Overview of Private Health Insurance
The following analysis is based on CMS data as well as the annual financial reports of the eight largest for profit health insurance companies in the US
The above chart doesn’t reflect the full influence private insurance companies have on health care, though. In reality, about 37% of Medicare’s spending goes through private health insurance companies in the form of Medicare Advantage and Part D payments and 75% of Medicaid’s spending goes through private insurance companies as Medicaid Managed Care. What’s more, the vast majority of out of pocket costs are determined by insurance companies since most out of pocket costs are private insurance copays and deductibles. This means that the private health insurance companies really control roughly 70% of the total money spent on personal health care in the US.
Figure 2: The full influence of the private health insurance companies (shaded blue) includes Medicare Advantage, Part D, Medicaid Managed Care and out of pocket copays and deductibles.
So the private insurance companies direct roughly $1.8 trillion of the $2.5 trillion dollars spent on personal health care in the US (personal health care doesn’t include spending on government research programs, investments or private insurance overhead). That’s an enormous amount of influence.
Types of Health Insurance Policies
When most people think of the different types of health insurance policies, they think of the types of policies they can purchase or that they receive as an employee benefit, such as HMOs, PPOs or HSAs. Health insurance companies spend very little time discussing these policy types in their financial statements, though. In fact, health insurance companies don’t actually separate the premium revenues they receive from each of these types of policy holder. All commercial premium revenues are lumped together in a single fund within each insurance company and benefits are paid from that fund without consideration of the source.
The Insurance companies divide their policy types differently when assessing their finances. The most important division of policy types to health insurance companies is to divide the commercial from the non commercial (Medicare and Medicaid) health insurance policies.
Non commercial policies are sold to recipients of either Medicare or Medicaid. There are four basic types of non commercial health insurance:
1. Medicare Advantage—where a Medicare beneficiary signs over their Medicare benefits to a private insurance company to be managed by them.
2. Medicaid Managed Care—where a Medicaid recipient has their benefits managed by a private insurance company.
3. Medicare Part D—a prescription drug program for Medicare beneficiaries mediated by the private insurance companies but paid for, in part, by the Federal Government.
4. Medicare Supplemental policies—private policies purchased by traditional Medicare recipients to cover their Medicare deductibles and co-insurance payments.
Non-commercial policies are a relatively recent innovation, allowed by federal laws enacted in 1997 and 2003. Non commercial health insurance policies have been very popular with insurance companies in recent years as figure 3 shows.
Figure 3: The number of non commercial members has increased by more than 500% since 2003 for the eight largest for profit health insurance companies.
Why are the non commercial policies so popular with health insurance companies? Two reasons for their popularity are that the premiums for most of these policies are backed by the federal and state governments (with the exception of the Medicare Supplemental policies) and the government, not the insurance companies negotiate reimbursement rates for most of these policies (with the exception of the Part D policies). These two factors minimize the risk insurance companies are exposed to with the non commercial policies. There are few things an insurance company would want more than a risk free insurance policy.
Commercial health insurance policies are for people who don’t qualify for either Medicare or Medicaid; in other words, they cover people who actually need health insurance. Commercial policies, unlike the non commercial ones, haven’t been very popular with the health insurance companies in recent years. As figure 4 shows, the eight largest for profit health insurance companies have barely increased their commercial membership at all in the last decade.
Figure 4: The eight largest for profit health insurance companies have only increased their commercial membership by about 11% in the last decade.
What’s more, The majority of commercial health insurance in the US isn’t actually insurance.
Administrative Service Contracts
People in the US who have their health insurance provided by their employer usually assume that their medical benefits are paid for by their health insurance company. Most of the time that’s not true, though. Most large employers in the US no longer buy health insurance policies for their employees. Instead, they self insure by contracting with a health insurance company that will “administrate” employee medical benefits without actually paying for any of them. These administrative service contracts (ASCs) now account for about 70% of all commercial health insurance policies in the US.
Figure 5: Roughly 70% of all commercial health insurance policies in the US are administrative service contracts instead of actual insurance.
How do ASCs work?
An insurance company approaches a large employer with a proposal. Rather than accepting premiums from each employee and then paying the employees’ medical expenses, the employer will keep the employee premiums in a fund it controls. When medical expenses occur, the insurance company writes checks off of the employer’s fund to cover the cost of the medical expense. This “service” will be provided by the insurance company for a small monthly fee.
In addition, the insurance company will continue to manage details of provider networks or, as well as continuing to manage reimbursement amounts and acceptance (or denials) of coverage based on services provided. In other words, the insurance company will continue to negotiate rates and enforce rules, as well as handle payments and collection from employees when an expense isn’t covered. They’ll do all the administrative parts. They just won’t do the insurance part. That part is covered by the employer.
Why are ASCs popular with employers?
The monthly fees for an ASC are only about $20-$30 per member which is a lot less than the $300-$500 per person monthly cost of actual health insurance.
Are ASCs really a good deal for employers?
No, but most employers have no way of knowing how badly they’re being ripped off by these contracts.
The Devil, as always, is in the details
Employers sign administrative service contracts with the assumption that insurance companies will get employers the same discounts for health care services as they get for themselves. There are two problems with this assumption:
1. There is no evidence that it’s true.
2. There is no reason to believe that it’s true.
This is important because most health care providers mark up medical bills by many times their value. If you remember my financial analysis of California hospitals, the average mark up for all medical bills issued by California hospitals in 2011 was about four times the expected payments.
Figure 6: California hospitals billed an average of about four times the amounts they received in payments for all of the paid bills issued in 2011.
What’s more, there is a huge variation in how much each hospital marks up the price of each medical service with some hospitals marking up their prices an average of eight to ten times what they expect in payments.
Since there is so much variation in billed charges between hospitals, it’s extremely difficult to determine the real value of a medical service. Health insurance companies are experts in determining these values for themselves but, as we’ve seen, they have very little interest in offering a fair price for medical services when others are paying for that service.
Add to that the fact that health insurance companies have no accountability whatsoever for any of their ASC negotiations. Since all of the money for all ASC negotiations goes directly from the employer with the ASC to the health care provider, the insurance company never has to report any details of any of these transactions to anyone but the employer. There is no outside record for any ASC transactions anywhere.
ASC transactions account for roughly 70% of all commercial health care payments in the US which is at least $700 billion in health care payments. Yet ASC payments are completely unregulated and have almost no oversight. That alone goes a long way toward explaining why health care costs in the US are spiraling out of control.