Can You Trust Your Health Insurer?

The health care system is bureaucratic, complicated and sometimes frightening. At least that’s the way it can seem if you confront it on your own.

In the past, most people had an ally to help them cope: an employer or an insurance company. One reason why companies have HR departments is to help their employees with health insurance problems. If you are buying your own health insurance, who better to help you confront an impersonal hospital bureaucracy than a veteran insurance company like Blue Cross?

Yet, if you have been paying attention to newspaper headlines recently, you may have noticed some disturbing revelations. In some cases, the insurers have been cutting deals with the providers that are good for them—while leaving patients to fend for themselves with some hefty medical bills.

Take out-of-network treatments—delivered by providers who do not have a contract with your insurer. There are all kinds of reasons why a person might see a doctor or get treatment at a hospital that is out-of-network. One reason is travel. The farther you are from home, the greater the odds the facility that treats you is not in your insurer’s network. So how do you keep from getting gouged by “list” prices when all the other patients are getting care “wholesale”?

In times past, most insurers had a solution to that problem. They would negotiate with the provider on behalf of the patient and make sure the charges were reasonable.

Times have changed.

According to an intensive investigation by New York Times reporter Chris Hamby, many employers and health insurers these days are using their market clout to negotiate low settlement fees with the out-of-network providers for themselves, but not for the patient’s share.

Suppose the charge is $10,000 and there is a 20 percent patient coinsurance requirement. Under the old system, the insurer would negotiate that down to, say, $5,000—leaving the insurer to pay $4,000 and the patient to pay $1,000.

Under the new system, however, the insurer might negotiate its share of the bill down to $3,000, but leave the patient owing the remaining $7,000.

Real-world examples can be much worse. In one case, UnitedHealthcare settled its part of a claim by paying $5449.27, leaving the patient owing more than $100,000.

Part of the problem is that some out-of-network providers have become very aggressive in seeking high fees for their work. Cigna, for example, claims that some providers tried to obtain fees that were 1,904 percent of the Medicare rate.

To combat such behavior, large insurers are using an independent service called MultiPlan, which uses algorithms to determine what a reasonable price would be for various services. Instead of negotiating with the provider, this approach is based on “automatic pricing”—determined by algorithms. If the provider accepts the price, the employer (or the insurer) is off the hook.

That might not be a bad practice, if MultiPlan were benefiting both the insurer and the patient. But the common practice these days is for the insurer to pay its share of the “reasonable” bill, leaving patients facing their share of the original “unreasonable” bill.

Any “savings” achieved by lowering the size of the final bill is shared by Multiplan and the insurer or the employer. But when the patients can’t pay their share of the list price, the debt can show up on their credit report.

Why is this happening?

Over the past three decades, federal and states laws have made it increasingly difficult for employers and insurers to discriminate on the basis of health status in making hiring or enrollment decisions. Yet the health status of employees and their families can have a big impact on the employer’s bottom line. Healthy enrollees are profitable. Sick enrollees are not.

The result: in our health care system, no one wants an enrollee with high health care costs. No employer, including government employers. No commercial insurer. And for the most part, no insurer in the (Obamacare) exchanges.

While it is illegal to discriminate at the point of enrollment, there is nothing to stop employers and insurers from configuring their plans to be appealing to the healthy and unappealing to the sick.

Traditional insurance economics holds that people should self-insure (paying out of their own pocket) for small medical expenses they can easily afford, but use third-party insurance for the large expenses. The typical employer plan these days does the reverse.

For example, it is not unusual for employees to have access to primary care for a modest copayment. But if those same employees enter a hospital, they can be exposed to thousands of dollars in out-of-pocket costs.

If hospitalization occurs, costs can skyrocket.

Take the health plan options for the federal government’s employees. Blue Cross, which has long dominated this market, offers a low-cost family plan for a premium of $283 a month. In return, the family pays $10 for an office visit and $5 for generic drugs—making those services almost free. But if hospitalization occurs, the out-of-pocket exposure is $9,000 for one person and $18,000 for the entire family.

For the most comprehensive Blue Cross option, the family will pay three times more in monthly premiums. Since this plan attracts sicker enrollees, an office visit is $30 and generics cost $7.50. But even though coverage under this plan is more comprehensive, the out-of-pocket exposure for the family is still $12,000 if hospitalization occurs.

I have previously noted that health insurance in the (Obamacare) exchanges is virtually free for most people and preventive care is free as well. But if people get sick, the exposure for a family of four can be almost $19,000—every year!

Also, if you go out-of-network with an exchange plan, the plan typically pays nothing. And the exchange plan networks tend to be very narrow—often excluding the best doctors and the highest-rated medical facilities.

It is tempting to blame health insurance companies and employers for these outcomes. But this attitude misses the forest for the trees. The private actors described above are simply responding to the perverse incentives created by unwise government policies.

If we want better private sector results, we need better public policies. For example, in the Medicare Advantage program, risk adjustment makes sick enrollees just as desirable as the healthy.

Laurence Kotlikoff and I have argued this would be an excellent way to reform the individual (Obamacare) market.