On the Morality of Insurance Premiums

As CVS-Aetna merger talks fill the air this Christmas season and experts weigh in on the impact this will have on the economy and consumers alike, I’m sitting at a little desk in a little office contemplating health insurance.

I run a little shop that’s about as far from CVS-Aetna as you can get in the health care space : a solo practice doctor with four full time employees and revenues a little south of $65 billion dollars.  I shouldn’t feel too alone.  Small businesses account for 99% of US firms and employ almost half of all private sector employees.  But knowing my problem is one shared by many provides only partial solace.

Prior to arrival of the ACA, I provided health insurance to everyone through the company.  At the time I had 3 full time employees and the insurance broker I worked with got me a quote for $1300 / month.  Now, I really didn’t want to be in the providing healthcare business, so when the ACA arrived with its individual market I was happy to facilitate buying health insurance from the exchanges.  So initially, I chose to pay for my employees plans on the individual market.  I was quickly told by my accountant that paying for my employees insurance in this manner was running afoul of a three letter entity of the federal government called the IRS.

Apparently the individual ACA market premiums were allergic to being deducted in this pre-tax manner.   Fine.  So I went ahead and paid each employee $6000 per year extra with the understanding that they would use that money to buy health insurance on the individual market.

Thus, the ACA experiment began with me as willing participant.  Unbeknownst to me one of my employees actually bought a non-ACA plan for her family that was fairly cheap – a few hundred dollars a month for a plan that included her spouse and a child.  Unfortunately, an unplanned pregnancy and complications after the pregnancy that required multiple ER visits and hospital stays meant that the $6000 deductible very much came into play.  Riding to the rescue, of course, was the ACA, which allowed enrollment outside of the enrollment window for life changing circumstances.  Having a baby was one such life changing circumstance.  So into the more expensive, but now worth it, ACA plan the family went.

Everyone was happy until the following year.  Fueled, in part, by Swiss cheese enrollment windows, insurance premiums  meteorically rose.  My nurse fumed about paying $300 per month for a bronze plan $6,000 deductible that he never came close to using.  I promised everyone I would look at trying to buy health insurance through the company again.

And this is why I’m sitting at my little desk in my little office trying to figure out what the best thing to do is.  The former insurance broker is now non-responsive for some reason.  Going online I found some options through Independence Blue Cross and United Health but these still seemed to be fairly expensive.  I reached out to another insurance broker – who promptly showed up at my office with quotes from Independence Blue Cross that were exactly like the ones I had found online!

Me: “Are these the only options?”

Insurance Guy: “The only good ones..”

Me: “United?, Aetna?”

Insurance Guy: “They’re basically the same, but IBC is the best”

Me: “Why?”

Insurance Guy: Unintelligible mumbling

Me: “What about non-ACA plans?”

Insurance guy: “I don’t really sell those.. ”

I asked about non ACA insurance plans because I knew that part of the reason ACA plans were as expensive as they were was because these plans were required to provide a wide variety of minimum essential health benefits that raised the underlying actuarial value of the plan.

An online search brought me plans that were roughly one half of what the ACA plans were asking for with a wide network of coverage, and a similar deductible.  Excellent!  The only problem – there’s a penalty for not having an ACA plan.  The IRS enforcement of this happens by them asking you to check a box when filing your taxes affirming participation in a qualified health insurance plan.  Technically the ACA allows levying a penalty of 2.5% of your yearly adjusted gross income (this is capped at the national average total premium of a bronze plan).   The IRS has not – to date- apparently enforced the penalty, but has recently threatened to do so for those leaving the health care checkbox blank.

Complicating matters even further, the most recent tax bill passed by the House Republicans makes the tax penalty for not having insurance zero, and the Senate Republicans repeal the individual mandate altogether.  The final details are planned to be worked out by Christmas – 10 days after the Obamacare enrollment deadline passes.

I still haven’t decided what to do, but I do find it interesting that as I puzzle over buying or contributing to my office families health insurance, some of my illustrious colleagues have taken to the pages of some even more illustrious journals to bleat about the immorality of the current health/tax policies being passed at this very moment.


The ‘immorality’ ostensibly refers to the recent tax reform bill that steals health insurance from the 99% to give a tax cut to the 1%.  I scratched my head at the stealing health insurance line, and so should you.  This references doing away with the individual mandate.  Apparently, if you don’t force people to buy health insurance on the exchanges – some people will choose not to buy health insurance.  In all the years I parroted the talking heads about the inhumanity of the 45 million uninsured prior to the ACA, I never stopped to think that many in that group had about as much interest in buying health insurance as my younger child has in eating broccoli.

