On the first of September this year, for profit HCA, a health care provider with a 35% market share and the highest profit margin of any provider network in Colorado, and United Healthcare, one of the largest health insurers in the state, broke off a long term favored “in network” relationship with each other. How did we get here?
The answer has it roots in a health insurance market dominanted by traditional indemnity policies prior to the 1980s, in which managed care plans, such as HMOs and PPOs became dominant by the mid-1990s.
Uncertainty about what happens if there is no deal in an evolving health insurance market has, in part, driven the current negotiating pattern, where neither side was bothered to negotiate over the Labor Day weekend, despite the immense sums of money and large number of patient cases involved. United instead resorted to full page ads in the Denver Post, and HCA is instead inviting health care policymakers to an event of its own.
The “Traditional Indemnity” Model
A generation ago, health insurance was structured on an “indemnity” model. You secured services from health care providers, you sent the bills you paid to the insurance company, and it paid a percentage, often 80% of the amount owed after a certain dollar amount which was 100% your responsibility called the deductible.
The theory of an indemnity model is that you should pay for your own routine care, since this isn’t really a “risk” suitable to insure against, and that the fact that you have to pay a signficant share of the total price would discourage abuses like overuse of expensive medical services or any bias towards high cost providers.
A Failed Business Model
The traditional indemnity business model has been virtually dead for a decade. In the late 1970s, more than 90% of the market was made up of these kinds of plans, In 1987, traditional indemnity plans made up 41% of the health insurance market. By 1996, they had just a 3% market share.
The failure of this model to control costs led to reforms.
The HMO: In Theory
The health maintenance organization was invented to address perceived failings of the indemnity model to control costs and keep plans affordable.
Encouraging Preventative Care
The large deductible in an indemnity plan, which essentially encompassed all routine preventative care, was too strong a disincentive to obtain preventative medicine. Instead, insurance companies left themselves paying for conditions that could have been prevented more cheaply, because insureds didn’t spend the money on routine check ups. HMOs addressed this by eliminating or greatly reducing patient responsibility to pay for preventive care.
Controlling Useage and Provider Charges
The notion that patients would control costs by not obtaining unnecessary care, or by comparison shopping amongst medical providers proved to be optimistic. Simply put, patients don’t know enough to do either.
Even Republican Gubenatorial candidate Bob Beauprez notes these limitations, stating on his website with regard to healthcare that “consumers often do not have access to meaningful information on health care cost and quality.”
Market mechanisms only control prices when consumers have both an incentive to control costs and the knowledge they need to do so appropriately.
HMOs tried to address overutilitization by requiring care to be approved by “primary care physicians,” and by limiting the quantities of common treatments covered by the plan.
HMOs also sought to control provider prices by negotiating prices with a network of approved providers in advance. In part, as a result of these efforts, providers typically charge insured patients far less than uninsured patients, although negotiations are only a small part of this difference. Patients who pay cash up front can usually get the insured patient rates or better, but bad debt risks drive up prices for everyone else, even patients who have insurance or can pay cash.
HMOs usually create a system of “co-pays” that assign specific, simplified, low prices to specific medical services, at levels just high enough to discourage out and out frivilous useage of health care services. Unlike indemnity plans, these co-pays usually have little or no direct relationship to the actual cost of the services provided.
HMOs also limit full coverage to a group of doctors in a provider network, and have often required most specialist and hospital care to be approved by a primary care physician and a bureacrat who checks the proposed care against the limits on that kind of care in the policy.
A History of Growth
HMOs date back to the 1930s with Kaiser Permanente, but didn’t really pick up steam until the 1980s, in the wake of ERISA and other federal legislation enacted in the 1970s that opened the door to HMO type health insurance plans. In the late 1970s, only 5% of health insurance was of the HMO type. In 1987, it was 27%, and by 1996, the figure was 74%.
The vast majority of health insurance that isn’t truly an HMO is what is called a managed indemnity program (sometimes called a PPO, for preferred provider organization), which incorporates HMO like elements, like a preferred provider list and negotiated in advance payment schedules, into an indemnity plan-like payment system. The line between the two types of insurance has grown fuzzy to the point where the two are almost indistinguishable.
The HMO: In Practice
While HMOs initially tried to keep costs down, key features of HMOs designed to do this have eroded.
Most health insurers, who a generation ago were offering traditional indemnity plans that covered all providers and had no cost control at all, now offer HMO like plans that cover the vast majority of medical providers in a service area, and hence, still have little ability or incentive to control costs.
