The Facts About the Health Insurance Industry
by Jeoffry B. Gordon, MD, MPH
Sun Jun 07, 2009
Most people are unaware how similar the major health insurers are to our failed Wall Street firms.They are corporate cash cows and have virtually no fiduciary responsibility and few activities for protecting or improving health or the health care system.They will devote their vast resources to prevent any meaningful health reform. They have controlled Congress and the mainstream media. The only cure is vigorous popular support for a single payer, Medicare for All reform.
This is a discussion about the huge and looming crisis in our nation’s health care system and the need for a radical paradigm changing reform. Because the issues discussed below necessarily involve a politically difficult restructuring of a large and well establish sector of our economy, the breadth and details of this reform have so far has been largely excluded from public policy discussions and debate. AHIP — American Health Insurance Plans — representing the private, for profit, health insurance companies and their partners had their annual national convention in San Diego, California this week. They are the association of all the major health insurers in the United States and their lobbying clout is unsurpassed. Major public political leaders of both parties, men like Jeb Bush, Dr. Howard Dean, and Tom Daschle attended.
As a practicing family physician who has been seeing patients since Medicare was started I can tell you what really ails our national health system. Making the correct diagnosis is important. Yet those in Washington — both in the White House and in Congress - both Republicans and Democrats — and the national media - are eagerly avoiding the right diagnosis and thus preventing public discussion about the necessary cures. As you all know if we don’t make the right diagnosis the disease will not be cured and the patient will not get better. Today the biggest barrier to improving our health care system in the United States is the private health insurance companies. They are the disease we suffer from. The best, and perhaps the only, public policy cure that will work is a single payer, Medicare for All, health care financing program. Yet due to financial power of the health insurance industry, their great financial lobbying clout, embarrassingly our elected officials are doing everything they can to avoid the current golden opportunity to create a single payer system.
I want to make only three main points:
1. The individual insurance companies are out for profit and must work to maximize their value on the stock market and not our friends. They treat patients like widgets or cost centers. This is not a culture of trust, caring, compassion, and fiduciary responsibility. If you were dumb enough to hope that Countrywide Mortgage would preserve your home and Lehman Brothers would preserve your retirement fund, then you will be stupid enough to expect Anthem Blue Cross and the other insurance companies to be there to protect your health. Yet it seems all Washington continues under this delusion.
2. The employer based private health insurance industry has been created by us, is hugely subsidized by public policy and public money and is expensive, inefficient, costly , and a structural barrier to a healthy America. It needs to be eliminated.
3. The only cure for our problem is a single payer, national, universal, health financing program like Medicare for All. This is not socialized medicine, but an efficient way to pool risk and share the unexpected costs of illness. Fifty percent of our population has virtually no medical expenses while five percent consume 25 percent of all personal medical care costs. This why we need the insurance principle: unexpected medical expenses are relatively rare and can be huge and should be spread across the whole population. Financial costs related to illness cause over 50 percent of personal bankruptcies in the United States. Over 46 million Americans are rationed out of the medical system (and during this economic catastrophe this number is growing by 10,000 people per day) 46 million people are subject to excess morbidity and mortality because they cannot afford financing and the insurance industry cannot profit from them. Health insurance is important and necessary. We need an efficient, national, publicaly sponsored, universal health financing system. This is the only treatment that will be a cure.
First, let me dwell on the track record of an individual insurance company, specifically United Health Plans. United Health Group is America’s largest health insurance company. According to their 2008 annual report United has 75,000 employees, insure 29.1 million Americans directly and cover up to 78 million people, contract with 650,000 doctors and 5200 hospitals. Their insurance programs include: a government subsidized Medicare Advantage program called Secure Horizons, a Medicare Part D prescription program called Prescription Solutions, and they have an exclusive arrangement with AARP to offer a Medicare supplement. The company has a subsidiary, Ingenix (remember this name) which provides “actuarial data, claims management services, and health intelligence” in 56 countries and in the USA to 6000 hospitals, 240,000 MDs, 1500 health plans, and 250 government agencies.
In 2008 United Health had total revenues of approximately $81.2 billion ($75.9 billion from health insurance and $1.6 billion from Ingenix) and their 2008 net revenue was $5.2 billion from health insurance. (This profit was in essence moneys diverted from health insurance premiums paid by government, individuals and employees to obtain medical care even after the company’s huge administrative costs are deducted.) They had an additional $229 million profit from Ingenix. According to SEC filings during our current economic and health care crisis their 2009 first quarter total revenue went up 8% to $22 billion and their net profit was $984 million. According to the company’s own report they have a medical loss ratio of about 80 per cent - that is, of collected premiums they spend only about 80 % on actual medical care, that is we loose 20 per cent of the money we pay them to their overhead and profit.
