Health Insurance Companies
Health Insurance companies are almost all publicly held, and are obliged to maximize shareholder returns (ie quarterly profits). For the most part they’ve been extremely successful over the past 20 years with many returning record profits.
The business of insurance is very simple: their revenue is health insurance premiums, and their expenses are administrative costs and the healthcare services that providers bill them for. It’s in the health insurance companies’ self interest to either limit the services they pay for, negotiate favorable rates for the services they do pay for, or to increase their premiums.
Health insurance companies are payers to healthcare providers, and this is generally perceived as a win/lose relationship by both sides, but financial returns seem to indicate it’s closer to a win/win since hospital profits are also typically high. Since the Patient Portability and Accountable Care Act, it’s become far less common for health insurance companies to limit payouts by arbitrarily cancelling policies or inducing engineered friction into the payments process; now, they protect profit margins by using market leverage to negotiate favorable fee schedules with providers. Depending on the geographic area and the relative brand strength of large providers, either the provider or the payer may have leverage for some or all services in a fee schedule. Smaller hospitals and individual physicians – and especially primary care physicians – often have little to no leverage and must either accept whatever the payer sets in the fee schedule, or lose access to all of the patients covered in that plan or by that payer. This is an especially acute problem in areas with low population density where only one payer is offering plans. In some cases this has resulted in fees for primary care services to fall so low as to drive physicians out of practice.
Health Insurance companies are vendors to employers, and in recent years this has been a win/lose relationship with the insurers winning. If costs or consumption increase, they simply raise premiums to maintain their profit margins. When employers are self-insured, they usually contract with insurance companies to be Third Party Administrators (TPA’s). This means the insurance company processes the claims from the providers, but the employer actually pays the bills directly. TPA’s are usually paid based on a % of claims filed, so there is zero incentive to control costs; there is actually a perverse incentive to pay more claims rather than less.
With the Affordable Care Act, insurance companies were required to pay out at least 80% of their premium revenue towards health benefits with the remaining amount left for overhead, administration, and profit. This concept is called the ‘medical loss ratio’, and it was put in place in an effort to discourage withholding payment in ambiguous circumstances. Unfortunately, this had the perverse effect of removing any remaining incentive for the insurance companies to control costs. Since they can always raise premiums, it is now actually in their best interests to pay out lots to providers since it grows the 20% from which their profits are drawn.
Health insurance companies have a strange relationship with employees under employer-sponsored health insurance. Since their employers are the actual ‘customer’ (they make the buying decisions), employees have very little leverage in their relationship with the insurance companies, and insurance companies have little motivation to protect employees from exploitative billing practices on the part of providers.
When individuals buy health insurance directly (as opposed to employer sponsored health insurance), then the individual and insurer are in a more traditional customer/vendor relationship. Individuals can shop the market for the best cost/benefit/network/value combinations for themselves or their families, and change plans if/when they’re dissatisfied or they find a more desirable option.
The professional associations for health insurance companies are well organized and have fairly active lobbying efforts. This was most clearly seen in the PPACA, which resulted in millions of new customers and trillions in government subsidies for new and existing customers at or below 400% of the poverty level. Efforts on the part of some members of congress to include stronger ‘give back’ legislation, which would effectively tax some of this new largess, were generally unsuccessful due to lobbying efforts.
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