most of today’s for-profit insurance companies don’t manage care, they just manage reimbursement. They don’t think like doctors — but like accountants. Instead of assessing their business from the perspective of medical research — looking at which treatments work best, for whom, and under what conditions — they work backwards from their balance sheets. And it’s this mindset that is undermining the industry.
A Cautionary Tale
To understand what is going on, it’s helpful to consider the history of HMOs in the U.S. As originally conceived by pediatric neurologist Paul Ellwood and the “Jackson Hole Group” in the 1960s, HMOs were all about managing care in the truest sense: actively regulating and coordinating medical services to ensure the best marriage of health outcomes and cost.
Here’s how Ellwood’s HMOs worked: patients enrolled in a plan that provided access to doctors and hospitals in a specific network of providers. Providers receive a fixed payment, per patient served, per month, for a particular set of services (this is called capitation). Their goal: to keep these patients well. (This is why they were called “Health Maintenance Organizations,” or HMOs.)
In return, doctors have the security of knowing that they will always have customers. These referrals will come from the primary care physicians in the network, who serves as “gatekeepers,” recommending a visit to a specialist when a patient needs it.
The idea here is to build the high-quality/low-cost truism into the very machinery of health care plans.
First, because patients need referrals to see a specialist, and provider payments are fixed, much unnecessary spending can be curtailed. We know that “fee-for-service” payment provides perverse incentives to “do more.” By contrast, fixed payments encourage more efficient medicine because doctors are getting one lump sum, regardless of what they do, they are not encouraged to undertake unnecessary, labor-intensive, high-cost procedures. Instead, they are motivated to stop sickness before it starts. The emphasis is on preventive care — which in the long run, is less costly for everyone and less time-consuming for the health care provider.
Finally, while many patients object to going through a “gatekeeping” primary care doctor to get a referral to a specialist, this is all part of making sure that “the right patient gets the right care at the right time.” More than two decades of work by Dartmouth’s medical researchers have shown us that when patients see more specialists, outcomes are not better; often they are worse.
Last, but certainly not least, Ellwood envisioned HMOs as non-profit organizations subjected to strict quality reviews (with these reviews based on medical research). In Ellwood’s mind, plans would compete with each other on quality, not price. The cost-consciousness of managed care is balanced with an emphasis on outcomes.
Ellwood’s original model for HMOs is “managed care” in the sense that Paduda talks about. It tries to encourage smart, efficient, and financially sustainable medicine, all in the interest of patients.
Yet today, the phrase “managed care” has been besmirched. Conventional wisdom has it that HMOs are among the most heinous villains in the health care field. Yet in theory, HMOs are a perfect marriage of cost-consciousness and quality. So what went wrong? One word: profit
Enter the Profit-Motive
As Ellwood lamented in an interview with Time magazine in 2001, ultimately HMO’s have focused on “competition on price alone,” instead of quality. The management of care has become a game of accounting, rather than an exercise in strategic medicine.
It wasn’t always this way. The first HMOs adhered closely to Ellwood’s vision. As George Anders notes in his 1996 book, Health Against Wealth: HMOs and the Breakdown of Medical Trust, almost all of the HMOs through the 1960s and 1970s were non-profit, and “they approached their goals of providing affordable medical care and promoting wellness with an almost missionary-like zeal.” The welfare of the patients came first, as “ninety percent of the premiums they collected — and often more — went for patient care.”
By the 1980s, Ellwood’s managed care model had gained a lot of momentum. One 1986 Health Affairs article noted that between 1980 and 1984, the percent of insured households enrolled in an HMO increased by one-third. The percentage of corporate employers offering health plans where at least 10 percent of their employees had joined HMOs almost doubled over this period, from 26 percent and 45 percent.
Yet as the HMO industry grew, Ellwood’s vision of patient-centered, cost-effective care receded into the background. Quality in health care is hard to measure (so hard, in fact, that a frustrated Ellwood eventually founded a non-profit to push for more clarity and accountability in health outcomes). Sadly, as the market expanded, size — not quality — became the major metric for success. Bigger HMOs could offer a wider network of providers — and consumers like having a broad choice of doctors and hospitals.
Meanwhile, nonprofit HMOs were hitting a ceiling in terms of expansion. They couldn’t amass the capital necessary to become huge, because, as Anders notes, the plans “couldn’t issue stock and sometimes had trouble arranging bank loans.” Their solution? Become for-profit corporations and make stock available to the public to create and expandable base of shareholders.
President Reagan also had a hand in the shift to for-profit HMOs in the early 1980s. The HMO Act of 1973 had made federal grants and loans widely available to non-profit operations. This is one reason why, in 1981, 88 percent of all HMOs were non-profits. But in the early 1980s, Washington cut off the stream of federal funding — and eliminated a major incentive for nonprofit status.
Thus, for-profit insurers took over the HMO industry. In the 1970s, notes Anders, there were “30-odd HMOs, almost all not-for-profit.” By 1997, there were “well over 600, more than three-quarters of them investor-owned.” HMOs became big business.
With the advent of share-holder HMOs came a change in priorities. As Anders puts it, “once managed-care companies started entering the for-profit arena, the financial world’s values started seeping in.” Securities analysts and big investors refused to support plans that spent “too much” on members, leaving “too little” for shareholders. “Before long,” says Anders, “HMO bosses regarded boosting stock prices as a major priority.” And that meant maximizing financial gains to ensure a sound investment.
Unfortunately, Wall Street isn’t savvy when it comes to medicine. The delivery of care that Ellwood labored so intensively to coordinate was reduced to a line item in a budget and a sunk cost. Increasingly, patient care was viewed as the least desirable of expenses, because it never found its way back to the company. HMOs shifted expenditures away from patients and toward business operations like marketing, administrative overhead, and salaries—expenses that are understood by Wall Street as a cost of doing business.
