THE BLOG

Why the Private Health Insurance Industry Has to Go

04/09/2015 02:50 pm ET | Updated Jun 09, 2015

The private health insurance industry in the U.S. has had a long run since shifting to medical underwriting and a for-profit status in the early 1960s. It finds itself increasingly dependent on the government as the costs and prices of health care have continued upward since the 1980s. Its many perks from government include tax exemptions for employer-sponsored insurance (ESI), privatized Medicare and Medicaid programs, and longstanding over-payments to Medicare Advantage programs. The Affordable Care Act (ACA) has added to these perks since 2010 with subsidized premiums through the exchanges, a "risk corridor system" to protect insurers from losses, and allowing automatic self-renewal for 2015 plans. (1)

Incremental attempts to contain health care costs and reform the system since the 1990s have built upon our current multi-payer financing system. After five years' experience with the ACA, we now know that insurers themselves are a major barrier to achieving the kind of access to affordable care that our population so desperately needs.

Here are some of the major reasons why private health insurers warrant no further bailout by government and taxpayers.

1. Continued discrimination against the sick.

Despite the supposed consumer protections in the ACA, a 2014 letter from more than 300 patient advocacy groups to the Secretary of Health and Human Services described continuing ways that insurers still discriminate against the sick, including benefit designs that limit access, high cost-sharing, restrictive drug formularies, inadequate provider networks, and deceptive marketing practices. (2)

A recent study by Kaiser Family Foundation found that only one-third of households with incomes between 100 percent and 250 percent of poverty have enough liquid assets to pay their deductibles, while only about one-half can meet out-of-pocket limits. (3) As other examples, Wellpoint developed an algorithm to search its database for patients with breast cancer with an intent to cancel their policies (4), while many insurers place all drugs used to treat such complex diseases as cancer, multiple sclerosis and HIV in the highest drug formulary cost-sharing tiers, thereby reducing insurers' costs but making the drugs unaffordable for many patients. (5)

2. Fragmentation, inefficiency, and exorbitant administrative overhead.

There are some 1,300 private insurers still trying to maximize their income by avoiding the costs of sicker patients. Their administrative overhead is more than five times higher than that of the single-payer program in two Canadian provinces (6); the overhead of private Medicare Advantage plans averages 19 percent vs. the 1.5 percent for traditional Medicare. (7) Although the ACA set limits of 20 percent for overhead in the individual market and 15 percent in large-group markets, a recent study has found that those requirements had no effect on insurers' overhead spending over the first three years of the ACA. (8)

3. Increasing costs for less coverage

The ACA provided insurers with four levels of coverage -- the so-called "metals" -- with actuarial values (what insurers pay vs. what patients pay) ranging from 60 percent (bronze) 70 percent (silver) to 80 percent (gold) and 90 percent (platinum). Not content with those levels of coverage, the industry through its trade group, America's Health Insurance Programs (AHIP), has been lobbying hard for copper plans with only 50 percent actuarial value. (9)

Silver plans have been the most popular on the exchanges, so that patients are left with almost one-third of their costs, plus the cost-sharing that was required to get and maintain their policies. All this has led to an epidemic of underinsurance, whether the plans are purchased through the ACA exchanges or through the private insurance markets. The ACA has made the mistake of focusing on raising the numbers of Americans with "insurance", but has not been effective in containing prices or costs of health care, with the result that an increasing proportion of these costs are shifted to patients and families. One-half of bronze plans in seven large U.S. cities requireenrollees to pay the deductible (often $5,000) before covering a doctor's visit. (10)

4. Gaming the ACA for profits more than service to patients

There are many examples of this, starting with Medicare Advantage. Many insurers have been cited by the Centers for Medicare & Medicaid Services (CMS) for serious violations of Medicare's patient protection requirements, including inappropriate denial of coverage and failure to consider physicians' clinical information. (11) Humana, one of the largest Medicare Advantage insurers in the country, is facing scrutiny from the U.S. Department of Justice for its risk-adjustment practices, which "upcode" the severity of patients' illnesses in order to gain increased reimbursement, even as they lobby Congress for continued high over-payments. (12) Meanwhile, some insurers are marketing short-term plans that last less than 12 months, evading any of the ACA's requirements. (13)

