Who is your real health insurer?

We are all accustomed to think of our health insurers and health care providers as separate entities. Nothing could be further from the truth!

The reality is that these rolls are usually entwined. While you no doubt hear a great deal about “fee for service” driving the cost of health care, the truth is quite the opposite. The “capitation” innovation is driving our costs up and the quality of care down, and capitation-like health care finance mechanisms are ubiquitous in our health care (finance) systems.

Capitation substitutes flat payments for the uncertain costs of care. When insurers, HMOs, Medicare/Medicaid use capitation-like health care finance mechanisms they shift the locus of insurance risk management from large, capable insurers, to smaller, less capable health care providers. Our health care providers become our de facto health insurers.

This may not seem to be a problem. Let me assure you it is a great problem. Insurers manage risk efficiently by issuing a lot of policies. The more policies an insurer issues, the closer to the expected loss ratio their result will be. When insurer loss ratios are close to the level assumed in their premiums, insurers face little or no risk, except through malfeasance.

The larger the insurer, the less risk, the more certain their profits. The smaller the insurer, the greater the risk, the less certain their profits and the more likely they will lose money.

The most efficient insurer for any population is an insurer covering every member of the population See “Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them” at http://www.standarderrors.org/). But when insurance risks are transferred to health care providers, such as happens when primary caregivers such as family physicians, hospitals, nursing homes and home health agencies are paid flat amounts per month, care episode, or diagnosis the uncertain future costs will be borne by the health care provider, not the health insurer.

That simple act changes your trusted health care provider into an inefficient health insurer, and you should be very skeptical about the �wuality of care you will receive.

But the worst is ahead. Because health care providers furnish health insurance for so few people they are wildly inefficient. Their losses may be small one year and large another. Because their revenues are fixed, while their costs vary, our risk assuming health care providers must, even at the start of the year, cut the level of care they plan to offer below the level of care assumed in their capitation payments.

If they don’t assume they will lose money by year end, they dramatically increase the likelihood of losing money. The reductions in care can easily exceed 50–60% compared to the level of care expected. If the provider wants to increase their probability of earning profits, or avoiding losses, all they have to do, and all they can do, is cut services from the very first day.

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