There are two issues here: How health care is provided and How health care is financed. Of the two, the most critical is how is health care financed because that will determine the maximum amount of care we buy per premium dollar. How does insurance work and why is this news bad news for patients and doctors? (Hint, I have explained it all in Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them). The core principle of insurance is risk spreading across many policyholders. We do not buy insurance from our neighbors, nor do we sell insurance to our neighbors. There is a good reason for this. Our neighbors tend to be near our own financial status and that means that they would have to have hundreds of thousands of dollars to pay our claims (or we to pay their claims) and they do not have it. So, first sub-principle: Insurers have to spread their risk assumption across many, many policyholders. Some policyholders will have modest claims, most will have virtually no claims and a very small number of policyholders will have large claims. So, how many policyholders should an insurer have to be an efficient insurer? An insurer could have 500 - 1,000 policyholders but with so few policyholders it will not spread the risk enough to have stable operating results. That said, there are well over 1,000 health insurers/health benefit plans and with a population of 320,000,000 Americans the average number of policyholders would be about 320,000. But a few dominant insurers actually have tens of millions of policyholders and there are still mom and pop insurers with only a few thousand policyholders. Now the relationship between between large insurers and small insurers is much like the relationships between small insurers and individual policyholders: large insurers manage risk far more efficiently than small insurers. Efficient risk management comes with many benefits. Very efficient insurers have claims costs right about where they expect them to be year after year. Small insurers tend to have claims costs that wobble all over the place like a BB in a freight car. Some years small insurers make very high profits because their policyholders had lower claims. Some years small insurers have deep losses and often go bankrupt because they were not large enough to have consistent levels of claims. The smaller the insurer the greater the potential for high losses and bankruptcy. So, what can we take away from this? Despite much rhetoric that many small, competing insurers would lower costs by competing on price, small insurers actually need to charge higher premiums if they want to avoid crippling losses. because they are inefficient risk managers. The larger the insurer the lower the likelihood of very large profits or very large losses. The smaller the insurer, the higher the likelihood of very large losses or very large profits. The absolute limit on how efficient an insurer can be is the size of the population to be insured. But one thing is crystal clear from a mathematical perspective: A single, national health insurer can provide higher benefits at lower cost, than any collection of smaller insurers. Why are thousands of competing insurers a disaster? At present we finance health care through thousands of inefficient health insurers and by shifting insurance risks to health care providers. United Health just announcing the most sweeping shift and as a result doctors and hospitals will be assuming most of the insurance risks for their patients. These doctors will become the health insurers for a couple of thousand of their patients which makes the doctors incredibly inefficient insurers. Doctors facing such a dilemma have only one way to manage their insurance portfolio: Cut access to high cost diagnostic testing and treatments. In essence, as your insurer, your doctor is going to look at you and focus on cutting the costs of your care, whether you are ill, or not. The less care they provide, the less risk they face. If they do not provide any care at all most of the revenue they receive will become profit. If they reduce care by 5-10% over the amount they would have gotten as fee for service providers they can greatly improve their likelihood of earning comfortable profits and reduce their risk of financial ruin. If your doctor tries to treat all their patients as well as they could under a fee for service system, your doctor will face virtually certain financial ruin. United Healths plan has nothing to do with better care, it is all about shifting the focus of risk management closer to the patient so that your doctors, acting as insurance claims managers, will delay and deny the care you need.
Posted on: Fri, 23 Jan 2015 23:24:11 +0000
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