Private Health Plans Versus Social Insurance
Implications for Health Care Reform
April 28, 2003
Private health plans are responsible for much of the administrative waste that uniquely characterizes the health care system of the United States. And for this outrageous cost and inefficiency, these plans are providing highly flawed and inequitable methods of pooling funds and allocating health care resources. We are receiving remarkably little value from this very costly industry.
Yet the leading incremental proposals for health care reform call for an expansion of the role of private plans as a method of expanding health care coverage to more individuals. Because of the unacceptable inadequacies and high costs of our current system we will have major reform soon. But before we invest more resources into the health plan industry, we should review the policy implications to decide whether this would be a worthwhile investment.
An evaluation of funding through private health plans would not be complete without comparing this model with a model of public funding through social insurance. A program of social insurance provides health care benefits for an entire population and spreads the financial risk equitably.
Contrasting the missions of private versus public funding
Private health insurance companies, whether technically for-profit or not-for-profit, have as their mission the creation and maintenance of a financially successful business entity that administers the funds for health care on behalf of both their purchasers and their beneficiaries. Success is measured by the growth of the insurance industry’s own intrinsic entity, the administrative body of their companies, and by the impact that this has on their profits.
Publicly funded systems of social insurance have a mission to allocate the health care resources as equitably and as efficiently as possible
These missions have almost nothing in common. Public insurance systems are designed to provide access to the best care possible for the patient, within the limits of the resources available. Administrative services are limited to the minimum required to accomplish this task while also ensuring, through oversight, that public funds are utilized for their intended purpose.
Private insurance companies concentrate on growth, as should any other business concern. They expand their administrative entities to the maximum size that would continue to enhance their opportunities for profit. They are engaged in the business of selling their administrative services to the purchasers of their plans. Offering ever more administrative services enhances their revenues and their potential for profit. The insurance companies also attempt to maximize the funding of the risk pool by increasing premium revenue as much as is tolerated, and they attempt to reduce payments out of the risk pool by paying the least they have to in the form of health care benefits.
Thus the public model supports equity and efficient utilization of available health care resources, and the private model maximizes premium income, minimizes benefits, and expands its administrative business to the maximum size tolerated, while neglecting the task of equitably distributing our health care resources.
The administrative excesses and burdens of the private health plans
The administrative excesses of the private health plans have been well documented repeatedly, and they will not be detailed here. But suffice it to say that the bureaucratic goliaths of the private health care plans consume a far greater percentage of health care dollars than do any public programs of health care coverage.
This problem is compounded by the fact that our fragmented system of a multitude of private plans, public programs, and no programs at all for the uninsured, places a tremendous administrative burden on the providers of health care. Although Medicare, as an example of a public program, is administratively efficient, it does add significantly to the administrative burden of the providers since it establishes yet another set of complex rules and administrative procedures to which the providers must adhere. A single administrative intermediary would establish one set of rules, which could be negotiated to ensure optimal efficiency. Numerous studies have demonstrated that the streamlining of the administrative process would free up enough resources to cover all of the voids in health care today.
Insurers are insuring less
The traditional role of insurers was to pool risk. Premiums were equitably assessed, and payments for health benefits were based on medical need. Premiums were set based on health care utilization plus the administrative costs of the plans. Besides insuring against catastrophic losses, insurers also functioned as administrators of health funds used for relatively routine care.
In pooling funds, insurers had been accepting most of the risk. But health care costs have continued to increase in excess of inflation. Purchasers of health plans understandably have become less reluctant to absorb the higher costs in the form of higher premiums. With pressure to slow premium escalation, and with the inability to extend further the price concessions extracted from the providers, the insurers had two more options. They could reduce the benefits covered, and they could shift more of the costs directly to the beneficiaries.