Some recent corporate history with you will demonstrate how far their corporate culture is from taking care of the sick and disabled. In 2006 The Wall Street Journal reported that company executives were back dating their stock options. Because of the ensuing scandal in October 15, 2006 company President and CEO William McGuire, who usually made between $60 and $120 million a year was forced to resign but he took with him the largest golden parachute ever paid, a compensation package estimated to be $1.1 billon. He was subsequently forced to pay back to the SEC $468 million in refunds and $7 million in penalties.In 2008 the net realized profit of the United HealthCare Group fell 36 per cent from 2007 — from $4.65 billion in 2007 to $2.98 billion in 2008 due to legal costs. In 2008, an investigation by New York State Attorney General Andrew M. Cuomo found that Ingenix and its parent UnitedHealth Group defrauded consumers and providers by manipulating its database used to quantify reasonable and customary medical care provider rates to make them remarkably lower than the actual cost of typical medical expense. This provided health insurance companies over the past 15 years the means to inappropriately lower payment of provider claims, thereby increasing the insurance companies’ profits and often leaving patients to pay the difference. The company paid a $50 million fine and set another $50 million aside to revamp its data system as an external organization under non-profit public supervision. In 2008 United Health paid another $895 million in legal and settlement costs in two other class action law suits, the major one brought by CALPERS retirement fund over the stock option deception. In addition, on January 15, 2009, UnitedHealth Group announced a $350 million settlement of three class action lawsuits filed in Federal court by the American Medical Association and others for not paying claims for out of network medical services to their patients. Anyone can easily see that the management of this company has no sense of public fiduciary responsibility and has focused major resources on making profit and manipulating the financing of health care. It is a real stretch to imagine that the same board of directors and top officials, so caught up in these huge illegal money grabs would really be interested in paying attention to my patients’, and your family’s, and our neighbors’ sickness and pain or in any remediation of our health care system’s problems.
In addition it is important to mention AARP — the AARP that supported the poorly designed Medicare Part D which became very profitable to insurance companies due to its mandated subsidies. The American Association of Retired People have an exclusive contract with this same United Health care to sell their health insurance policies. Do you know that AARP’s annual budget is over $1 billion a year and over $700 million of that comes from fees for selling insurance products. Some of these products are total rip offs as was recently revealed by our conservative Republican Senator from Iowa, Chuck Grassley who sent AARP a searing letter dated November 3, 2008. It embarrassed AARP and forced them to withdraw from the market several scandalous products (Essential Health Insurance Plan and Essential Plus Health Insurance Plan) developed by the United Health Group and sold by AARP to 44,000 people. You will note that AARP is always invited to the public policy table and the hearings to contribute to major political discussions about health care reform. This is totally inappropriate. AARP is part of the problem and not part of the solution. It is nothing but an insurance broker disguised as an advocacy group — and they will never take on the health insurance industry. AARP will represent the insurance industry rather than the public welfare in discussions about health reform.
Now examine the health insurance system as a whole: It should be obvious that the only functional purpose of the insurance company is to collect money (premiums) from one set of folks (people/patients) and pool it and then pay it to another set of folks (medical providers). Other than acting as a bank, there is NO value added. All the rest is expensive smoke and mirrors: marketing, false consumer choices, medical rating, care management — all of which they do poorly and very expensively. In fact, all these expensive activities are designed to either maximize profit or to be a window dressing rationale for their profit. Furthermore, the health insurance industry itself and its egregious expenses and profits are virtually wholly a creation of tax payer subsidy and 70 years of one sided industry supportive legislation. Federal programs such as Medicare, Medicaid, the Veteran’s Administration, Crippled Children’s Services, SCHIP, and the Ryan White Act take huge numbers of potentially expensive or chronically ill Americans out of the pool of privately insured people, allowing these private firms to cherry pick the most affordable enrollees.
Few people remember that the first private health insurance companies like the original Blue Cross and Blue Shield were not for profit entities with some charitable purpose. In 1944 FDR’s attorney general charged the South-Eastern Underwriters Association, an insurance company, with anti-trust price fixing. The case made it all the way to the Supreme Court, where the insurers made the audacious defense that they could not be regulated under the Interstate Commerce Clause of the Constitution because they were not a business, not “commerce.” The insurance company lost, but within a year their lobbyists took their revenge. In 1945 the McCarran-Ferguson Act declared that “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for regulating the business of insurance…” This why we are stuck with the relatively fragmented and impotent state attorney generals and 50 state agencies to regulate the massive corporate businesses represented by AHIP. (It takes a creative and powerful attorney general like Andrew Cuomo of New York to have an impact.) Since then and along the way the insurance lobby has had its way with state legislatures. First, the health insurance companies were allowed to give up community (a geographic standard) rating for medical rating (an individual disease history standard) — so they could increasingly exclude potentially expensive patients and secondly, not for profit health insurance companies were allowed to become for-profit so their companies and enrollees could be cheaply acquired by the expanding for-profit corporate giants like United Health care. In this process, over the last 65 years, the health insurance companies have long given up any semblance of being service organizations. They became the disease in our health care system. Now we have to deal with massive powerfully oligopolistic insurance companies. In February, 2009 the US GAO surveyed the small group health insurance market. They found “The five largest carriers in the small group market, when combined, (had)…three-quarters or more of the market in 34 of the 39 states…and they (had)…90 percent or more in 23 of these states.”