In part, as a result of this version of the HMO business model, their inclination to respect the defining elements of health maintenance organizations has been weak.
The Fall of the PCP
For example, overutilization of specialists, the problem the “primary care physician” was supposed to control, has proven to be overstated. People other than pregnant women aren’t flooding obstetricians with visits. Men and pre-pubescent girls aren’t beating down the doors of gynecologists requesting pap smears and mammograms. People without brain injuries aren’t crowding the waiting rooms of brain surgeons. And, busy work primary care physician visits in obvious cases can drive up insurance costs too.
As a result, most of health insurance providers now offer an “open access” product, which allows insureds to skip referrals from a primary care physician for all physician visits for a modest additional cost, and the vast majority of plans allow visits to certain kinds of specialists, like gynecologists and obstetricians, without a primary care physician’s referral.
Bloating Provider Networks
The idea of using an HMO’s network to an elite group of high quality, low cost providers has also had only a marginal impact on costs in most plans.
Currently, 81% of all plans have “networks” of providers that include at least 75% of the providers in the service area (Chart 61), according to a 2002 report by the trade association for health insurers. In large plans, this is true 83% of the time. About 75% of insureds are in “independent practice association” model plans, which means that the insurance company has no in house or affliated medical providers. Unlike the original HMO, Kaiser, they are pure insurance companies.
In practice, the vast majority of health insurers, use their “networks” as devices to punish the least administratively compliant and very highest cost providers, rather than as a way of aggressively controlling costs. Two-thirds of the time, when a provider relationship with a network is terminated, it is the voluntary decision of the provider to have nothing more to do with the insurance company (or simply cease providing services all together for some reason), rather than a decision initiated by the insurance company itself to involuntarily terminate network membership.
Great freedom to choose doctors, especially, for employers outside the health care industry (and employers purchase the vast majority of health insurance for people who are not elderly or disabled), has been a key selling point for most insurance companies.
Kaiser Permanente does not follow this model, as its insureds primarily use the plan’s salaried in house medical staff for non-emergency care. Neither does Tricare, which provides health care to retired and disabled veterans. It similarly confines patients largely to the VA medical system.
But, some of the other exceptions are ideosyncratic. For example, the Centura Health provider network in metropolitan Denver has a deal with its health insurer, United Healthcare, to include only Centura Health facilities as in network providers in the plan it offers to its employees. Thus, they are one group of United Healthcare insureds not impacted directly by the impass with HCA.
Until now, almost nobody was offering middle ground between the “everybody minus” system of almost all independent practice association plans, and the small group of in house providers offered by a plan like Kaiser.
But, the downside of the “everybody minus” provider network business model for health insurance, is that it makes it hard for an insurance company to say no to a big player in the provider market, like an HCA, no matter how much it wants to be paid for its services.
A New Paradigm?
Is the existing health insurance business model, which had led to continual health insurance premium increases in excess of inflation, viable?
Is it possible for an insurer with a more select provider network, such as the one United Healthcare has now without HCA, to survive?
The last time Colorado saw an impass between HCA and Aetna, another major health insurer, in the 1990s, Aetna eventually reached a deal that largely caved in to HCA’s demands, because its patients kept going to out of network HCA facilities, for which HCA charged high prices, and simply paid out of network care prices, according to the Denver Post. Thus, the end of a contract with HCA ended up increasing Aetna’s costs, while reducing the plan’s attractiveness to employers.
It isn’t clear that the same thing will happen this time.
Health insurance has become a key factor in almost every contract negotiation between unions and employers. It was, for example, a key factor in recently resolved negotiations between the Denver Public Schools and its teacher’s union, and it was also a key factor in negotiations between each of the state’s major grocery chains and their respective unions in recent years.
Many smaller employers have dropped health insurance for their employees entirely in the face of rising rates, and many of those that have kept health insurance have opted for less generous plans or larger employee contributions to health insurance, which are simply pay cuts by another name.
Rising health care costs are a major factor in the more than 8% drop in real median income in Colorado since 1999. Rather than keep up with inflation, wages have remained stagnant as employers have spent a larger share of their compensation costs on health care spending (which isn’t counted in median income).
In a more price sensitive market for health insurance than we saw in the 1990s, a marginal price advantage might be more important to employers than even a major dent in provider choice presented by having HCA as an out of network provider.
Cross Posted at Wash Park Prophet.