Benefit reductions have been somewhat subtle. Plans not required to provide certain mandated services such as obstetrical care or mental health services will frequently exclude those options from coverage. Tiering has been a mechanism through which graduated levels of cost sharing have created price disincentives that have made more expensive pharmaceuticals or higher cost care in academic institutions less affordable. The level of services should be based on the best interests of the patientís health rather than on the differences in pricing structure. Although many plans promote their preventive services, the actual services authorized are often quite Spartan. Pediatric immunization costs are sometimes shifted to the provider, placing in question the sincerity of the insurer in promoting prevention. Cost sharing when using non-contracted providers is frequently so high that, for practical purposes, such point-of-service options are so limited that they are not much better than no benefit at all.
Cost sharing has been a more important mechanism for insurers to reduce their expenditures. Many plans now have very high deductibles, but often with a restricted number of routine visits with modest co-payments, which creates the impression that most services are covered, when, in fact, the patient bears most of the deductible costs. Larger co-payments (a given dollar amount) and co-insurance (a percentage of the allowed charges) are now quite routine. Frequently the insurer bears little cost until a defined catastrophic level is reached. At that point, most plans now use managed care contracts requiring the provider to accept some of the risk in the form of fee reductions.
Thus innovative benefit packages, increases in beneficiary cost sharing, and fee concessions from providers have all reduced the risk exposure for the insurers as that risk is passed on to patients and providers.
Perhaps the leading reason that private health plans should no longer serve as the administrators of health funds is their role in promoting risk segmentation. They have become masters of the art, and we are all paying for it.
The group market is composed largely of plans sold to employers to cover their employees. Group plans tend to be more comprehensive with less cost sharing, partly because of more stringent regulatory requirements in the group market, and partly because of concessions gained by organized labor. But the insurance industry has prospered in this environment because most members of the work force are younger and relatively healthy, as are their family members. This is a relatively low-cost sector for the insurance industry.
The individual insurance market is subject to underwriting which allows the insurers to charge unaffordable premiums or even exclude from coverage those who are anticipated to have greater health care needs. Also, in the individual market, administrative costs are much higher and benefit packages are not nearly as generous. Costs are about 30% higher than in the group market, giving the insurers a larger cushion to accept less certainly in their risk exposure, even though they actively avoid risk through the measures mentioned.
It is instructive to see how the industry has been spared the requirement of covering some of the higher risk sectors. People over 65 who are expected to have a high incidence of chronic disorders and more expensive end-of-life care are placed in the Medicare program. Although the insurance industry attempted to skim off the healthier subset of this sector by selective marketing of their Medicare + Choice options, this has proven to expose the industry to a higher risk than intended, and they are backing out of this market.
Many individuals with long-term disabilities become eligible for the Medicare program, again relieving the insurance industry of this burden.
Low-income individuals frequently do not have access to affordable insurance, either because their employers do not offer it, or simply because they cannot afford their portion of the premium. Low-income individuals who do have greater health care needs may be eligible for Medicaid and would tend to enroll in this program through necessity. This concentrates higher-cost individuals into the Medicaid program, and, thus, this is yet another higher-cost sector that the insurance industry has been able to avoid.
Individuals with major preexisting disorders are also excluded from the individual market and have to resort to state-sponsored high-risk pools under HIPAA. The premiums for these plans are often unaffordable, and the benefits are as minimal as state laws will permit. These programs have not functioned well, leaving many individuals uninsured. But the insurers are able to shift this responsibility from their own industry, and then blame the state for failing to provide an adequate program.
We are paying the insurance industry a disproportionately high share of the health care dollar, especially when considering that the insurers have been successful in cornering the market for healthy individuals, and in shifting high-cost individuals into taxpayer-funded programs, or worse, into the ranks of the uninsured. Funding the plans richly for taking care of the healthy while placing the burden of funding care for the sick on the taxpayer is not rational policy.
The impact of the insurance underwriting cycle
The health care insurance underwriting cycle is the variation in premiums that are not explained by the changes in health care costs, but are due to unrelated factors such as the impact of corporate behavior in a competitive market. At peaks in the cycle, premiums are priced higher as insurers attempt to maximize profits. During these peaks, consumers are wasting even more health care dollars that are not being use to purchase health care benefits.
