Health Care Reform 2009 Part 4 (continued): How Insurance Works Now

Yesterday we talked about the health care crisis, and how most of the reforms being proposed are directed at insurance companies.  Today we’ll take a look at how insurance works now and why insurance companies need to be reformed.

Why do we have health insurance?

Just over a hundred years ago, there was no health insurance.  If you got sick, you paid the doctor or hospital out of your own pocket– this type of system is called fee-for-service.  But as medicine got better, it also got more expensive- to expensive for most people to pay for on their own.  Chances are you wouldn’t get sick very often, but if you did it could be catastrophic.  Any time you have a situation with a small risk, but one that could be hugely expensive if it does happen, you have a market for insurance.  Private insurance companies began offering health insurance, and doctors and hospitals started offering Blue Cross and Blue Shield plans, which evolved into the nonprofit health insurance associations we know them as today.

What is insurance?

No matter what type of insurance you have- at its heart that insurance is just a big pool of money.  Every month, you and a bunch of other people toss some money into that pool- that money is your insurance premium.  If, like the vast majority of Americans, you have health insurance through your job, then your employer tosses money into the pool for you.  If one of the people who has put money into the pool gets sick, then money is taken out of the pool to treat them–paying for doctors, tests, hospital visits, stuff like that.

Sometimes you’ll have to pay a copay or deductible- all this means is that you (or more likely your employer) puts less money into the pool every month, but when you get sick you have to pay some money out of your own pocket before you can start using money from the pool.

So what does the insurance company do with your money?

Basically two things:

1. It manages the money– you can’t leave a big pool of money just sitting there, so it keeps track of all the administrative stuff by making sure the doctors and hospitals get paid when someone in the pool gets sick.  They’ll also invest some of the money, so that it can make interest while it’s sitting there- sort of like what a bank does with money you put into a savings account.
2. They negotiate with health care providers to get the best rate.  And the bigger they are, then the better rates they can probably get.  It’s like buying a tiny bottle of ketchup at the corner store vs. buying a giant barrel of it at Costco.  If you get the tiny bottle it’s gonna be more expensive.  Same with health care.  If you as an individual go to the hospital you’re going to get charged a much higher rate than the insurance company with hundreds of thousands of customers, because they’re buying in bulk.

So the insurance companies make arrangements with the doctors and hospitals that give them the best deal and that becomes your network.  This is also where you start getting into all of the confusing different types of plans- indemnity, managed care, HMOs, preferred provider organizations, health savings accounts, etc.  You don’t need to know the difference now, but if you’re curious, check out our definitions.

What does the insurance company get out of this?  They get to keep all of the money that’s left in the pool, once they’ve paid for everyone’s care.  And this is why they start acting kind of shadily…

The problem

Since insurance companies get to keep the money that’s left in the pot once they’re done paying for care, they have a huge financial incentive to deny you that care.  You can get a sense of their mindset in the terminology they use.  They don’t call the percentage of the money that they pay doctors and hospitals the “care ratio”  or the “percent we spent to get our customers better” they call it the medical loss ratio.  That’s right- to the insurance companies, paying for the care that gets you well is a “loss.”  So, to avoid losing that money, they’ll often find ways to deny care.  There are a few ways they do this:

Screwing over small businesses:
If you’re like most Americans, your employer provides health insurance.  But not all employers are charged the same rate by insurance companies.  Insurance companies charge your employer a rate per employee based on your employers past history of claims.  So if you work for a big corporation with a lot of employees who are relatively healthy, the insurance company won’t charge your employer that much– it’s way easier for that big corporation to provide health insurance.  And even if a few people do get seriously ill one year, there will still be enough healthy people under the plan that rates won’t go up that much.

But if you work for a smaller company and a few people come down with serious or chronic illnesses, then the rates your employer pays could skyrocket.  They might be forced to switch to a cheaper plan, with crappier coverage.  And if you’re the one with the serious illness, you should remember that if the economy is bad, and your boss has to lay people off, he or she might be thinking about more than just how much they pay for your salary.

Claiming certain procedures aren’t covered:
This is common with managed care plans, like HMO’s.  If you come down with a serious illness, watch out for the HMO going back to the fine print of your plan, which you probably barely understood because it was filled with medical terminology or vague terms that are open to interpretation, like “experimental treatment.”   In this clip from the movie Sicko, Linda Pino, former medical director for an HMO talks about her role in that process:

And it’s not just a few people that are having their claims denied.  Some insurance companies deny as many as 40% of all claims:

Usual, Customary, and Reasonable
If you go out of network to get treated, insurance plans usually state that they will pay a percentage of the costs.  Most customers assume that they will pay that percentage of the actual costs– for example, if your insurance company says it will pay 80% of out of network, and you get a test that costs $500, you’d assume that your insurance company would pay $400.  In reality though, the insurance company pays that percentage on what it believes is “usual, customary, and reasonable.”  So, even though that test costs $500, your insurance company might decide that usual and customary is only $100, and then pay you 80% of that.

There is no regulation for determining what is usual and customary– it could be different for every insurance company– and insurance companies don’t disclose those rates until after the procedure is billed.

Now, to be fair, insurance companies usually pay what is “usual, customary, and reasonable” because doctors and hospitals would often jack up their rates, knowing that insurance companies would be on the hook for 80% of whatever they charged.  But in this dance between insurers and providers, it’s you that ends up paying in the end.

Denying coverage if you have pre-existing conditions:
Let’s say you don’t get insurance through your job and are trying to buy health insurance as an individual.  There’s a huge stack of paperwork you have to fill out about your medical history, to determine if you have any pre-existing conditions.  If you have a chronic (ie. expensive) illness, insurance companies either won’t sell you insurance at all, or will charge exorbitant rates that you probably can’t afford.

Rescission:
Now, let’s say your healthy enough to buy insurance at a rate you can afford.  If you’re diagnosed with a serious (i.e. expensive) illness, it will automatically trigger an investigation into the claim by the insurance company.  They’ll go back to that huge stack of paperwork and go through it line by line, matching it up with your medical records.  Keep in mind that they didn’t do this when you signed up for the policy- they were happy to take your premiums month after month when you were well.  If there’s any discrepancy or any evidence of any pre-existing condition- even if it has nothing to do with your current illness- they can cancel your policy (this cancellation is called rescission).  Heck, they might try to cancel your policy even if you didn’t know you had the pre-existing condition.  In this video, Joe Stupak (R-MI) talks about a man who was denied treatment for brain surgery due to a pre-existing condition his doctor never told him about:

Conclusion
It’s kind of amazing if you think about it.  You and other people in your community pool your money together so that if one of you gets sick he or she will be taken care of, but the insurance company, whose only job is to pay doctors and hospitals with that money, has every financial incentive to keep you from getting that care.

The health care reform bills that Congress is discussing start to address many of these problems.  We’ll take a look at those bills in our next post.