Are Health Insurance Executives To Blame?

The murder of United Healthcare CEO Brian Thompson in New York City last week has gotten a lot of attention on social media.

No motive for the murder is known right now but many have speculated it was due to the fact that Thompson was the head of an "evil" insurance company that put profits ahead of people. That line of reasoning suggests that Thompson was murdered because his company denied care to either the assassin or someone close to the murderer.

When all the facts are in we may find that the killing of United Healthcare's CEO had nothing to do with this position. However, the fact that so many are citing insurance coverage and care issues as a possible motive is very, very troubling as it shows how little most people understand about the economics of health care insurance and coverage.

I oversaw employee benefits and the health insurance program for two Fortune 500 companies in my career so I know something about the system of health care coverage in the United States.

Despite the complaints that are often voiced about the US. system, there is little question it is the highest quality and most accessible health care system in the world.

A primary reason for that is that much of it is supported by the private sector.

Health insurance companies are often made to be the villains in the system but they play an important role  in balancing accessibility and affordability.

Government controlled health programs such as those in much of Europe and Canada primarily control costs by limiting accessibility. That is why it might take many months to get care for things like hip replacements in some countries if you are not denied altogether because of your age or other conditions.

It is also a fact that the United States health system could not operate without the private sector subsidizing hospital, physician and other costs that are vastly underpaid by Medicare and Medicaid.

If you doubt that compare the reimbursement rates on what Medicare and Medicaid pay on different services compared to the rates that private insurers are paying.

Almost every hospital in the United States would be forced out of business if they had to operate with the Medicare and Medicaid payment schedules.

My two employers used both Anthem Blue Cross Blue Shield and United Healthcare in the delivery of health care to our employees.

However, in that they were large employers, these companies did not provide any healthcare insurance for our employees. Both companies in which I managed the benefits function were self-insured. We only used these companies for administrative services to pay claims, provide standard medical necessity oversight and the like for which we paid a set monthly fee per employee. All the claims came back directly to the company. 

This was a surprise to most employees when they found out the reality of the insurance pool. In effect, all employees and family members were in their own insurance pool. If their fellow employee had a heart attack, was injured a major accident or had a premature baby, everyone was effectively paying a portion of the bill.

It is just one of many facts that most people do not understand about the delivery of their health care.

The other big one is how claims costs are distributed in any large health insurance pool.

The reality is that most people have very little in healthcare costs in a given year.  A handful of people will have enormous costs.  A few will have very large costs.  The majority will have almost no costs.

For example, the bottom half of a population will only consume about 3% of the costs of the group.

The top half will consume 97%.

The top 5% will consume 50% of the total health care costs.

The top 1% will consume 20% of the total costs.

This is why most people will gamble if left to their own devices if they are faced with expensive health care insurance. They will simply not part with their money today against the chance that they might get sick tomorrow. That is basic human nature.  Live for today and think about that other stuff tomorrow.

In fact, most people will pay no more than 20% of the true cost of health insurance without showing significant resistance to its cost. It is not a coincidence that many corporate plans (and even Medicare Part B premiums) charge 20% of the full cost of premium to the enrollee.

This is why Obamacare failed to attract the young and healthy to its risk pools. The insurance costs too much (even with generous subsidies) for the young.

Some of those "dancing on the grave" of Brian Thompson suggest that this would have never happened or things would be so much better if we had "Medicare for All".

One thing is for sure---if the government is the one denying care it makes it almost impossible to complain.

What do you do if your hip replacement is denied in Canada or the government tells you that you have to wait months for a heart bypass or cancer treatment?

There is nothing you can do but find your way to the United States.

In Canada, it is against the law to even go outside the system in your own province and personally pay for a necessary procedure on your own in that nation. Some are now getting around this by traveling to another province to seek care at a private clinic.

While healthcare insurance and coverage is in the news I thought it also might be a good time to republish a blog post I wrote in 2019 to provide context on healthcare costs as well as possible paths forward to improve affordability.

Nothing has really changed regarding the substance of what I wrote over five years ago. 

However, everything has gotten a LOT more expensive.

The bottom line is this----there will be no gain in making healthcare more affordable without a lot of pain.

And the pain that the Thompson family is going through right now should not be part of any of this.

No Gain Without A Lot Of Pain

(originally published April 14, 2019)

"Medicare for All" has become a popular theme for many Democrats and that party's Presidential candidates.