At other phases of the cycle, the insurers deliberately price their products low in order to gain a greater share of the market. This results in pressure to reduce payments to the providers, which then can impact their solvency, especially for providers who also tried to increase their volume by agreeing to excessive rate reductions. The low pricing will often negatively impact the insurers, frequently causing them to withdraw from markets that are no longer profitable. This instability can disrupt the continuity of care for patients, and affect the richness of the benefit packages as the insurers readjust their strategies to improve their balance sheets and profit and loss statements.
As long as we rely on the market to control private health plans, we will be subject to intermittent periods of excessive pricing, interspersed with periods of health plan and provider instability. A universal public program would be designed with price stability and would include all providers, eliminating intervals of instability of the delivery system.
Consumer-directed health care
Advocates for reform that reduces the role of government in health care have been promoting consumer-directed health care. The theory behind this approach is that when patients are insulated from health care costs by comprehensive coverage, they waste resources by over-utilizing health care. It is contended that, by increasing cost sharing, especially by requiring payment for all up-front costs, patients will reduce health care spending by eliminating unnecessary services.
This theory is flawed. Numerous studies have demonstrated that such approaches create financial barriers to beneficial health care services. Controlling costs by preventing access to beneficial services is not good policy. There are other methods of controlling health care costs and reducing over-utilization that do not erect financial barriers to care.
Several versions of consumer-directed products establish a fund for use by the individual and his or her family. Health spending arrangements, medical savings accounts, flexible spending accounts or other forms of personal health accounts are a few of the options. The details vary with each of these accounts, but they all establish an individual account that is used for initial expenses. Then once the requirements of a deductible are met, a high-deductible catastrophic plan covers further expenses.
Recognizing the potential popularity of these plans, the insurance industry is now beginning to offer its own versions. Insurers wish to retain the lucrative business of administering these accounts, and they can do so without accepting any risk, since the funds belong to someone else (either the employer or the individual, depending on the version). The insurers also escape any risk until the deductible is met with the patientís own personal funds. Even then, the catastrophic insurance product will not be an unlimited, traditional indemnity-type plan. Costs will be controlled through managed-care contracted provider lists, Spartan coverage, and perhaps with even more cost sharing required by the catastrophic coverage plan. Under these proposals, health plans will be reducing their risk exposure even more than they do so now, while retaining their administrative business. Although their premiums will be competitive with other insurance products, it can be anticipated that they will include an even more generous cushion for health plan profits.
The consumerists are also using the deceptive rhetoric that patients want choice, but they extrapolate that to mean choice in their health plans. Patients do want the freedom to choose their personal physicians, the hospitals they will use, and other providers of care, including the option of choosing an integrated health care delivery system such as Kaiser Permanente. Preserving this choice is very important for the individual patient. But patients are not really interested in choosing from a menu of restrictions in their coverage, when they realize that this is what a ďchoice of health plansĒ really means. A single payer system covers all beneficial services. When patients have a need for those services, they do not want to be told that the plan they have chosen does not cover them.
Threat to individual financial security
Employers are beginning to shift health care costs to their employees by increasing the employee share of premiums, by reduction of benefit packages, and by increasing employee cost-sharing when utilizing health care services. For individuals or families with significant health care needs, these costs frequently exceed disposable income, even for moderate-income individuals. Thus financial security is no longer assured for those with needs, defeating the purpose of insurance. Personal bankruptcy is increasing because of unpaid medical bills, even for those with health insurance. The innovative products being offered today do not provide the level of security that we should expect from this industry.
It is very unlikely that more comprehensive products will become available in the individual market, and even the group market is experiencing pressure to reduce benefits and increase cost sharing. Plans compete primarily on the price of their premiums. Low premium plans will be popular with those who are in relatively good health and wish to gamble that they will not develop major disorders. Those who do develop significant problems will have lost the bet and then understand why everyone needs comprehensive coverage. Those with greater health care needs because of preexisting disorders will be reluctant to purchase plans that leave them exposed financially. They will tend to select the more comprehensive plans. But these plans will concentrate high-risk individuals, driving the premiums up to unaffordable levels, causing the plans to withdraw because of loss of market share.
