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Best Financial/Health Advice Part 2: Understanding Insurance

For Part 1 in this series, click here.

A little history is required in order to grasp how we got here. Until the arrival of Medicare in 1965, the only health insurance available was Blue Cross/Blue Shield, a network of not-for-profit companies founded in 1929, Blue Cross covering hospital charges, Blue Shield physician fees.

Then, in 1973, President Nixon with the help of his friend and major donor Edgar Kaiser (later to receives buckets of federal funding for his Kaiser Permanente HMO), signed the Health Maintenance Organization Act of 1973. In this legislation, medical insurance companies, hospitals, and physician groups were encouraged to function as for-profit corporations. The AMA supported all this because the act would end any discussion of the much-feared “socialized medicine,” which we know today as single-payer health care or Medicare for all.

If you have a minute, click here for a page of the Nixon transcripts as he discusses with his Chief of Staff John Ehrlichman just what Kaiser had proposed (scroll toward the bottom of the page).

Ehrlichman: The less care they give them, the more money they make.

Nixon: Fine.

The law, known as HMOA73, encouraged the establishment of hundreds of health insurance companies, some as spin-offs of old insurers (like Aetna and Cigna), others as new players in the insurance game (Humana, United). But whether you were insured by Blue Cross/Blue Shield or one of the new players in the insurance game, either you paid the premium yourself or it was shared as part of the benefits of your job.

This was a massive conversion of health care from a service industry to a for-profit business model. It is the moment that triggers the devastating downstream effects we feel today. Highly inflated prices, steadily increasing at inflationary rates that vastly exceed those of any other goods or services, coupled with overutilization of everything. Too many tests, offices visits, surgical procedures, prescriptions, and the like. The mantra of health care became “Bill ‘em high. Bill ‘em often” (that’s an actual quote from an orthopedist to me).

With the exception of Blue Cross, all the insurers were publicly traded companies, many of them in the Fortune 500. Their loyalty is to the shareholder, not to the patient-enrollee. Later, in an attempt to level the corporate profits playing field, some of the Blue Cross companies dropped their not-for-profit status and are now publicly traded as well.

How well have these companies actually done over the years? If you’ve been holding UnitedHealth Group stock during the past decade, you’re sitting pretty. Take a peek at this link at the third-quarter highlights for 2017.

Here’s what Time Magazine reported on the compensation of UnitedHealth Group CEO Bill McGuire, MD:

During his 15-year tenure as CEO and chairman of UnitedHealth Group Inc., McGuire turned the regional health insurer into the second largest managed care company in the U.S. He received his thank yous in the form of stock options—$1.6 billion of them, to be exact—but he took some of them on the days the company’s stock price hit yearly lows, profiting when the stocks went up again.

I think of Dr. McGuire’s largess and then remember how for years we posted on our office bulletin board an uncashed check from UnitedHealth, the reimbursement for one patient’s office visit. It was made out for exactly five cents.

Enter Obamacare
Until Obamacare (also called the Affordable Care Act, or ACA) came along and shook up the health insurance industry, you didn’t need an MBA to figure out how health insurers became some of the most profitable companies in the US. Obamacare did trim their profits for a while, but fortunately for them (though not for us), they recovered and these days are doing just fine.

This is how it works: Money (yours, along with your employer’s) pours into insurance companies in the form of insurance premiums, to the tune of $18,764 per person in 2017. This money is held in enormous reserves, the amount determined by a variety of formulas so that the insurance company theoretically always has enough to cover the medical needs of its policyholders. It’s notable that our total healthcare costs per person in 2017 came to $10,348 (about 25% of which is spent on something called “insurance administrative fees”). To get a rough estimate of reserves, it’s $18,764 minus $10,348 times the US population.  Do the math and you come up with some serious money.

Health insurance companies invested these mind-boggling reserves and made so much money that for years they were pretty inattentive to how they spent it on your health care. A physician, hospital, or laboratory would sign a fairly generous contract with an insurance company (called “being in network”) and agree to accept the insurance company fee schedule. But no one was paying much attention to how the money was being spent.

You could get full diagnostic testing for your symptoms at Northwestern on a Monday, have all the tests repeated on Wednesday at Rush, and again on Friday at Loyola. Breast biopsies, prostate biopsies, and skin biopsies galore were ordered. I know of one young patient with irritable bowel syndrome who had four colonoscopies, all normal, before she turned 30 (see my earlier Health Tip “Pigs At A Trough”). Bill ‘em again and again.

At the same time, Big Pharma created mega-expensive meds, often out of recycled generics, hospitals charged $20 for a BAND-AID, and physical therapists saw six patients an hour and sold three of them overpriced “home equipment” billed to their insurance. I remember back in the 1980s when, working at the now-defunct Augustana Hospital, it was revealed that a physician had been removing non-existent lesions from a blind woman.

Before Obamacare, you could get easy access to care if you were a healthy specimen of a human being. The doors were locked if you were ill and/or had one of those poorly defined pre-existing conditions. Obamacare caused a major jolt. Suddenly everyone with any condition was allowed access and the industry began hemorrhaging cash. It even looked like some companies might have to tap into their precious reserves.

In an effort to stem the tide since Obamacare became law, the industry has resorted to the two tactics it knows best: deny benefits and raise prices.

Denial of benefits is now honed to a fine art. To rein in costs, you as a patient are limited to using certain hospitals. Blue Cross dropped super-expensive Northwestern Memorial (with its richly compensated $9-million-per-year CEO), Rush, and University of Chicago. You’re also limited as to which drugs you can take (access to brand-name pharmaceuticals is well nigh impossible) and even which pharmacies you can patronize. Have you noticed the long lines at Walgreens and the empty pharmacy counters at CVS?

Even more profitable than denying benefits is raising your premium and your deductible. For many, the annual deductibles are so high that (if they’re healthy) they never spend enough on health care to even use their insurance. Which, of course, is just peachy with their insurer.

This is where we are today
High premiums, high deductibles, super-expensive medical costs. After following healthcare economics for decades, I’m here to say there are ways to get the coverage you need and not go broke in the process.

So before next week’s Health Tip arrives, if you have questions about what kind of insurance is right for you, think carefully about what you need from the healthcare system. Do you want everything completely covered, from your office visit to the specialist of your choice to the option of going to Mayo Clinic for a fourth opinion?

Or are you big on self-care, avoiding the system except when you really need it, trusting that your body can generally take care of itself but having the brains to know that it’s not a good idea to perform your own appendectomy.

Give this some thought and I’ll be back next week.

Be well,
David Edelberg, MD

Leave a Comment

  1. Bob Wilson says:

    Dear Dr Edelberg,
    The grim facts that you have given about health insurance are a reminder that we need more health care reform, not less. I recently went for my annual physical with a Cleveland Clinic doc. She agreed to order a test for Vit D but said that I needed to be aware that Medicare may not cover this and that my cost could be $161. I agreed, of course, but checked later to see what Life Extensions would charge. It was $47. How can it be that a non-profit has to make 3 times what a for-profit lab charges ?!! I think we need more earthquakes in health care /insurance like Amazon threatening to get into the business.

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