Failed Private Insurance Middlemen: Like Tumors, You’ve Got to Shrink Them or Cut Them Out

Want to see into the future? Look at the ongoing fight over premium increases for policies on the Massachusetts Connector (exchange), and the effort by the state regulator to control prices, and you’ll get a glimpse--because the health care plan just put into law would effectively replicate the Massachusetts health care system in every state. What we are seeing in Massachusetts is a complete failure of middlemen--health insurance companies--to do their main job, which is to use their size to negotiate good prices with providers.

Scarecrow wrote about how what we are seeing is a failure of the whole principle of the market structure and a failure to achieve a utility-style “regulatory bargain.” In an important way, it is even worse than that because it is an attempt to create an second-order regulatory bargain. Instead of the regulator trying to reach an agreement directly with providers, we are trying to use a failing and wasteful intermediary, the health insurance industry.

Mandate and taxes are the same thing

Effectively, the state, through the exchange, has decided to pay providers, drug makers, and hospitals to provide people with health care. The state is paying for this through subsidized insurance and a mandate forcing people to pay for coverage--essentially a poorly designed private tax. Using the power of the government to force someone to pay a certain amount to a private entity is a distinction without a different relative to the government collecting a tax from an individual and then handing the money over to the private entity.

Failure of the private health insurance middlemen

The problem is, instead of the state directly paying providers (or forcing people to pay providers), it is paying (or forcing people to pay) a middleman--the health insurance companies--who in turn give the money to the providers. Having a middleman is not inherently bad if they can add value--in this instance, the main potential value insurance companies could theoretically add is functioning as bulk negotiators to get the lowest rates possible from providers—but, as we see in the “reform” health care system in Massachusetts, the insurance industry has completely failed at this function.

Clearly, it is possible to get health care services and medications for much cheaper than what the private insurance companies are able to negotiate. Looking all over the industrialized world, we see they pay dramatically less for health care and pharmaceuticals. Even within the United States itself we have proof through Medicare that the government can cut out the private health insurance middlemen and do their job much better and cheaper.

The failure of Massachusetts "reform”

The amazing thing is that, in Massachusetts, all parties involved seem to fully acknowledge that the private insurance company middlemen are just incapable of negotiating better rates with providers and drug makers to keep down costs.

You have the Massachusetts Attorney General, Martha Coakley, who launched a massive investigation determining that premiums are not going up because of increased use of services, tests, and procedures, but as a result of relevant providers with too much market clout (i.e. monopolies and oligarchies) increasing the prices they charge much faster than inflation.

The Massachusetts Division of Insurance rejected the private insurance premiums increases. The top two reasons they cited were about insurers failing to negotiate sufficiently good reimbursement rates with providers. (via Think Progress)
•The disapproved rate filings failed to illustrate how the carriers pay similarly situated providers differing rates of reimbursement based solely on quality of care, mix of patients, intensity of services, and geographic location at which care is provided.

•The disapproved rate filings failed to demonstrate that carriers have renegotiated provider reimbursement rates;

Amazingly, you even have top insurance companies in the state admitting they are powerless to fulfill their main function of negotiating lower bulk rates from providers.
Officials at Blue Cross Blue Shield of Massachusetts, the state’s largest health insurer, acknowledged that insurers pay some hospitals and physician groups far more than others, mostly because they have to. Andrew Dreyfus, executive vice president for health care services, said hospitals in high demand or serving geographically isolated populations can hold out for higher payments.

This is an important revelation. The insurance company is saying that hospitals are powerful enough to essentially set their own rates. It is an admission by insurers that they are a failure at their main justification for being part of the system.

Either cut out the middlemen or seriously narrow their job description

Since the private health insurance middlemen have proven a market mechanism (exchanges) will not hold down cost because insures have failed at their job of negotiating lower premiums with providers and drug makers, there are two potential solutions.

First is to just completely cut out the wasteful, failed middlemen. Have the government directly negotiate rates and pay providers without an intermediary. Medicare has shown the government can do this much more cost effectively. Either you go with a simple single payer system, or a strong public option. A strong public option on a properly risk-adjusted exchange will eventually either relegate the ineffective private insurance companies to niche status if they can't adapt, or force private insurance companies and/or providers to come to an agreement so they can actually hold down costs. Non-profit insurance HMO's that are technically providers because they own their hospitals and clinics might be forced into being competitive.

Barring attempts to completely cut out the middlemen, the other option is to strip away their major function using all-payer, like in Switzerland, Belgium, Japan and basically every other “private” health insurance system. This requires a centralized reimbursement negotiator for all non-fully integrated HMOs. It can either be the government negotiating the rate directly, or overseeing a regulatory cabal if all the insurance companies agreed to appropriate rates with all the providers. This, in effect, would reduce the private insurance middlemen to a much more limited function that they might do better than the government, such as costumer service, bill processing, fraud detection, or float management. This is roughly the function served by the non-profit insurance companies in Belgium. Of course, if reduced to this minor level of usefulness, it would be impossible to justify anything less than a 94% medical loss ratio.


This is not complex economics. In fact, the Obama administration and their allies have tied themselves in logical knots trying to avoid the conclusions reached by the available data. It has been evident for years looking at the federal employee insurance exchange that a regulated market of private insurance companies without all-payer will not bring down costs. We have seen in Massachusetts that the planned system of reforms has failed. Independent study and even claims from major insurance companies make it clear that these middlemen simply can't perform their assumed added value function of negotiating lower rates.

Every day we avoid adopting real reform, we waste billions of dollars on a broken system. The Massachusetts experience shows us the new law will not solve the underlying cost problems. The question is how many years and how many billions we will waste on this “reform” plan we know will not work.

Harry Reid (D-NV), Michael Bennet (D-CO), Bernie Sanders (I-VT), and Jeff Merkley (D-OR) implied that they might take a step toward real cost containment reform by having a vote on a public option in a few months. We will know very shortly how serious they are if we get proper reconciliation instructions in the upcoming budget resolution.

1 comment:

Anonymous said...

Before I went to medicare, I spent a year with "The Health Connector" od the new Massachusetts miracle. Prior to its existence, I had endemnity from Blue Cross at a serious amount of money. I watched, in horror , at the enormous increases in my Blue Cross insurance over the years. Ok. As I payed close attention to annual out of pocket costs, I am a confident insurance shopper. When the "Heath Connector: came along, it was clear that the affordable plans were high risk junk. Either selection would risk a familie's economic welfare if they wanted reasonable care. I know the middleman must be removed. And more importantly, the separate and distinct world of "Medical economics" must be brought into the real world.I don't care if that results in me having an Army medic as a physician. If the Army can train them they can train many more. This is an emergency and should be treated as a national emergency.


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