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What Good are Health Insurers?

Bill KramerAs the health reform effort moves into the final stages, everyone seems to be taking a whack at health insurers. Some of the insurers’ wounds are self-inflicted, such as WellPoint’s announcement of 39% premium increase for individual policies in California. Some of the attacks are calculated to build public support for health reform, since every good crusade needs a good enemy. Some of the criticism has even suggested that we don’t need private health insurers. Michael Hiltzik asked the question in a recent column “What do we need health insurers for anyway?” James Surowiecki – usually a careful and thoughtful observer of business and economic issues – said the following in a recent article in the New Yorker:

Congress [in its health reform bills] is effectively making private insurers unnecessary, yet continuing to insist that we can’t do without them. The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

Surowiecki goes on to comment on what the world would look like without private health insurers:

In fact, the U.S. already has such a system: it’s known as Medicare. In most areas, it’s true, private companies do a better job of managing costs and providing services than the government does. But not when it comes to health care: over the past decade, Medicare’s spending has risen more slowly than that of private insurers. A single-payer system also has the advantage of spreading risk across the biggest patient pool possible. So if you want to make health insurance available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

Not so fast. I would feel more optimistic that this would work if we had a different political system. One of the limitations of this approach is that Medicare’s spending is ultimately determined through the political process. The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector. The idea that Medicare has a “hammer” to force providers to accept lower payment rates is largely an illusion. In the current system, Medicare can do this only because there is a safety valve, i.e., a large private insurance segment that pays much higher rates to providers. If Medicare gets larger or replaces private insurance altogether, there will be less opportunity to use the safety valve, so providers will step up their efforts to use political pressure to increase payment rates in Medicare. I simply don’t see a strong countervailing political force that would exert sufficient political pressure to hold down costs.

Is there an alternative to this? Unless we change the U.S. political system by reducing the effect of money on elections and legislation, the best potential solution lies in healthy competition in the private market. In this approach, government has an important role in setting the “rules of the game” to ensure that the markets are competitive and will benefit consumers. The current Senate and House bills implicitly embrace this approach. For example, the insurance reforms prohibiting medical screening will eliminate “unhealthy” competition based on risk management. This should help to encourage “healthy” competition based on cost, service and quality. Another example is the creation of insurance exchanges, which should offer increased choice and information to consumers, thereby stimulating healthy competition. If the exchanges are allowed to grow over time, this could be a significant factor in bending the cost curve downward.

In this model, there is a very important role for private health insurers. As the successful insurers adapt their business strategies by moving from risk management to cost management, they will develop new approaches to paying providers to create incentives for efficiency and quality. Insurers may also become more selective in contracting with providers, by including in their networks only those who demonstrate the ability to manage costs effectively. And competitive price pressures may cause insurers to exert stronger negotiating tactics with providers. All of this is separated from the political process and thus more likely to be effective than a government-run effort to control costs.

To put it another way, the control of health care costs depends on the existence of a strong buyer. In the current system, buyers are in a relatively weak position vs. hospitals, physicians, and drug companies, especially in small or mid-sized markets where there are only one or two hospitals and consolidated medical groups. (A recent  article by Berenson, Ginsburg & Kemper highlighted the trend toward increasing concentration among hospitals and physician groups in California, leading to higher payment rates to providers.) Similarly, consumers are in a very weak position, since they are dependent on physicians for telling them what kind of medical care they need, and there is a lack of useful information to help consumers compare the price and quality of physicians and hospitals. Employers likewise have been relatively weak, since most of them seem unable or unwilling to become knowledgeable and effective purchasers. The government’s ability to be a strong buyer is limited because of the political pressures described above.

So who will be the bad guy and become a purchaser that is strong enough to balance the power of hospitals, physicians and drug companies? Although most health insurers haven’t been willing or able to exert pressure on providers during the past 10-12 years, they are probably the best candidates. They are already accustomed to being bad guys; it would be hard to damage their public image much further. And they have the mechanisms to have an impact: traditional tools such as utilization management, prior authorization, and physician profiling, as well as more progressive ones such as new incentive payment models, data analytics and feedback to physicians. If health reform passes, insurers in the exchanges will have to compete more on price, since the traditional tools of risk management will be taken away. Healthy competition among insurers will drive them to find ways to work with providers to hold down costs. From an overall policy and political perspective, it’s probably better to have the providers negotiating and sometimes fighting with private insurers rather than lobbying the government for higher payment rates. And some of the insurers might actually be seen as good guys, if they can develop constructive partnerships with providers to offer affordable, high quality health care.

In the end, there is a potentially important role for private health insurers in a post-reform world. Getting this right is hard and the results are uncertain, but it’s probably the best chance we have to design a financially sustainable health care system.

