Private Profits, Cost Shifting and the Public Option
COMMENTARY | September 04, 2009
An attorney at a Medicare advocacy group deals with the claim that a public option in health care reform wouldn’t be fair to private insurers, and says a public option is needed if there are to be better competition and reduced health care costs.
This is an excerpt of a report on the Web site of the Center for Medicare Advocacy. Some documentation, in the form of footnotes, appears in the original but not in this excerpt.
One common objection used to undermine a public plan option in health care reform is the idea of "cost shifting."
Opponents of a public plan say that this supposed cost shifting is one of the problems with Medicare, our nation'scurrent public health care option. They say that Medicare underpays health care providers, with the result that private insurers end up subsidizing those same health care providers because Medicare has underpaid them. The argument claims that a public plan would not be "fair" to private health insurers; that private health insurers could not compete with a public plan because they would be, in effect, subsidizing the public plan, or that a public plan would result in a health care reform package that is too expensive.
The truth, however, is that a public plan is needed to provide more and better competition and lower overall health care costs. This is particularly true given the increasing consolidation of the insurance market resulting in fewer and fewer private health insurers.
Private health insurance companies are some of the most profitable corporations in the nation. According to insurance industry filings with the federal Securities and Exchange Commission, profits for the 10 largest publicly traded health insurance companies rose 428 percent from 2000 to 2007, from $2.4 billion to $12.9 billion. As examples, Aetna's profits increased by 1,342 percent during this 2000-2007 period; Wellpoint's profits increased by 1,380 percent; Humana's by 827 percent; and UnitedHealth Group's by 532 percent.
If it were true that Medicare's proven cost effectiveness is subsidized byprivate health insurers through cost-shifting, it certainly does not seem to be affecting the huge profitability of those private insurers. And it surely is not affecting the compensation of their chief executive officers. In fact, in 2007, the CEOs of these 10 companies collected combined compensation of $118.6 million, roughly $11.9 million each. This is 468 times more than the $25,434 that the average American earned!
The fact is that a large proportion of Medicare spending goes directly to private insurance plans under the completely private portions of Medicare - the Medicare Advantage and Medicare Prescription Drug programs. According to the Kaiser Family Foundation, 34 percent of Medicare payments are made to private insurance companies for the private portions of Medicare. Moreover, 77 percent of the costs of the private Medicare Prescription Drug program are paid out of general government revenues (not out of the Medicare tax which employees pay).
In fact, the first year after private Medicare Advantage was introduced (with subsidies way over and above the actual cost to traditional Medicare to treat a Medicare beneficiary) the solvency projection of Medicare dropped by eight years. Clearly, substantial cost shifting from private insurers TO Medicare is occurring; not the other way around. The cost of private Medicare is contributing to the federal deficit because a high proportion of it is paid for out of general revenues, not the Medicare trust fund. Meanwhile, private health insurance companies' profits, paid in large part by taxpayers, are increasing astronomically.
Perhaps even more shocking, while opponents of a public plan argue that Medicare shifts costs to private insurance companies, the fact is that private insurers shift health care costs to the very people whom they are supposed to be serving. They do this by covering fewer sick people, most often by denying coverage for pre-existing conditions, cancelling insurance or raising premiums to unpayable levels when plan-holders become sick. Further, private insurers shift costs by increasing premiums and cost sharing, such as deductibles and co-insurance, for those they do continue to insure.
Recently, Wendell Potter, a former health insurance industry executive with CIGNA (which had a net income in 2007 of $1.115 billion) testified
before the U.S. Senate's Committee on Commerce, Science and Transportation. Here is some of what he had to say:
"In the 15 years since insurance companies killed the Clinton [health reform] plan, the industry has consolidated to the point that it is now dominated by a cartel of large for-profit insurers….To help meet Wall Street's relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick. Insurers have several ways to cull the sick. One is policy rescission
. They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as a justification to cancel the policy… Dumping a small number of enrollees can have a big effect on the bottom line. Ten percent of the population accounts for two-thirds of all health care spending."
"They also dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that an employer has to cut benefits, shop for another carrier, or stop offering coverage altogether - leaving workers uninsured. This practice is known as purging….[T]he number of small businesses offering coverage to their employees has fallen from 61 percent to 38 percent since 1993, according to the National Small Business Association. Once an insurer purges a business, there are often no other viable choices in the health insurance market because of rampant industry consolidation."
The consolidation of private health insurers is no small matter when it comes to controlling the escalating costs of health care in the United States. According to a 2009 report of the American Medical Association, the country's largest health insurers have continued to pursue aggressive acquisition strategies. The largest insurer, WellPoint (formed from the merger of Anthem, Inc and WellPoint Health Networks) has acquired 11 health insurers since 2000. The second largest health insurer, UnitedHealth Group, has also acquired 11 health insurers since 2000. A 2003 study found that the market concentration of private health insurance companies in 34 states was high enough that, when the measure used by the U.S. Department of Justice and the federal Trade Commission was applied to these concentrations, all 34 states were deemed "highly concentrated" and therefore of anti-trust concern. In 2007, more than half of the health insurance markets in at least 39 states were controlled by two carriers.
And yet, despite this extraordinary consolidation, insurers aren't leveraging better values for their customers…
A broad and vibrant public plan would provide a solution to all of these problems. It would provide competition to private insurers in already overly concentrated markets. With sufficient enrollment, enrollment that is not limited as envisioned under some current proposals, it would have sufficient market share to negotiate forcefully with providers to drive down costs, and open up competition in markets for other smaller private insurers.
By offering a standard basic plan, and requiring that private insurers do the same, a public plan option would help consumers make more informed choices about choosing health insurance, and would allow consumers to rationally choose health insurance based on quality and price. Finally, a public plan – not guided by the profit motive, but able to contain costs and have lower administrative overhead than private health plans – would provide the option of health insurance to all, regardless of a person's health status and desirability in terms of "risk."
Health reform without a public plan will result in escalating costs, insufficient decreases in the number of uninsured persons, and a continuation of vast profits for health insurance companies, at the expense of the health of all
the American people...
Brad Plebani, an attorney, is deputy director of the Center for Medicare Advocacy. For Nieman Watchdog articles by the group’s executive director, Judith Stein, click here.
Director , Research Assoicates
10/14/2009, 04:09 PM
Strange, that in summarizing hospital operating expenses in your article, it must have been an inadvertanly oversite, when you forgot to include American citizens who have large deductables that they pay to hospitals every year.
This is just another another for insurance companies to boost profits and executive compensation which.