Greedy Insurance Companies are Making Health Care Expensive!

It’s not just “greedy insurance companies are making health care expensive!”

It’s that *we built a system that incentivizes insurers to systematically ⬆️ health care costs.*

The issue is the so-called “80/20 rule” of the Affordable Care Act.

The goal was to keep insurance companies from taking excessive profit margins by requiring them to spend at least $0.80 of every premium dollar on paying for health care.

So imagine you start a new insurance company.

You manage to recruit 100,000 customers, and each pays a premium of $1000/y.

That means you take in $100 million a year. Not bad!

But – you’re required to spend at least $80 million paying for actual health care for your customers.

That leaves only $20 million to cover your administrative costs, marketing, distributions to shareholders, and a generous compensation package for your CEO. 

It may not be enough…. but you have only two broad strategies you can use to increase your profits.

Option 1 is to increase your number of customers. 

Suppose you offered better rates, or better customer service, or you came up with snazzier advertising – you might be able to pull away a few customers from your competitors.

This was what people assumed would happen with the 80/20 rule – that it would force companies to compete with each other for market share in order to increase their profit.

And maybe there *is* more competition. But most insurers have chosen Option 2.

Option 2 is to increase the premium you charge each customer.

Say you increase your premium from $1000 to $2000. Now you have $200 million, and have to spend only $160 million on actual health care – leaving $40 million for you.

Naturally, you can’t increase your premiums suddenly or you’ll lose customers. 

But if the *overall cost* of health care rises, all insurers can justify gently raising their premiums – and no one loses customers.

Before the ACA 80/20 rule, health insurance companies had an incentive to try to keep health care costs low. The less they paid out in claims, the more money they could keep for themselves.

Now, they have the opposite incentive.

Higher overall health care costs mean higher premiums – and increase the value of the 20% slice of the pie the insurance company gets to keep.

“B-b-but what about prior authorization?”

PA (and other similar measures) are not usually intended to LOWER costs. The company still has to pay out $0.80 of every premium dollar.

They’re best understood as ways to make costs more predictable, so they pay out *exactly* 80%.

Sure, there are cases in which prior authorization allows you to completely deny expensive care – so that your medical loss ratio doesn’t exceed 80%.

One egregious example here:

Prior authorizations also allow the insurance company to DELAY payment… which keeps premium dollars in their coffers for longer (where they’re earning interest).

Point is, no insurer has ANY incentive to lower health care costs. The more we all spend on health care, the more high premiums are justified, and the bigger their 20% slice of the pie can be.

Come back in a few years, and I promise @AjKavanaugh’s numbers will be even higher.