Bernie Sanders introduced his proposal last week. Predictably, it is short on details and makes no mention of how it would be paid for.

It is claimed that going to a government-run single payer program will massively reduce administrative expenses and lower health care costs for the American public. In so doing, private insurance companies, and their "obscene profits", will be eliminated from the system.

I have written before how the facts about healthcare costs are often much different than is portrayed by politicians and understood by most of the public at large.

For example, one fact that is often overlooked is that the average cost per day for a hospital stay is actually higher in a non-profit hospital than in a for-profit hospital. The costs are also higher in a state/local government run hospital than a for-profit one. I wrote about this in 2013 but it is still true today.

This is exactly the opposite of what Democrats would have you believe when they argue that healthcare should be a not-for-profit government function. They argue government or non-profits are able to deliver healthcare better and cheaper as there is no profit motive adding to costs.

Here are the latest average costs per inpatient day for hospitals based on ownership according to the Kaiser Family Foundation. All of the other charts below are also from the KFF with the exception of the out-of-pocket expenditures by country comparison chart which is based on WHO data.

When you consider that hospital costs are the largest component of national health expenditures, it would seem to be a pretty significant fact that for-profit hospitals are over 20% less costly than non-profits.

Why is this? I explained in my previous post.

A big reason for the higher costs with non-profit hospitals is the lack of accountability. They are not accountable to tax collectors, shareholders, and most particularly, patients (due to our third party payment system where it is rare that the bill is paid by the person receiving the treatment).

How about another fact that most people are not aware of? Many complain about high deductible plans today, which has meant more out-of-pocket spending by patients. However, the reality is that out of pocket costs still make up only 11% of total U.S. health care expenditures in the United States. In 1970, it was 33%.

Americans are also paying less of the total share of national health expenditures in out-of-pocket expenses than other countries.

How much better can it get on this score? Would "Medicare for All" lower these "out of pocket" costs? Our out of pocket costs are already lower than in the "socialist" systems.

Let's also look at the components of U.S. national health care expenditures to determine how big the effect would be if we could reduce administrative costs (including all private insurance profits) from the system.

Here is where the $3.5 trillion in healthcare expenditures went in 2017 that represented about 18% of the entire GDP of the country.

Hospitals account for 33% of all costs. Physicians and clinics are 20%. Drugs are relatively small at 10%.

Administrative costs (included in other health costs above) make up just 7.4% of total costs. This includes all private and public plan administrative expenses and all the profits of the private insurance companies. 92.6% of healthcare costs would remain even if you removed all private insurance companies and administrators in the system.

In other words, you could eliminate all the administrative costs that are being paid for by all the private insurance plans, Medicare and Medicaid and you would only save about one year of health care inflation.

Granted, there are internal administrative costs in the costs of each hospital and medical provider but it strains credulity to believe that this alone is going to significantly lower healthcare costs in the United States.

Total expenditures per capita have increased 30-fold since 1970. Adjusted for inflation, costs have increased 6-fold!

What can be done? There is no easy answer despite what glib politicians might tell you. In fact, as I have written before in my post "Why Is Health Care So Expensive", everything suggests that the problem will get even worse no matter what the policymakers do. Every factor is trending against controlling health care costs.

More and more medical technology becomes available everyday. Americans have rebelled against every attempt to limit choice in selecting doctors, hospitals, etc. Americans are getting older. Americans are not getting any healthier and the United States still has more money to spend on healthcare than any other country. Attempts to control costs are akin to trying to change course heading into a Category 5 hurricane.

How could health care costs take a smaller bite of our economy and household budgets?

There are only three options.

1. Hospitals, doctors and other providers have to make less money.

2. Patients need to see their care rationed or limited in some way.

3. We all need to get a lot healthier.

"Medicare for All" sounds great as a theory. 56% in a recent poll stated they favored the idea. They liked the idea of guaranteed health insurance (71% favor) and eliminating health insurance premiums and reduced out of pocket expenses (67%),

However, support collapses when people hear exactly how the plan would have to work--eliminate private health insurance (37%), require most people to pay taxes (37%), threaten current Medicare (32%) and delays in getting medical tests and treatments (26%).

The bottom line is this.

There will be no gains in controlling healthcare costs without a lot of pain on someone...and most likely, everyone.

Don't let any politician convince you otherwise.

If you want to actually consider a system of healthcare that might work at controlling costs, while serving the American people better, read my previous blog post "Revolutionary Replacement".