The problem, I am told, is that not having health insurance with a $6000 deductible is the equivalent of base  jumping with a squirrel suit off a cliff.  Not eating broccoli is apparently slightly less dangerous. To hear the oracles from high castles tell it – the millions that won’t get health insurance because they no longer have to, will die in massive numbers.  It is an interesting position to take because the very same oracles bemoaning the mass graves that will need to be dug to accommodate not having access to health care also bray the loudest about the avalanche of unnecessary health care the populace receives that also necessitates the digging of mass graves.

Are the group of folks that are desperately attached to the ACA with its mandate for expensive plans on the side of all that is good in the world?  Are folks like me that are hoping for the individual mandate to be gone to make it cheaper to provide health insurance to my employees worshipers of Satan?  Is it worth mentioning that many of the physicians supporting transfer of the nation’s wealth to insurance companies are employed by medical centers with much to gain by keeping the status quo?

There is a debate to be had about the best way to provide health care to all Americans.  If you believe the solution to spiraling health care costs is to strengthen the individual mandate – go ahead and make that case.  I’m all ears.  But a word of advice: If someone brings up morality in a debate about health care policy – don’t get outraged, offer to feed them some grass instead.

Anish Koka is a cardiologist based in Philadelphia. His posts appear regularly in THCB.

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17 replies »

  1. Steve2, thanks very much for your very interesting and informative response. It sounds like you have a very sound and comprehensive plan for turning these small hospitals into better and more satisfying places to work for staff which should also result in a better experience for patients as well including, probably, better clinical outcomes.

    It’s not easy to change the culture of an organization but I’ve seen it done successfully numerous times during my 40 year career in the money management business. It generally needs to be led from the top. Goals and expectations need to be clearly defined and articulated. Capital investment to modernize the place will be a huge help and clear evidence that good things are happening. Employees, especially those in leadership positions, who can’t or won’t adapt to the new culture after being given reasonable time and opportunity to adjust need to be removed from the organization. For hospitals, I also think nurses and techs need to feel empowered to speak up when they see something wrong, especially in the OR, and perceive that management will have their back if they do so.

    One thing I wonder about though is even if you execute your plan flawlessly, how does a hospital make money at less than a 20% occupancy rate? Can you attract more patients who may now be traveling farther to bigger hospitals for care? Do you plan to just let your more profitable bigger facilities subsidize the small hospitals? Are there enough good doctors willing to staff rural hospitals and raise their families in rural communities which have a lot less to offer in terms of lifestyle than big cities and suburbs and do you need to pay a significant compensation premium vs. what they would be paid in the more urban areas despite MUCH lower housing costs in the rural towns?

  2. Barry- They both have occupancy rates of under 20%. OR utilization rate is 18%, with a cancellation rate of 17%.

    What will we bring? Don’t underestimate the importance of capital. It is really demoralizing to work in a dump. Just having functional equipment and basics like hand sanitizers will help loads. Next we will bring process and personnel. These small places that are failing all have bad process, often centered around poor personnel. They are desperate to recruit and keep any staff possible, so they put up with bad behaviors. At a recent culture of safety lecture I think they called it something like normalizing down deviant behavior. So, bringing in process that works, bringing in an experienced leader or two, and finally giving them the wherewithal to get rid of bad actors is key. AS one staff member told me, “you kind of know what we are doing isn’t quite right, but you get used to it and work with it.”

    We will upgrade all of the hospital based services, and that will allow us to bring in better providers that will make the place financially successful. Fixing Radiology, the ED and Anesthesiology is key. The ICU always needs attention.

    We won’t fire that many people. Most of the ones we actually will fire are on our “list”. We have a list that says this person was fired, never hire them again. There is a hierarchy of hospitals. Some people start at the bigger, more urban hospitals. When they fail they go to a smaller, less urban hospital. If they fail there they go even more rural. We are going to have to fire some people who have been fired multiple times before from other places. However, we are mostly going to offer people positions at our other facilities, and not just hospitals.

    Records and billing. They are nearly all on paper. They have little reliable data on what they do. Talked with our network quality person and realized that what we found was sometimes troubling, but not really clear if we had an accurate picture. Even in areas that appeared to have good outcomes, they were very expensive. Adding and upgrading IT will have a huge impact.

    Finally, and this is so nebulous but so true, we need to change culture. If we can get people to care, to work together to allow people to actually provide good care (which is really what most nurses really want just as an example) we will win in turning these places around.


