A big disconnect between health insurance, care cost

Our company is still negotiating the annual renewal of our health coverage. According to the insurer’s rate filings, we should probably expect an increase.
We know any increase will undoubtedly further erode take up (the number of employees who participate) among our employees who bear 25 percent of the cost. Dropouts will be among the younger and healthier of course, so the increase in premium may not prove profitable for the insurer.
I have been actively studying the health-insurance market and participating in the public debate for 20 years now. Over that period health-insurance rates have increased at double the rate of inflation.
This raises the question of whether it is a proper mission of a health insurer to produce an affordable product, or even to exert any influence over rates. Obviously if that is what we expect of them they are failing – but why?
I believe the reason has most to do with the way the insurers pay providers. Traditional fee-for-service reimbursement creates perverse incentives that have driven costs inexorably upward.
In the fee-for-service model any licensed provider can bill the system independently and get paid. No one is actually responsible for the outcome the patient experiences, and even more important, no one is paid to coordinate his care. The result is a health care system in which there is no accountability for the health of the patient.
Let’s just glimpse at the way private insurers pay hospitals, where about 40 percent, by far the largest portion of expense, is incurred.
Recently, the OHIC released its 2012 Hospital Payment Study, a much expanded effort more than a year in preparation.
Keep in mind that negotiating rates with hospitals is a key performance metric bearing upon insurers’ profitability. If they pay hospitals less than their competitors, they can have lower premiums, a competitive advantage, or they could simply retain more as profit. So this is not a function insurers take lightly.
A team of top-paid executives manage the process, usually headed by, or including a medical doctor. It is equally important to the hospitals, so they also must utilize highly paid experts. Since there is a vast list of prices, the process can really drag on and get contentious. According to the OHIC study, commercial payers end up paying hospitals about 66 percent more than Medicare pays for the average patient stay. How does Medicare come up with its rates?
Rather than bare-knuckle bargaining, the Centers for Medicare and Medicaid Services employs some of the industry’s foremost experts in what is called the Medicare Payment Advisory Commission or MedPac. This group figures out what it really should cost the provider for each reimbursed procedure. And get this; they actually measure hospital margins on Medicare business, which for many hospitals is more than half their business.
You have all heard hospitals say they lose money on Medicare/Medicaid and have to make it up on the private payers. OK, so how much do you lose on the public payers that has to be shifted onto the privately insured? Is it 66 percent?
And how about rate differences between contracted hospitals? For the average hospital stay, the OHIC study found rates that were more than double from the lowest-paid hospital to the highest. Really?
OK, so as a subscriber, why didn’t I know this? I mean if you are going to pay hospital X twice what you pay hospital Y for the same procedure and build your costs into my rates; shouldn’t I know this up front?
Let’s just go to the extreme of the spectrum and assume for a moment that OHIC had the legislative authority to just set the rates – like Medicare. Now rate setting, like price controls, is never an effective method in a free, competitive market. But do we think the health-insurance market is functioning properly? Or even if we think it merely reflects the market for health care services, do we think that market is efficient?
What would really happen? Providers and insurers alike tell us Armageddon. I wonder. •


Ted Almon is president and CEO of the Claflin Co.

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