Over the past couple of years there has been considerable back-and-forth over what has been accomplished by the Patient Protection and Affordable Care Act of 2010 (PPACA). While a short post cannot survey the entirety of this multifaceted law, several elementary confusions have been repeated in public discussions and should be addressed in the interest of clarification. The most urgent of these is to point out that, despite the Act’s (deliberately misleading?) title, it addresses neither the practice of medicine nor its cost. At most a government-sponsored institute has been authorized to find and make suggestions. The Act, then, is not about making health care affordable, but an effort to make health-care insurance affordable – a related but separate topic. To understand the implications of this, we must consider the business of health insurance.
Private Health Insurance is a Business
The health insurance business is–it cannot be overemphasized–a business. While its advertising may suggest otherwise, we would do well to remember that business differs from charity in ways that matter. Being private for-profit businesses, health insurance companies are engaged in the pursuit of profit. If the health insurer is a corporation, and many of them are, their profits are expected to show steady growth over time so as to satisfy “Wall Street expectations.” This is not always easy, and firms must be vigilant if they are to achieve these targets. As is the case for any and all businesses, revenues must be greater than expenses if health insurance companies are to show a profit. Without profits they will soon cease to exist. But before this occurs, senior management will be fired. As they understand this, we should expect these managers to make every effort to avoid this outcome. None of this, it should be noted, implies that health insurers are more or less moral than other firms. Business is business. With that point cleared up, let us turn to specifics.
The revenues of health insurers come from customer premiums and the returns on their portfolio of earlier premiums that have been invested. Their usual portfolio can vary, but it generally consists of government and corporate bonds (about 65%), corporate stock (about 10%), mortgages (including some mortgage-backed securities), cash and other liquid items, and other assets. Expenses can be broken down into essentially three components. The first includes all marketing costs, paperwork, and related overheads. The second is wages for workers and bonuses for bosses. The third, and by far the largest expense, is the payment of claims.
From the above list it is evident that insurance company profits can rise in one of four ways: (1) revenues from current premiums or past investments can rise (which may imply higher premiums and/or riskier investments), (2) marketing, paperwork and overhead costs can be reduced, (3) wages and bonuses can be reduced, or (4) payments for claims can be reduced (or at least rise more slowly than revenues).
Given that the payment of claims are, by far, an insurance company’s largest single expense, it is reasonable to suppose that they will work diligently to control or even reduce them. To this end, they hire staff to negotiate with hospitals and others over the appropriate charges for services provided. Similarly, they employ a staff to direct customers into lower cost options, assert that the “normal and standard cost” for a given procedure is lower than the bill presented (which means that the patient must shoulder a disproportionate share of the payment even if their insurance contract suggests that they always pay a fixed percentage), or find some grounds to decline care altogether which in the past has included finding grounds for cancelling the policy.
For patients and their families, these cost-reducing decisions can be, as innumerable stories and research has shown, medically and financially devastating. It is clear to everyone with a beating heart that these – essentially business decisions — are fraught with moral implications. Yet, of necessity, insurance companies must think of them as part of their normal business operations. One is reminded of the cliché line uttered by mafia movie assassins, “Sorry man, it ain’t personal, its just business.”
This difference in perspective raises a crucial observation. Every society must decide, by some process, how goods and services are to be distributed amongst the population. Most of us would agree that some items, such as ice cream or the vagaries of current fashions in clothing, are best left to markets. The difficulty, and this is the largely unmentioned issue, is that most of us also believe that decisions fraught with profound moral implications – such as life and death — should not be left to the vagaries of the market.
If this supposition is correct, then the problem with privately-provided health insurance is less with the specific performance of the firms involved than with the fact that many, if not most, of us consider basic health care to be closer to a right than a commodity to be distributed according to the contingencies of price and income. As such, we find the normal business decisions of health insurance firms, decisions that are necessary and essential to their business operations, to be at best amoral if not immoral. That people are awarded bonuses for denying care to people they have not met, and on the basis of little more than a cursory look at a chart and some statistics based on national averages, strikes most people as wrong. Again, if this were the market for ice cream or fashionable clothing, our response to the cost control efforts of for-profit health insurance companies would be very different. But it is evident that firms are routinely making decisions that are fraught with the deepest moral significance.