  3. Very interesting…way over staffed yet capital poor. Where are the drivers for efficiency and quality improvement?

  4. Steve2, I’m curious what the average inpatient occupancy rate averages at your small rural hospitals. I was under the impression that critical access hospitals with 25 or fewer beds especially often have comparatively low occupancy rates but are the only hospital for many miles around. It’s hard to believe that they are just employing as many people as they can get away with to maximize local jobs while starving their physical plant of investment.

    Also, could you add some color around what your system is offering them besides capital to bring their facility up to date, especially in the OR’s, and central docs working with NP’s on the opioid crisis both of which are undoubtedly important and desirable. Will you be significantly cutting staff after you take them over and, if so, where?.

  5. We are taking over three more hospitals. Two are very small, and one is just regular small (100 beds or so). One thing we have seen at every place we have taken over is they are over staffed. A lot. In many of these communities hospitals serve as jobs centers. They maintain staffing at all costs. They become capital poor and cannot maintain themselves. I cannot begin to describe how bad conditions are in some of these places. Our ORs and wards in tents and pre-fabs in the middle the desert were better off than some of what I have seen. (Not being 100% sure that this is totally anonymous, I will refrain from saying how bad things really are at these places. Not sure many would really believe it anyway.)

    So, while I am skeptical about one big city hospital taking over another and achieving any economy of scale or efficiencies, once you leave the big city and get into rural areas there is desperate need for what larger hospitals can offer.

    Also, let me point out that NPs really do save money sometimes. Our smaller rural hospitals have really been hit with the opioid issue. They need help, but can’t really afford a full time doc. So we are training NPs to work as “circuit riders” with a central doc at the big hospital working with them. They do great work at a much lower cost.

  6. I hear you Anish. A relative’s wife works as an NP in an Eastern PA hospital. She makes somewhat more than $120K including bonus for ten 12 hour shifts per month. Hospitals all complain that Medicare doesn’t pay them enough to cover their full costs and Medicaid pays even less. The system only works as well as it does for hospitals because there is still a significant commercially insured sector to shift costs to. The single payer folks don’t quite get that in my opinion.

    Out of curiosity, how much in salary can solo docs like you in the Philadelphia market afford to pay an NP and sustain your business model? Also, could you and your fellow physicians make an acceptable living if you had to accept Medicare rates from all patients?

  7. As you allude to, I don’t believe hospital labor costs are that ‘fixed’. Staffing in hospitals has increased markedly, and I’m not clear what we’ve gained for it. But there’s no real pressure on hospitals to work more efficiently as long as they continue to get big $$$ from commercial payers. Part of the reason it is so hard to compete with large hospital systems is that they – as one example – can pay their ancillary staff a lot more than I can.. I continue to be bewildered at the number of nurse practitioners in the hospital that have come to be in the last decade. I would love to have a nurse practitioner, but I can’t pay the $120k salary being offered in hospitals…

    I have a half written column that I abandoned b/c it seemed like I would offend everyone I work with… The healthcare slowdown,when it comes, will be painful – I take no pleasure in what that will mean for me or the many good folk employed as a result of this bubble

  8. Anish, people who have been around healthcare and health insurance for a long time tell me that part of the early history of Blue Cross in the late 1920’s and 1930’s was that it was intended to be a funding mechanism for hospitals as well as to provide affordable health insurance for their insured members. Of course, back then, there wasn’t nearly as much that medicine could do for us patients as there is today but the mentality continues to persist at least to some extent.

    One of the things that I really like about UnitedHealth Group’s strategy of getting deeper into providing healthcare as well as health insurance is that it will gain considerable insight into what it actually costs to deliver high quality care in an urgent care clinic, an ambulatory surgical center and in physicians’ offices. They do not seem to have any interest in owning hospitals, at least so far in the United States.

    One of the big problems facing hospitals is that they are saddled with high fixed costs, especially for labor, and there are surprisingly few economies of scale. Two of the big for profit chains, Tenet Healthcare and Community Health Systems are struggling financially and are burdened with a lot of debt. The recently announced combination between non-profit systems Ascension Health and Provident Health is probably more about market power against insurers than cost reduction. We will see how that plays out.

    The long term secular trend is toward fewer and fewer hospital inpatient beds per 1,000 people. I think the national average is now down to about 2.9. Shortly after World War II, it was 10. That all said, I don’t understand why academic medical centers can’t be fully compensated for their medical education and research missions with a separate pool of tax dollars rather than having to build much of those costs into what they charge patients and insurers for the care they provide.

    With respect to exposing patients to more of the actual cost of care and the notion of catastrophic health insurance plans, both sound good in theory and when you say them quickly. The problem is that while I can easily afford a $10K or even a $20K deductible, lower income people can afford relatively little in the way of out-of-pocket costs. Perhaps catastrophic insurance plans would need to be supplemented by medical stamps that would help people cover their healthcare costs inside the deductible. A reasonable balance would have to be struck to minimize moral hazard.

