The Health Insurance Company Is Your Friend
By Todd Hixon
I’m serious about this, not just trolling for comments. Health insurers have developed a negative image, in many ways justified. But, the game is changing, and in the next period they will be more allies than enemies for both consumers and plan sponsors.
Why? The next decade will be about bringing U.S. health care costs back to earth. Healthcare expenditure is the main driver of U.S. budget deficits in the long run (more). It is imperative to dramatically slow the growth of healthcare cost, or the U.S. is Greece. And, healthcare spending in the U.S. is about twice as large, as a percent of GDP, versus other advanced countries, and results are not better in general. There are a number of reasons, however, the biggest drivers are over-utilization of advanced medical care, and the high earnings of the providers of that care (more).
The next era in healthcare is going to be the battle of the payers versus the providers. Health insurers are firmly on the side of the payers, and the payers need their help.
Providers have been preparing for this battle for years. In the 1990s the payers used “managed care” to squeeze lower charges from providers. Managed care enabled payers to channel customers to preferred providers and thus enhanced their bargaining power. This dynamic succeeded in “bending the cost curve” (= slowing the rate of cost growth) for most of the 1990s.
US Healthcare Expenditure in Constant 2010 Dollars: $/capita (blue) and Annual Growth Rate (red).
But, the strategy ran out of steam, in large measure because providers learned to fight back: they consolidated to create market power at the regional level. Early on this took the form of hospital mergers, like the merger of Massachusetts General Hospital and Brigham and Women’s that created Partners Healthcare in Boston, the leading (some say “dominant”) provider. Then hospitals began hiring primary care doctors and buying primary care practices, the referral sources for most advanced care. Today, 40%-50% of primary care doctors work for hospitals. This raises revenues two ways: hospitals can often charge more for the same service than independent doctors, and they gain control over referrals for hospital services (more).
The third phase of “provider fortification” is, ironically, the Accountable Care Organization (“ACO”) initiative that is part of the [so-called] Affordable Care Act (aka ObamaCare). ACOs are providers that take end-to-end financial responsibility for patient care and outcomes. It’s a well-intended idea with merit, but it drives further consolidation, as it makes the providers payers: they assume the “insurance” function and divvy up a fixed payment among the medical team. So, you have the example in Pittsburgh of UPMC, long the dominant provider, which now offers a health plan and is driving the major payer in the market, Highmark, to acquire hospitals and become a provider. That will lead to a market with two dominant providers who also control the payer function. Businessmen know that duopolists quickly learn to compete vigorously on every factor except price. Who will negotiate on behalf of the patient?
A final sign that the insurers are now on our side is the stock market’s judgment on their fortunes under the ACA. I took a look at how the stock market values of key parts of the healthcare industry moved after the Supremes affirmed the ACA last June (normalized to the broader market using the S&P 500 index). Hospitals stocks appreciated nicely, and health insurer stocks were flat. That’s evidence that their economic interests are different.
Change in Share Price After SCOTUS Affirmed the ACA, Normalized to the S&P 500 Index
There are many aspects of healthcare where proactive consumers can buy better. Prescription drugs are a good example: there are options for buying long-term meds that are cheaper and more convenient than the nearby chain drug store.
But, when it comes to a major hospital procedure, we are all pretty helpless. I’ve got a couple of four-figure hospital bills in my file on which the insurance company paid about 30% of the face value of the bill, due to a combination of lower negotiated prices and striking off major billing errors and duplications that were Greek (actually Latin) to me.
So we need a champion on our side in the coming healthcare price wars. The health insurer, together with the plan sponsor, is our best bet. It’s either that or government takes all, which politicizes decision-making and introduces new types of inefficiency. Insurers will frustrate and anger us at times, but we can’t survive the coming health cost wars without them.
[This post first appeared at blogs.forbes.com/toddhixon on January 29, 2013.]