In an indication of how the profit-driven mindset took over managed care, the percent of premiums that insurers actually paid out for patient care was re-christened the “medical-loss ratio.” Reimbursements for medical care were regarded as an undesirable financial loss, regardless of whether the care was necessary or unnecessary, life-saving or totally ineffective. Insurers were not getting smart about health care delivery.
According to Anders, in the late 1970s leading nonprofit HMOs spent about 94 percent of premiums on members’ medical treatments; by the late 1990s, leading HMO companies were spending less than 70 percent of their earnings on patients. Plans began rolling back coverage based solely on cost — as opposed to cost-effectiveness — and refused to cover expensive procedures like certain cancer treatments.
Preserving the bottom line became a mission divorced from any interest in medical necessity: in one blog post, Paduda notes that insurance giant WellPoint actively canceled coverage for seriously ill people if they actually sought care, and the company HealthNet “paid bonuses based on executive’s success in canceling individual policies” for people with high claims.
The clumsy stinginess of private insurers has not escaped the public eye—and it’s helped to fuel the belief that “managing care” equals refusing people treatments they need. As recently as 2004, 61 percent of Americans were worried that their health plan was more concerned with saving money than providing the best treatment.
As a result of the backlash, HMOs have moved away from Ellwood’s capitated model. Too many people worried that when doctors were paid a lump sum to keep a patient well, they might skimp on care.
And in fact, some for-profit HMOs did encourage doctors to “do less.” But at the same time, many doctors realized that it was in their long-term interest to do everything necessary to keep the patient well, both because they wanted the best for their patients, and because they realized that, if the patient became sick, this would mean more work without additional pay.
Nevertheless, patients suspected that if a doctor wasn’t paid fee-for-service, they would be short-changed. “Capitated care” began to disappear. People said it “just didn’t work.” Here the last of Ellwood’s bulwarks against high-cost, low-quality care crumbled. Now too many HMOs offer the worst of both worlds, focused on reducing care even as they adhere to a payment system that encourages high-volume, wasteful treatments.
Getting it Wrong
“It didn’t have to be this way,” lamented Ellwood in the 2001 interview with Time Magazine. HMOs could have kept their non-profit status. They could have looked to medicine and science as a guide in refining their coverage policies. But they didn’t—and now they’re paying the price.
With no effort to truly regulate and audit the value and coordination of care delivery, pay-outs on benefits have spiraled. A 2006 analysis by Price Waterhouse Coopers found that between 1993 and 2003, expenditures on health benefits grew at an annual rate of 7.2 percent. Premiums grew at essentially the same exact rate, 7.3 percent, meaning that insurers are barely able to keep up with the rising cost of providing health care.
The race to become giant for-profit, publicly-held corporations has also brought on new expenses. The bigger the business, the bigger the operational costs. According to the Kaiser Family Foundation, private insurer administrative costs per person covered rose from $85 in 1986 to $421 in 2003—a five-fold increase, and the fastest-rising component of health expenditures. When insurers became mega-corporations they took on a new set of financial burdens investing more and more in marketing, advertising and lobbying. And to lure Big Name CEOs to their Big Name Corporations, they began paying multi-million dollar salaries
With so much money sloshing around, HMO insiders faced a new temptation to cook the books. UHC, for example, currently has to pay a fine of $895 million to settle a lawsuit stemming from the company’s stock option manipulation. This sort of funny business—and the huge costs, both financially and in terms of wasted time and inefficiency—wasn’t part of Ellwood’s vision of a non-profit HMO industry.
Another unforeseen by-product of the corporate takeover of HMOS has been that, as insurers got bigger, they gobbled up their competitors. Today the private insurance market is highly consolidated. Paduda reports that, according to a 2006 American Medical Association study, “one health insurer has at least 30% market share in virtually all of the nation’s major markets…[and] in 56% of the markets studie[d by the AMA], one health plan has over 50% market share.” Further, “in one of five markets, a single health plan controls over 70% of the market.
In this context, there’s little incentive for insurers to compete in any real, meaningful sense—especially on quality. The market is mature; they can only tweak the margins, adjusting their costs. For folks who judge health care at the end of Excel spreadsheets, this means hacking away at spending on patient care, that most undesirable of expenses. Yet as we’ve established, the haphazard reduction of care is no way to manage costs in health care.
As a result, today insurance companies seem stuck in an enormous hamster wheel: unable to make the profits investors expect, without incentives to truly innovate, and unwilling to think beyond Wall Street’s very short-term view of success.
Little wonder then, that the resulting expensive, inefficient health insurance is becoming too much for employers to bear. According to the Economic Policy Institute, “6.4 million fewer workers had employer-provided health insurance in 2006 than in 2000.” Because insurers have failed to rein in costs (by not thinking about how they can truly “manage care”) employers are not getting a bang for their buck—and they know it. So they’re opting out of the whole thing. That’s bad news for workers, yes; but also for insurance companies. Their skewed priorities and inefficiencies are scaring away business.
But it’s important to note that the screw-ups of private insurers aren’t a condemnation of Ellwood’s original HMO model. As Ellwood said in 2001, it doesn’t have to be this way. In fact, “managed care”—as Ellwood presented it, and not as HMOs perverted it—is a great idea.
Indeed, Ellwood’s managed care is, in all likelihood, the future of health care in America. It’s what most of us realize we need: effective, evidence-based medicine. But after the debacle of HMOs, we’ll no doubt have to find a new name for it.
Niko Karvounis tracks the health care system for the Century Foundation. Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. A fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.
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