Why Health Insurers Can, But Won’t, Break Up Medical Monopolies


Virtual monopolies exist in almost every healthcare sector: from hospitals and health systems to drug companies and private-equity-staked medical practices. With so much consolidation of power and influence, U.S. healthcare has become a conglomerate of monopolies; the subject of this continuing series.

If there’s one big lesson to take from this series so far—something that unites the many monopolies that make up American healthcare—it’s this: As monopolies expand their power and influence in healthcare, they grow complacent. And when that happens, innovation dies.

Ultimately, Americans pay the price with their wallets and their health.

One group, more than any other, wields enough might to stand up to monopolistic hospitals, drug companies and private-equity firms—and could drive industrywide improvements in quality, cost and access.

Doing business with the big five

That mighty sector is the health insurance industry. Of the 300 million insured Americans, more than half (169 million) are covered by one of the “big five”: UnitedHealth Group, Anthem (now Elevance), Aetna, Cigna and Humana. Private insurance is a $1.2 trillion-a-year industry, accounting for 30% of all healthcare spending.

Make no mistake, insurance companies know how to assert control. Ask practicing physicians about their experiences with the big five, and they’ll passionately criticize the “prior authorization” process, which requires that insurance companies approve, in advance, nearly all expensive medical tests, treatments and procedures. And in communities with multiple hospitals, insurers often pit one against the other to keep daily rates down. That’s why, in recent years, hundreds of hospitals have been forced to file for bankruptcy, particularly in underserved and rural areas.

With so much influence over medical professionals and their workplaces, the nation’s insurance giants have enough clout to rewrite the rules of healthcare and drive vastly better performance at the care-delivery level. Insurers, in theory, could use their size and influence to simplify an overly complicated (and increasingly dysfunctional) medical system while dramatically lowering prices.

But they haven’t. As a consequence, the U.S. spends nearly twice as much on healthcare as every other nation but ranks last among the 12 wealthiest nations in medical outcomes.

Why private health insurers pull punches

Without question, any insurer attempting to drive down high prices (resulting from hospital consolidation, private-equity investments in physician groups and the failure of the government to regulate drug pricing) would face industrywide resistance and need to overcome stiff regulatory restrictions.

As an example, state and federal laws require insurers to offer “in-network” doctors and hospitals within 15 miles (or 30 minutes) of where enrollees live or work. As such, it does little good (from a negotiating standpoint) to secure great rates and threaten to send patients to a hospital or physician group that’s 50 miles away.

Rather than battling with local doctors over how much to pay for each office visit or procedure, insurers could encourage physicians to form medical groups and pay them based on the quality of clinical outcomes achieved (rather than the number of services they provide). This approach would reward physicians who excel at preventing heart attacks or strokes and avoiding medical errors. In addition, it would eliminate the need for “prior authorization” and keep patients healthier while maintaining the profitability of insurers.

But instead, insurers accept the status quo, even when the current approaches to medical care prove problematic for patients.

Two insurance models, both problematic

With rare exception, health insurers don’t try to manage medical care or optimize performance. Instead, they take an actuarial approach, calculating how much medical care is likely to cost (given the uncoordinated and inefficient delivery system) and price accordingly, adding 6-8% for profit.

This approach—more calculator driven than safety driven—is akin to home insurers who sell fire coverage. Rarely do they inspect the home or mandate safety upgrades to the furnace, stove and hot-water heater. With an actuarial mindset, insurers don’t focus on opportunities to improve future performance. Instead, they rely on a mathematical calculation based on the pooled risks and economics of today.

When it comes to health insurance, this hands-off approach explains why patients spend days in hospitals when outpatient procedures often prove safer and less expensive. And instead of hiring a physician to provide telemedicine visits at night and on weekends (an effective and cost-saving approach), patients are told to go the nearest emergency room, where they wait hours for care that is 10-times more expensive than a virtual visit.