    I’m optimistic that over the longer term, medicine will make strides in extending health span as opposed to life span which means that people will spend fewer months and years sick and needing expensive care. At the same time, technological advances from self-driving cars to robots to specialized equipment will make it possible for people with health challenges to continue to live independently longer than they can now which implies lower or at least flattening costs for assisted living and skilled nursing facility care. One of the holy grails in healthcare would be finding a drug that could either cure Alzheimer’s disease or at least significantly postpone its most debilitating effects. I think our society is going to find innovative ways to fix the healthcare cost conundrum eventually.

  9. Great comment. Part of the problem is everyone is on an island and not speaking to each other.

    You’re right – premiums are cheaper b/c the actuarial value of the plan offered is lower for the number of reasons you’ve outlined. My general problem, though, is that as the ACA is currently realized, the plans are inordinately expensive for basically catastrophic only coverage.

    Healthcare is available at lower rates without insurance.. CT/MRI’s for $400.. $4/month/pill for the vast majority of meds. The best way to tamp down overuse, and wasteful care may very well be to expose patients to these exorbitant costs. Would the family for NH patients/or the patient agree to PT if there wasn’t some 3rd party mindlessly paying.

    I don’t think the insurance folks are bad people, but it seems to me that they are in part responsible for the mess because they are supposed to negotiate prices for us. If they’re paying 3x the cash rate for a CT scan to hospitals – don’t they bear some responsibility? You want providers to just unilaterally charge less… I don’t think thats going to happen without pressure from payers. Anthem said it wasn’t going to pay for CT scans done electively at hospitals… there was a hue and cry from radiologists/hospitals/pt. advocacy groups – and anthem recently caved somewhat. That’s bad..

    You’re happy with car/home insurance – because its affordable without some massive taxpayer subsidy hiding the real cost of care. Same can’t be said for healthcare. An individual mandate forces folks to buy a certain product, and does nothing to tamp down the cost of care. So yes, I’m opposed. If you want to do that, you need price controls on the other end, otherwise it just makes everything worse. Not the system I would like to live in for a number of reasons, but at least that would make sense. This push to be forced to open our wallets for healthcare we both agree is overpriced makes no sense.

  10. Anish, I suspect that those cheap insurance plans you are referring to are called short term medical plans which are underwritten products for which an applicant must requalify every year. They are only sold to healthy people. That’s one reason why they’re cheap. The other is that they don’t cover maternity, mental illness, alcohol and drug abuse rehab and probably chiropractic care. Prescription drug coverage may also be limited to generics or expensive specialty drugs may not be covered. When healthy people buy these cheap plans and then transfer to an ACA plan after they get sick they are gaming the system and classic adverse selection results. Are you suggesting that people should just be able to wait until they get sick to buy health insurance? No insurance works this way. Try buying homeowner insurance after your house burns down or car insurance after your vehicle is totaled in an accident.

    As for the single payer approach, Medicare spending, including the Part B and D premium as well as IRMAA surcharges, already costs roughly $12,000 per year per person. By definition, of course, Medicare is paying for services, tests and procedures at Medicare rates. The experts tell us that the over age 65 population uses roughly twice as much healthcare per person as the under 65 population which includes millions of children who are, for the most part, cheap to cover. Thus, that implies that it would cost $6,000 per capita annually to cover the under 65 population at Medicare rates.

    I find it interesting that when it comes to health insurance, people feel ripped off if their health insurance premium exceeds their healthcare claims. By contrast, I haven’t had a claim on my homeowner insurance policy in over 44 years. I don’t feel ripped off. I feel lucky. The same is true for auto insurance. A year without a car accident is a good year and I don’t mind paying an insurance company a reasonable premium to protect me in case I have an accident.

    People can’t expect to be able to wait until they get sick to acquire health insurance. If you don’t like the individual mandate, what do you suggest instead? Maybe a requirement to show you had creditable insurance coverage with no more than a 63 day gap in coverage to acquire a new policy without being subject to underwriting. Maybe there should be a requirement to pay an additional 1% in premium forever for each month that you didn’t buy insurance when you could have and should have. That’s the way Medicare Part B works.