Obamacare: What Does It Do?
As mentioned, when reading popular discussions, blogs, and more than a few newspapers, one is left with the impression that many people are confused about the distinction between health care and health insurance. Stated simply, the PPACA does not grant anyone, anywhere, a guarantee of adequate health care. The Patient-Centered Outcomes Research Institute that has been founded as part of the Act may, at best, fund investigations designed to uncover and publicize inefficiencies in the delivery and cost of health care. But they cannot mandate changed practices. At best, these revelations can be accompanied by exhortatory language. Someone, somewhere, somehow, is then supposed to do something.
What PPACA does do is require that every American find a way to acquire health insurance. Most likely, as in Massachusetts, this will be enforced through the tax code. This suggests that those without health insurance will have to pay for insurance out of pocket and then await compensation in the form of a tax rebate. If this is indeed the plan, it should raise important questions concerning the liquidity or credit-worthiness of America’s poorer households and the many well-known issues surrounding predatory lending that were not addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Perhaps it is obvious, but it also needs to be stated, that on its own the health insurance mandate modifies neither the incentives nor the profit motives of private health insurers. That said, some useful changes are embodied in the Act. For example, in exchange for the law’s producing just under 50 million new health insurance customers through its mandate, health insurance companies will be required to spend 80-85% of the premiums they receive (depending upon the firm’s size) paying for health care and, additionally, to cease terminating contracts after the disclosure or revelation of “pre-existing conditions.” Now, with the additional revenues anticipated from millions of new customers, the first of these requirements may or may not prove to be an imposition. I would, however, caution everyone to be wary of the accounting rules used in calculating what is known in the industry as the Medical Loss Ratio. It is often, and correctly, said that the devil is in the details (this is especially the case when an industry can employ legions of lobbyists).
As to the second requirement, it speaks only to the grounds by which a proposed course of care may be refused. Let us consider the problem logically and from the perspective of a profit-seeking firm. If there are potentially grounds, from A to Z, by which to deny or modify a proposed course of care, and grounds A are excluded, that still leaves grounds B to Z. Perhaps none will be found applicable and the care in question will be duly authorized. But perhaps alternative grounds can be identified, and it should be evident that the incentive to find such grounds remains. Maybe the insurance company will find the course of care proposed by a patient’s doctor to be “overly experimental” or “unlikely to be effective” in light of statistics based on national averages that they may have on hand but whose source or author they will refuse to disclosure (believe me, I have tried). Alternatively, they may declare that the “normal and standard cost” of the course of care proposed is one-half of what the hospital charges, thereby forcing a family to “chose” between a course of care and penury. These problems can be expected to remain.
According to the American Journal of Medicine, 62% of all the people who declared bankruptcy in the year prior to the financial crisis, 2007, were ruined by an illness they could not afford. Worse, the majority of those who declared bankruptcy that year were covered by heath insurance. Stated simply, health insurance, even assuming that it actually becomes affordable to everyone, will not end of the dread of financial ruin in the event of a severe illness.
This brings us to the matter of the how much assistance will be provided to help families meet the mandate. We are told that everyone up to 400% of the poverty level will be eligible for a subsidy (based on a sliding scale). Given the current political environment, with its bi-partisan vogue in favor of austerity, I will leave it to the reader to speculate whether or not these subsidies will remain adequate as health costs and thereby health insurance premiums continue to rise. We can be certain, however, that the mandate will remain in place long after the subsidies become inadequate. And, what of the days when American families had to chose between adequate care and penury? Such dire choices will remain a part of our reality the day after the PPACA has become fully operative and every day thereafter.