Bill Kramer is an independent health care consultant, focusing on health care management, finance and public policy. More information about Bill may be found at his website. You can read more of his commentaries on health care management and policy at his blog, “Now’s the Time”, where this post first appeared.

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AED CabinetsNigel WilliamsSome DudeDevon Devinejd Recent comment authors
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AED Cabinets
Guest

Whether or not we have health insurance right now, the reforms will bring stability and security we don’t have today.
This isn’t about politics. This is about people’s lives. This is about people’s businesses. This is about our future…

Nigel Williams
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Nigel Williams

Why not use prescription utilization data to control costs and prevent future adverse health events? Transparency, data, and memember engagemnent will help to REDUCE businesses healthcare spend. Two companies I have found doing wonders are http://WWW.WELLNET.COM and Healthcare Interactive……Genius!

Some Dude
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Some Dude

Here’s an interesting blog post. It’s a little rough around the edges, but the basic principles make sense.
http://empirical42.net/?p=134

jd
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jd

Nate, I don’t have time to address all your distortions, so I’ll just tackle two: 1. You ask for nations that control costs better than the US. The answer over the last 25 years is: every single developed nation. Here is a nice overview of the international comparisons. Note figure 27 in particular. The fact that many nations have health care costs increasing faster than GDP doesn’t matter. We are still worse than they are. They are still better, at least when you look at 1985 to 2002, and not much changes when you extend the analysis to 2010. 2.… Read more »

Nate
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Nate

jd, what version of accounting are you using? Medicare was suppose to be paid for by Medicare taxes, thus the huge “trust fund” with all the IOUs. Medicare was never to be paid out of the general account. What dedicated Military taxes are you talking about and what military trust fund is set up? I could go on put its pointless arguing against something that is that ridiculously wrong. I’m using the same accounting the CBA and accounts use, your trying some liberal made up logic doesn’t apply accounting I have never seen outside the lefts ideology. Curious were exactly… Read more »

Devon Devine
Guest

In those small markets with only one or two hospitals, there are also likely only one or two big employers. While momentum may be against employers as a point of aggregation, in this instance of small markets, the employer group may still have an important role to play.

jd
Guest
jd

Nate, by the same creative accounting, private insurance is underfunded by trillions of dollars and the US military is underfunded by trillions as well. I’m sure you’ll correct me if I’m wrong, but I gather you get that number by making very long term projections of costs and coupling that with very simplistic (and wrong) long term projections of dedicated taxes. You can’t just look at the dedicated taxes and judge Medicare wanting, unless you also use the same standard for the military. It certainly doesn’t pay its own way, but is in fact a massive anchor on our economy,… Read more »

Paul
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Paul

The whole framework of the debate is in error. Health is not a commodity that can be dispensed by government, though they are good at harming or killing people. Meanwhile the false choice of having health dispensed from big businesses or the government that is in bad with them every night is no choice at all. The reform that is needed is to rein in the reckless overuse of drugs in healthy people to treat lab values, the use of dangerous and unproven vaccines for everything under the sun, the screening tests such as whole body CT scans “virtual physicals”… Read more »

Gary Lampman
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Gary Lampman

The article revieled a important fact the needs further investigation.Perhaps A seat at this table for consumers would be what the Doctor ordered. “In the current system, buyers are in a relatively weak position vs. hospitals, physicians, and drug companies, especially in small or mid-sized markets where there are only one or two hospitals and consolidated medical groups. (A recent article by Berenson, Ginsburg & Kemper highlighted the trend toward increasing concentration among hospitals and physician groups in California, leading to higher payment rates to providers.) Similarly, consumers are in a very weak position, since they are dependent on physicians… Read more »

Nate
Guest
Nate

From the summary you would almost think James Surowiecki didn’t know Medicare was underfunded by 34 trillion dollars.
Shoplifting is a great way to pay for groceries and other needs, maybe we should embrace that to.

Lynn
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Lynn

Maryland’s all payor rate review commission has been successful in managing the balancing act between providers need for sufficient revenues and controlling rising costs of care for patients and payors in an open and public process. Private insurance companies protected from anti-trust actions have only limited incentives to manage costs from providers. Private companies will continue to hide “excess” reserves unless public policy requires some sunshine. One needs only to look at the experience in Massachusetts for the high cost special deals with certain insurance companies and selected providers to see what happens when trade secrets are protected, especially when… Read more »

Russil Wvong
Guest

“The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector. The idea that Medicare has a ‘hammer’ to force providers to accept lower payment rates is largely an illusion.” Is this a weakness unique to the US political system? Here in Canada, our experience with single-payer and cost control has been pretty good. There’s certainly pressure to increase health care funding (my subjective impression is that it’s from the public… Read more »