    If you want to see lower health insurance premiums, we need lower healthcare costs. Our litigious society drives the medical specialty societies to develop practice patterns that reflect that litigation risk. Extra tests just to be sure drive up costs. Hospitals are expensive places to get care. Maybe more surgical procedures can be safely done in ASC’s at half the cost that hospitals are typically paid. There’s lots of futile and expensive care at the end of life much of which the patient may not even want but can no longer communicate that fact. Nursing homes provide unnecessary physical therapy to drive up revenue for the home, not to benefit the patient. There is plenty of fraud in both Medicare and Medicaid. Specialty drugs cost way too much in many cases based on reasonable QALY metrics. While there is no silver bullet to fix healthcare, there are lots of silver pebbles. Insurance companies are not the problem. Healthcare costs and healthcare claims are the problem.

  11. I prefer the concept of institutional codependency that exists between the large payers and the large medical centers, aka, medical schools.

  12. The well intentioned bureacrat gave the keys to large groups/insurance co. . I’ve said in the past – insurance co. (all well intentioned I’m sure) are poor stewards of your wallet. Perhaps, Peter, we should stop giving power to any of these folks. Most of healthcare can be taken care of w/o a 3rd party in the middle. I’m open to having the ability to have a catastrophic plan that everyone should buy into. I’d also be open to having those below a certain income threshold be given the dollars (we currently give to private insurances (managed medicaid) ) in an HSA that can take care of most of their needs. THere are plenty of dollars in the health care space flowing everywhere but to the patients and the providers that are trying to take care of them.

  13. “I have no interest in giving well intentioned bureaucrats control of the entire health care system.”

    Are you happy giving control of the entire system to the insurance industry, because that’s who your dealing with now – ACA or not?

    How skinny a plan? Your example showed that predicting future need is not vary predicable (pregnancy), and ironically a government policy bailed her out. It’s been argued that why should men be forced to pay for women’s pregnancy, even though they are one half of the outcome.

    We all pay one price (based on property) for education, kids or not, 5 kids or one – seems to work OK, although it would be fairer if based on income, as health care should be.

  14. I can only deal with the ACA as presented. As noted, I was a supporter- seemed like a good idea – it just fails practically as I’m showing.

    There is no option to pick skinnier plans… which may help in trying to entice ppl to buy in. Where we sit right now, the individual mandate to buy a bronze plan is a barrier. Skinny plans to be had that consumers are ok with for cheaper in the market outside the ACA.

    Given the mess the ACA turned into – the transfer of dollars to insurance co and large providers – I have no interest in giving well intentioned bureaucrats control of the entire health care system. (Which doesn’t mean it won’t happen)

  15. You’ve just learned that health insurance is about the math of risk and coverage. The larger and more diverse the pool, the lower the risk, the more things covered, the more expensive the plan. There’s no free lunch or magic plan, either ACA or non-ACA.

    Reducing coverage for an individual to save money means THAT coverage is more expensive for the other guy needing it.

    Single-pay with 350 million people in the pool spreads the risk and means we all contribute. Single-pay also means a better chance at price controls.

    You’re quibbling about insurance costs for four employees with $65 billion in revenues – really?

  16. 1. The 1300 included me. So it was about the bronze plan but without the high deductible and it was pre-tax.
    2. The upside of having the employees feel what the premiums actually cost by giving them a fixed amount and having them pay was they became more discriminating shoppers. So yes , 300 x 12 < 6000.. but folks paying 300 would rafter pay less and keep even more right?

    3. Appears mental health , maternity is not covered, but otherwise hard to say what isn’t being covered that matters

    4. Clarify ?

  17. “My nurse fumed about paying $300 per month for a bronze plan $6,000 deductible that he never came close to using. ”

    300 x 12= 3600

    “So I went ahead and paid each employee $6000 per year extra with the understanding that they would use that money to buy health insurance on the individual market.”

    6000-3600= 2400

    ” At the time I had 3 full time employees and the insurance broker I worked with got me a quote for $1300 / month. ”

    1300 /3= 433

    1) Your nurse is making $2400 in profit on this deal. ( I am assuming you mean here by never came close to using that he is healthy and not really using the insurance.)

    2) The bronze plan is $133 cheaper per month than what you were paying.

    3)”An online search brought me plans that were roughly one half of what the ACA plans were asking for with a wide network of coverage, and a similar deductible.”

    I kind of have to assume they also have limits on what they cover, so how do you not end up in the same place where the first nurse in your story ended up if you go with these plans?

    4)” This references doing away with the individual mandate. ”

    And doing away with Medicaid coverage. (It also means that costs will rise quite a bit. Perhaps you have a solution to the free rider problem?)


    (Every year I have to look at plans for the 100 or so people we employ. If there is anything you learn from doing that it should be, if it is to good to be true, something is wrong. Since we are right outside Philly, we probably deal with the same insurance products. Our brokers have steered us away from the products you are talking about, but maybe they are wrong. Which insurers are we talking about here? Blue Cross? Aetna?)