Each health provider has to deal with potentially 1500 different insurance companies, each with their own care rules and payment querks. In my office I regularly deal with about 40 payers. A study published just last month in HEALTH AFFAIRS, demonstrated that “billing and insurance-related functions” cost each FTE physician at least $85,276 a year (or about 10% of gross revenue) in time and staff. In the last 30 years the number of health system administrators has grown by 3000% while the number of physicians has grown 300%. In the past 9 years workers’ pay has grown 29% while the cost of health insurance net of administration has grown 75% and the net cost of health insurance administration has risen 106%. This year per capita health expenditures in the United States will approach $8000 a year or about 17 % of our GNP. A study by an international management consulting firm demonstrated that on an internationally adjusted comparative basis annual health care spending for each person in the United States is over $2000 a year more than would be econometrically appropriate given our nation’s wealth. This added expense is almost wholly due to the costs of the private, for profit health insurance system and adds no value. The bottom line is that the private, for profit health insurance companies divert on the order of $350 billion of insurance premium money from medical services. This is a sum which approaches the size of the peacetime Pentagon budget. Single payer reform will reallocate these moneys to care for the uninsured.
In order to understand why single payer reform has not been given a fair hearing in Washington I want to detail the power of AHIP. In 2008 alone they gave $36,695,680 to Congressional candidates - $17,493,170 to democrats and $19,128,523 to republicans. Senator Baucus, chairing the health reform hearings at the Senate Finance Committee, has raised $11.4 million from 2005 through now. Of this about $500,000 came from insurance companies, $500,000 from pharmaceutical companies, and $500,0000 from health professionals. This is why two weeks ago my concerned colleagues from the California Nurses Association and Physicians for A National Health Program had to disrupt the order of his hearings to point out he was ignoring the single payer reform option.
It is important to understand why a “public health insurance plan” created to “stand beside” existing private health insurance plans does not provide a cure. This proposal is based in part on the experience in Massachusetts. The current Massachusetts universal coverage health reform plan is being looked upon as a model for the nation. It has had some success, yet it cannot and must not be used as a model for national reform with a “stand along public health plan” option. The Massachusetts model relies on government subsidy directed through the private health insurance carriers. There are three important observations here:
1. A 2007 study sponsored by AHIP reviewed prior experience with this type of reform model in 8 states in the 1990s (Kentucky, Maine, Massachusetts (in 1996), New Hampshire, New Jersey, Vermont, and Washington). They found that “in general…, individual health insurance markets deteriorated.…Often, insurance companies chose to stop selling individual insurance in the market.…Enrollment in individual insurance also tended to decrease, and premium rates tended to increase, sometimes dramatically…(And) we did not observe any significant decreases in the level of uninsured persons following the enactment of these market reforms.” The result was that all these reform programs failed and went out of existence.
2. Even with state government subsidy and leverage on premium charges many residents are excused from the “universal” program because they cannot afford the premiums. Many others are faced with unacceptably high and unaffordable copayments, deductibles, and benefit limits built into the approved insurance plans.
3. The program is totally dependent on the private insurance companies and there is no cost and minimal quality control mechanisms built in. The state of Massachusetts is thus currently facing a huge and perhaps intolerable budgetary deficit.
Finally, the cure is conceptually simple, but admittedly politically difficult. If the disease is an expensive and dysfunctional private, for profit health insurance system, the only possible cure is a single payer, Medicare for All reform. This option must not only be on the table, but must be passed into law. Our elected representatives must be supported to have the courage to objectively evaluate its benefits, and then given the backbone to pass it. This option already exists in the detailed legislative form contained in HR 676 by Congressman Conyers and already endorsed by 70 Congressmen and women. It contains five simple to understand solution components:
1. AUTOMATIC ENROLLMENT — Everyone receives a card assuring payment for all needed care by any willing licensed provider. This would eliminate the need for expensive marketing and sales campaigns and the broker system. Universal coverage will also shrink the need for workman’s compensation insurance as well as medical malpractice insurance.
2. FREE CHOICE OF DOCTOR AND HOSPITAL
3. DOCTORS AND HOSPITALS REMAIN INDEPENDENT and negotiate fees and budgets with public agencies. This is not socialized medicine.
4. A PUBLIC AGENCY PROCESSES AND PAYS ALL BILLS. This should massively cut the administrative overhead drain generated both by insurance companies, by employer HR departments, and by medical providers from the order of 40 % of costs to 10% of costs allowing an estimated savings of $50 billion in the first year and up to $250 billion annually which can be used to cover the currently uninsured without the need to add new taxpayer subsidy. Money is provided by this law to retrain displaced insurance company workers.
5. The system would be FINANCED BY PROGRESSIVE TAXES. This would lift the burden of health insurance costs from America’s businesses making them more internationally competitive; widely expand the risk poll, thus lowering the cost for every individual participant, and eliminate the need for expensive HR systems.
The information, discussion, and perspective presented here has been virtually absent from White House, Congressional, and media discussions of the need to reform the health care system. This seems to be largely because of the political and financial clout of AHIP. It is important to know that single payer reform, Medicare for All, is the only proposal in the public arena with broad, enthusiastic support from the men and women on the street who must understand these facts to be motivated to get involved.