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Health Insurance Rate Wars - Are We Focused on the Right Fight?

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By Darius Tahir and Clayton Christensen

On opposite ends of the country, differing results in battles with health insurers lead us to the same conclusion: we need to attack rising costs of health care delivery which will not be fixed, as many had hoped, by the recent health care legislation or by periodic regulatory tweaks.

Recently, Aetna became the second major California insurer to withdraw intended rate hikes after intense examination by state regulators. Anthem Blue Cross had earlier elicited national attention and reproach from the White House when it attempted to raise rates by as much as 39 percent for individual policies. When the company backed down, Secretary of Health and Human Services Kathleen Sebelius hailed the rate increase defeat by saying, "Finally, the power is shifting back to consumers."

Meanwhile, in Massachusetts, the story has turned out to have a different ending. In April, Massachusetts governor Deval Patrick and his insurance division rejected over 200 requested rate increases, ranging from 8 percent to 32 percent, which were proposed by the four largest insurance providers. But last week, the attorneys of the state's Division of Insurance overturned the cap and pronounced the rate increases reasonable based on what the insurer pays hospitals and physicians.

Rate increases are the last symptom of the disease afflicting the health care system. Whether the rate changes are allowed to go through or not, most Americans still won't have the ability to choose their insurer or to comparison shop for treatments and tests such as MRIs, for which prices vary wildly in large part due to the opacity of health care's pricing model. Capping insurance rates does little to address the underlying fact that health care needs a fundamentally new business model.

In the current system, the patient's insurer pays most doctors through a fee-for-service scheme wherein each activity and procedure is itemized and reimbursed. This method creates perverse incentives: doctors are encouraged to give too much care and may favor more expensive services, even when a less expensive--and often less invasive--service might be equally or more effective. That means that the fee-for-service model promotes more expensive health care and ultimately, less effective health care practices.

Another problem with health care's business model is that its services are generally housed together in a centralized setting. A hospital performs many services: it treats complicated and urgent cases, but it also has to handle simple treatments that are easy to diagnose and straightforward to cure. This is a critical distinction if health care costs are ever to come down: the former function indeed requires a lot of expertise and technology to manage, but the latter can be delivered elsewhere, in a lower-cost venue by lower-cost personnel.

But all too often, the use of new business models and technologies in health care is incentivized along fee-for-service lines, so that prices don't fall as they have in most other industries. In Massachusetts, for example, digital mammography is 45 percent more expensive than non-digital mammography, even though it ought to be cheaper on a per-unit basis: it's faster, and it neither requires film nor physical storage. But there is little incentive for hospitals and physicians to disrupt existing business models by undercutting their own prices.

Arguing over rate changes is only dealing with the end of a long chain of errors and problems. All that will likely be accomplished is more insurance vs. provider bickering over pricing, or worse yet, a reduction in services that leads to longer queues and less access to care--in essence, an intensification of the status quo.

Instead, achieving cost savings and better care by changing the delivery model should be the goal, because those benefits will travel up the chain of care. The Patient Protection and Affordable Care Act makes some efforts, albeit incomplete, to consider this problem. It allocated money to promote electronic medical records, which, if properly deployed, can greatly increase continuity and efficacy of care. It created a group to evaluate comparative effectiveness--determining which treatments and drugs are most effective. It tasked pilot programs to experiment with alternative payment schemes like Accountable Care Organizations.

But what happens when the pilot programs' time is up and the results are in? These initiatives are worthy experiments, but they are each only a piece of re-building a new delivery model that could deliver more for less. Ensuring that we continue to progress down that road will require more attention, more effort, and more political passion. And it starts by redirecting our focus away from the old health care business model and the endless battles it produces.

Darius Tahir is a health care researcher with Innosight Institute. Clayton Christensen is a professor at the Harvard Business School and co-founder of Innosight Institute.