5. Private insurance has priced itself out of the market.

Premiums keep going up at rates much higher than the cost of living, with little or no containment by regulators. As examples, MetroPlus, a popular new entrant on the New York exchange in 2014, has requested rate hikes of up to 28 percent in 2015 for some of its enrollees (14), while Florida Blue, the state's largest insurer, has announced an average rate increase of 17.8 percent for 2015. (15)

One can argue that the private insurance industry should be regarded as obsolete and not worth saving. However, the ACA has extended its life, including almost $2 trillion in federal subsidies over the next ten years (16) (if these subsidies survive a U.S. Supreme Court ruling on their legality in coming months). Insurers have focused on attracting enrollees with low premiums, high cost-sharing, and low levels of actual coverage. Large insurers such as Wellpoint (Anthem) and Humana expect to receive $5.5 billion in 2015 through the ACA's "risk corridor" provision that protects them from "losses." (17)

6. As their business plan dictates, insurers are leaving unprofitable markets without regard for patients' needs.

Private health insurers are all about making money, so they leave unprofitable markets regardless of the public's needs. A recent example is Blue Shield of California (which just lost its state tax-exempt status with a surplus of more than $4 billion), which withdrew from 250 zip codes in California throughout the state in 2014. (18, 19).

Based on the above, the time has come for us to replace private health insurers with a more efficient, not-for-profit single-payer financing system--national health insurance (NHI)--which could be enacted by passage of H. R. 676, Expanded and Improved Medicare for All.

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References:
1. Geyman, JP. How Obamacare Is Unsustainable: Why We Need a Single Payer Solution for All Americans. Friday Harbor, WA, Copernicus Healthcare, 2015, p. 170.

2. Patient advocacy groups. Letter to Sylvia Burwell, Secretary of Health and Human Services, July 28, 2014.

3. Claxton, G, Rae, M, Panchal, N. Consumer assets and patient cost sharing. Kaiser Family Foundation, March 11, 2015.

6. Woolhandler, S, Campbell, T, Himmelstein, DU. Costs of health care administration in the United States and Canada. N Engl J Med 349: 768-775, 2003.

7. Healthcare-NOW! Single-Payer Activist Guide to the Affordable Care Act, 2013. p. 22. Available at www.healthcare-now.org

8. Day, B, Himmelstein, DU, Broder, M et al. The Affordable Care Act and medical loss ratios: No impact in first three years. Intl J Health Services 45 (1), 2015.

9. Andrews, M. Proposal to add skimpier "copper" plans to marketplace raises concerns. Kaiser Health News, July 1, 2014.

11. Pear, R. U.S. finds many failures in Medicare health plans. New York Times, October 12, 2014.

12. Herman, B. CMS pitches 1.1 % boost to Medicare Advantage payments. Modern Healthcare, February 20, 2015.

13. Andrews, M. Short-term plans can skirt health law requirements. Kaiser Health News, October 28, 2013.

14. Hartocollis, A. Insurers on New York State's exchange seek significant rate increases. New York Times, July 2, 2014.

15. Galewitz, P. Florida's largest insurer is raising exchange rates average of 17.6 percent. Kaiser Health News, August 1, 2014.

16. Pear, R. Health law turns Obama and insurers into allies. New York Times, November 17, 2014.

17. Wayne, A. Insurers' Obamacare losses may reach $5.5 billion in 2015. Bloomberg News Businessweek, March 4, 2014.

19. Bartolone, P., Capital Public Radio. Insurance choices dwindle in rural California as Blue Shield pulls back. Kaiser Health News, January 30, 2015.