The insurance industry will be left with precisely what it wants: a well-funded, large, private administrative bureaucracy, with minimal exposure to risk. Employers will have shifted their risk to their employees. Unions that are successful in negotiating generous health benefit packages will pay for them by accepting lower wages for their members. But those who have a greater necessity to access the health care system will be left with neither health security nor financial security.
Is regulation the answer?
Costs continue to escalate. The numbers of uninsured continue to increase. Under-insurance is becoming epidemic. Since our current system of public and private plans has failed to provide satisfactory solutions, some have suggested that we need to increase the regulatory environment of the plans.
Suppose that we did specify the precise benefits that a standard plan must cover. Suppose that we required plans to accept all applicants regardless of health status. Suppose that we did require regulatory approval of premiums charged, and that those premiums did not have enough cushion to include wasteful administrative excesses. Suppose that we did require the plans to adopt uniform administrative procedures to reduce the administrative burden of the providers. If these measures were effectively instituted, the role of the insurers might well be limited to being a contractor for administrative services in what would amount to a single payer system. If we really want to adopt the policies that characterize a single payer system then we should seriously consider the obvious solution of enacting single payer reform, thereby enabling us to benefit from all of the advantages of a single, equitable, publicly administered system.
Public funding of health care
60% of our health care system is currently publicly funded, which is more than the combined public and private funding of most other nations that provide universal health care coverage. Relying on the fragmented public and private system of allocating funds has resulted in the deficiencies, inequities and waste of our current system. Numerous studies, including the California Health Care Options Project, have demonstrated that we can have much more without any increase in total health care spending, merely by adopting a single, publicly administered health care program.
A single payer system of social insurance would be universal, covering everyone. It would be comprehensive, covering all beneficial services. It would improve accessibility by eliminating financial barriers to care. It would provide permanent, life-long coverage. It would be portable, covering individuals regardless of employment, location, or any other arbitrary determinant. It would improve quality by improving access, and by detecting and preventing both under-utilization and over-utilization of the system. It would ensure free choice of providers of health care. Through administrative simplification it would reduce the expenses and burden of our current public and private bureaucratic excesses. And by establishing cost containing mechanisms, such as global budgeting, it would ensure that health care would remain affordable while, at the same time, ensuring that the system would be adequately funded to meet the health care needs of everyone.
Does the blame lie with the private insurers?
The private insurance companies are businesses. They have an ethical obligation to behave as businesses. They must maximize revenues, minimize expenditures and nurture their own industry. To do less would be to fail their corporate responsibilities, whether or not a for-profit corporation. They are doing precisely what they should be doing in a health care system relying on the discredited theory that health plan competition in the marketplace would bring us a higher quality system at a lower cost.
So who is to blame? The policymakers who insist that solutions to our problems in health care must include private health plans should carry most of the burden of guilt. Employment-based private insurance funds only 19% of our health care system. Yet, in protecting this industry, policymakers are supporting the perpetuation of the severely flawed policies that are essential for private health plans to thrive. Our policymakers have access to the health policy science that has established the superiority of a single public model of funding health care. They understand precisely the models that would greatly improve allocation of our health care resources. They know that further entrenchment of private plans into our health care system significantly decreases the likelihood that we will ever adopt an equitable and efficient model of reform. Continuing to support models that waste resources by catering to this superfluous industry represents a failure of the responsibility for policymakers to promote systemic changes that maximally benefit patients. But policymakers can redeem themselves by renouncing the flawed policies of private plans and by supporting the policies of an equitable system of social insurance.
Our current fragmented system of private plans and public programs continues to waste an inordinate amount of health care resources, which is tragic considering the unmet needs in health care. The current system has been incapable of containing costs, now threatening affordability even for those with health care coverage. Policies supporting the private health care plans have perpetuated the inadequacies, inefficiencies and inequities that plague our system today. It is time that we demand value for our health care investment by replacing this antiquated, ineffective and wasteful system with a single, efficient, equitable, and affordable program of social insurance.