You’d think that reducing the cost of medical care would benefit the bottom line of the big five. In practice, the opposite is true. High costs most often result in increased revenue and higher profits. To understand why, it’s helpful to examine the two types of coverage insurers offer:

1. Traditional health insurance

In the traditional commercial market, insurers receive a set fee (monthly premium) from individuals or businesses and use those dollars to reimburse physicians and hospitals for the care they provide. Underwriters working for the insurance company calculate the likely cost of providing that medical care. The price covers expenses, generates a profit and protects the insurer against unforeseen events like a pandemic or new million-dollar medication.

Therefore, insurers view higher prices as necessary—the best way to minimize risk and maximize profits.

Of course, if insurance prices rise too fast for individuals or businesses to afford, then the insurer risks losing customers to a less-expensive competitor. However, this is not as big of a risk as one might think. That’s because the big five have purchased competitors, consolidated power and sought to achieve monopolistic control. The result: 75% of U.S. markets are highly concentrated, with one insurance company dominating.

According to an AMA report, “It appears that consolidation has resulted in the possession and exercise of health insurer monopoly power—the ability to raise and maintain premiums above competitive levels—instead of the passing of any benefits obtained through to consumers.”

There’s another reason higher healthcare costs benefit insurers. The Affordable Care Act includes the 80/20 rule, which states that insurance companies must spend at least 80% of the money they take in from premiums on healthcare costs and quality improvement activities (and 85% when selling insurance to large employers). The other 15-20% can go to administrative, overhead, marketing and profit.

Under the law, if the insurance company fails to meet this 80% threshold, enrollees get a rebate for part of the premium they paid. So, to adhere to this rule, insurers are forced to lower premiums and reduce profits whenever the cost of care drops. On the other hand, when medical costs go up, insurance companies have the freedom to charge higher premium prices and earn greater profits.

So, think about it: As an insurer working under these rules, how aggressively would you work to innovate and lower medical costs—especially knowing those efforts would cut into your profits?

2. Administrative services to self-funded employers

More and more companies are turning to self-funding rather than purchasing an insurance plan for their employees. Self-funding requires employers to assume the financial risk for providing healthcare benefits to workers, which they opt to do for several reasons.

One is that companies want to have more details about the healthcare needs of their employees overall. Though it’s illegal for employers to collect medical information about individual workers, they believe aggregate health data will allow them to customize health benefits and lower their overall medical costs (compared to buying a standard policy from an insurer).

The other reason to self-fund is the “float.” With usual insurance contracts, businesses must cut a large premium check at the start of each month to pay for future medical care. But self-funded businesses usually don’t receive bills from doctors or hospitals for several months after care has been provided. And they don’t have to pay those bills for another 60 days. This lag, up to six months, means businesses can retain the cash and either invest it or use it to fund capital projects.

But there’s a catch for businesses. Providing healthcare coverage is complex with many legal requirements. Few businesses have the expertise or industry connections needed to contract with medical professionals, complete regulatory requirements, and implement the necessary IT and data-analytic systems.

To fill these gaps, businesses hire either an ASO (administrative services organization) or TPA (third-party administrator) to perform these functions. Insurance companies are happy to play these roles for self-funded businesses. In return, insurers receive a percentage (often in the 10% range) of the total paid for medical bills.

Being a TPA or ASO generates less revenue than being a health insurer. But this function is no-less profitable and far-less risky. And, once again, the higher the cost of care provided, the more the insurer earns. If employee medical care totals $10 million, the ASO’s 10% equals $1 million. But when costs rise to $15 million, the insurer receives an additional $500,000. As such, when total expenses rise, the insurer makes more money, not less.

Long live the status quo

It might seem to the outside world that the best path to profitability for private insurers would be to drive down medical expenses (i.e., the less insurers pay doctors and hospitals, the more they theoretically pocket as profit).

But most often, they do just as well when costs rise. In the end, insurers know that going to war with other industry giants is daunting and not worth the effort.

The current system proves financially beneficial for all. Over the past decade, profits and stock prices for the largest insurers have risen at a rate comparable to technology companies. And, in an industry of comfortable profits, innovative solutions that could produce higher quality and lower costs have been ignored.

Insurers see the current system as optimal: If it isn’t broken, why fix it? That same inertia exists among payers (businesses and the government) who have the greatest motivation to drive down healthcare costs. The reluctance of payers will be the focus of the next article in this series.

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