"Do Insurance Companies Deserve All The Crap They're Getting?"

A blogger's dream...I finally received an actual question from an actual reader (thanks for both, by the way), and it happens to be an important question, at that.

First, "deserve" has almost nothing to do with it. As the past several months of debate have made clear, health care reform is a complex exercise, because of the many powerful entities...hospitals, physicians, pharmaceutical manufacturers, medical equipment makers,...who, together with insurers, are both contributors to the current mess we're in, and beneficiaries of the status quo.

But no matter how complex, the standard public relations strategy for shaping discussion of an issue is the old game of "villains and victims." Every story needs a good guy and a bad guy. So in this debate as well as any other, you're either one or the other.

We know the pharmaceuticals industry and the hospital industry have already pledged their support for the President's efforts in exchange for a pledge that the resulting reforms will mitigate their downside (whether all these pledges hold up through the legislative process remains to be seen).

We also know that most people's views of the health care system are seen through the lens of their health plans. If a claim is denied, if a treatment isn't authorized, if the newest prescription drug isn't on the "approved" list, people tend to blame their insurance companies. If patients are surprised by big co-pays or out-of-network penalties, they tend to blame their health plans, And rightly or wrongly, those other big players tend to see insurers as curbs to their ability to generate as much revenue as they believe they deserve.

So no one likes insurance companies, which makes them a convenient choice to play the villains in this debate.

The many talking heads who have bemoaned the fact that the current debate seems to be focused primarily on health insurance reform, rather than on reform to the overall delivery system, are all right...but they all miss the point. The President has made very little headway selling systemic reform as necessary because of the complexity of the message. Simplifying the message to focus on a villain is helping to sell the public on the need for reform; everybody has a horror story about how they or someone they know have been "screwed by an insurance company." And in the politics of this debate, it's less important to actually fix the entire health care system than it is to be able to take credit for having done something good. And beating up on insurance companies is an activity which many people find satisfying.

Is this to say that insurance companies have been unfairly singled out for abuse?...That they're innocent victims? Hardly. Health insurers have made out pretty well over the past 15 to 20 years, largely on the basis of a big push they made both in Congress and in state legislatures across the country which established many of the pricing, underwriting and administrative rules under which they currently operate.

It was the health insurance lobby which defined "small group health insurance" as coverage for companies with between 2 and 50 workers...thus creating a lucrative and exclusive market for individual health insurance coverage.

It was the insurance lobby which made sure that those individual health plans would not be subject to the same government regulations as group coverage...thus enabling the pricing, underwriting, and recission issues that we hear about so often.

It was the insurance industry which has created high-deductible health plans, and sold families on $10,000 family deductibles as a smart financial decision...even when those families might earn $40,000 a year or less, and the deductible would ruin them.

It's health insurers who created short-term health coverage, and limited benefit plans, and sold them to often ill-informed customers who had no idea how useless those "products" are when a serious illness or injury occurs.

But as unacceptable as many of those practices seem, it's important to recognize that they are all perfectly legal. And within the industry, there are reasons for them.

The health insurance industry is not monolithic. There are nearly 2,000 licensed life and health companies out there. Much of the outrageous behavior we see in the marketplace has resulted from efforts by small, "niche" insurers to use the legislative and regulatory process to undermine the market power of the few gigantic mega-plans which dominate local and regional health care markets. In over 70 percent of local communities, three or fewer insurers hold 75% combined market share or more.

The small guys find it hard to compete under those conditions. So they've gamed the system a little to create opportunities for themselves.

An excellent example of these curbs on more open competition is regulation which impedes large insurers from forming association-type "pools," which can reduce administration costs and bring down prices for participating companies. Smaller insurers won rules which prohibit insurers from discounting administrative costs or taking any other steps which might enable them to make use of the laws of large numbers to offer lower rates to some small groups than for others.

The combination of the promotion of heavily-underwritten individual health coverage and curbs on efficiencies in the small group market have been major factors in the devolution of the risk pool, requiring insurers to rate each small group and individual application as if it were a universe of one, two, or three people. This strategy of risk-based selection has been a bonanza for small specialty insurers, and has undermined incentives for large insurers to find ways to reduce their costs and create a more competitive local market.

Interestingly, it's these same insurers who have objected to the formation of large non-profit purchasing co-ops, on the outrageous assertion that the formation of a bunch of co-ops would "fragment the risk pool." Actually, their fears are just the opposite: that the formation of co-operatives would mobilize groups of purchasers into economic units which might be able to negotiate aggressively on behalf of their participating members. Insurers hate negotiating in the small group and individual markets; they vastly prefer their "take it or leave it" approach.

Keep in mind that it's easy to talk just as broadly about outrageous behavior on the part of hospitals, doctors, drug and equipment makers...even individual Americans whose risky behavior drives up costs throughout the system...as it is about perfectly legal "abuses" by the insurance industry. We're all contributors to our health care crisis.

But changing some of the more egregious practices within the insurance industry, enabling the formation of large risk pools through co-operative purchasing, opening the group market up to self-employed individuals...these steps really could help a lot of people, stabilize rates, and expand coverage in the private voluntary market.