The Need for Carriers to Explain Their Value

When an industry is being remade, as is arguably happening with America’s health insurance system over the next four years thanks to the Patient Protection and Affordable Care Act, there comes a time when every participant in the current system needs to step back and ask “What’s my role? What value do I add?” Employers, carriers, brokers, government agencies, all need to examine their place in the system, both as it exists today and as it will exist in the future.

There’s a sometimes heated discussion going on in the comment section of this blog concerning the future of brokers. In the past few posts we’ve seen some argue that the value brokers bring to the table will be ignored and the profession will disappear. There have been equally passionate comments explaining why brokers are likely to do well in the new world of health care coverage. (Readers of this blog know I believe professional health insurance brokers will play an important role in the post-health care reform world). 

In his comment, reader Scott summarized the value of brokers and why the good ones will continue to play an important role in the future. “Agents and Brokers, please stop talking about how hard or easy it will be to buy health insurance once the exchanges come, because that is not what we do, and that is not what we get paid to do. If it was, we would get a one time fee for the sale and then we would disappear and move on to the next person. We get paid to service the group and to provide this service ongoing. If we don’t, we get replaced, by someone who will. That is what we do. I am not worried.”

The debate over the value brokers add to the system and their chances of survival will continue. And brokers will need to work hard at both the state and national level to make sure decision makers understand this value. But they’re not the only players in the system who need to justify their existence. So do health insurance companies.

Ask most insurance executives to list their contribution to America’s health care system and high somewhere in the top two or three will be “we lower the cost of health care in this country.” Then take a look at virtually every rate increase letter sent by carriers in this country. In justifying the premium hike they all cite skyrocketing health care costs. And they’re right. Medical inflation greatly outpaces general inflation. Over the past year the buying power of $1,000 in 2000 requires $1,285 in 2010. Except for medical care, what $1,000 purchased in 2000 now takes $1,500. That’s a 75 percent difference.

But being right doesn’t clarify carriers’ value. Consumers, and the officials they elect are, are confused – and no wonder. If one of the key reasons insurers exist is to manage the cost of health care they’re not doing a very good job of it. (To be fair, medical costs would likely be significantly higher if health plans were not negotiating reductions. Compare the “allowed” charge on virtually any insurer’s explanation of benefit against the providers actual charges and you’ll see a huge discount – often more than 50%. Negotiating these price reductions lowers the cost of health care not just for that particular insured, but for the system as a whole – less the amount of the discount the provider shifts to other payers).

This disconnect between what carriers claim to do and what they lament they cannot do is not the only problem health plans face in justifying their existence. They have also been subjected to a brutal, incessant pounding over the past several years by the press, Congress and state legislatures. Carriers have offered themselves up as easy targets. Their vilification over  rescission practices, patient dumping, outsized executive compensation, insensitivity to their members, denying needed coverage and a host of other practices and misdeeds was to be expected. Combine this bludgeoning of their reputation with ever increasing medical costs and it’s no surprise some question whether insurance companies are necessary at all.

What makes this situation significant is that a poor reputation results in reduced credibility and diminished reputation lessens political clout, something carriers will need in great abundance in dealing with the implementation of health care reform over the next several years.

Brokers have long had to justify their place in the health insurance market. For many years carriers got a free ride on the issue. Yes they suffered the slings and arrows of the press and politicians, but except for single payer advocates their value to the system was generally assumed (if unspoken). The accumulation of attacks, however, coupled with carriers own touting of their role in reducing health care costs while medical costs spiraled out of control, puts this assumption in jeopardy.

As health plans develop their strategies for 2011 (and yes, they’ve started that process) near the top of the list should be asking – and answering – two very important questions: “What’s our role in America’s health care system? And what value do we add?” Then they need to share their answers, forcefully, fully and credibly, with the rest of the class.

4 thoughts on “The Need for Carriers to Explain Their Value

  1. James Thornton raises an interesting question: why haven’t insurers done the things that are assumed to control costs. In the large group arena 200+, but really 5000+, the buyer of the coverage determines the benefit package. In fact, many of the innovations in the past have been at the request of employers and the consultants who advise them. Since they self insure they are very interested in cost control measures balanced by the need to attract and retain employees.

    Many of these innovations then trickle down to the mid and small group markets. But remember the last time we “bent the curve” in health care costs we got gatekeeper HMO’s. Costs were kept lower but the outcry from employees and the public lead to open access HMO’s, no more referrals and we ended up with the PPO’s of today.

    My bottom line is that since consumers don’t see the costs of their care the need to attract and retain overcomes the desire for lower costs. HSA’s on a PPO network are the best chance at meaningful controls. Consumers will be a real market, comparing cost and quality. What does Obamacare do to HSA’s?

  2. Alan,

    You’re a sage in the industry from whom I’ve learned much over the years – and in your article here, certainly no one can dispute that the rate of medical inflation has far outpaced the rate of general inflation over the past 10 years; however, I think your math is in need of minor repair.

    If that which required 1,000 health care dollars in 2000 now requires 1,500 health care dollars, does that not represent an increase of 50%, not 75%?

    In your example, perhaps you added the $285 of general inflation to the $500 of medical inflation to arrive at 75%. If so, I believe you’re double-counting insofar as general inflation is a subset of medical inflation.

    • Thanks for the question Dave. I could have been more clear in the post. What I was trying to say is that the $500 increase in medical inflation is 75% greater than the $285 increase in retail inflation ($500 divided by $285 = 1.75). Could be this isn’t how the math works in which case I hope someone will correct me.

  3. Alan, another very thought-provoking blog.

    I wonder to what extent insurance companies could do more to control costs by unilaterally implementing strategies that many health care economists would like to see done by federal law.

    For example, new drugs are tested against placebos to show whether they have any efficacy above and beyond what a sugar pill can produce.

    Pharmaceutical companies, for obvious reasons, prefer this standard as opposed to what many researchers argue is a far better one: test a new drug for Condition X against the best current drugs available for the condition. If the new drug does significantly better, or has fewer side effects, than this information would be useful to patients and doctors alike. However, if it does no better–or possibly worse–than the current treatments, then patients and doctors should have the right to know this, too.

    Could an insurance company insist on such comparisons in order for a new (and presumably highly expensive pill) to gain access to its formulary?

    Ditto for only allowing evidence-based medicine practices.

    Free marketeers always tout the power of markets to come up with solutions to problems. I, for one, would gladly agree to receive only treatments that are proven, including eschewing new “miracle” drugs that have not been shown any more efficacious than older treatments, provided the insurance company insisting on this shared some of the cost savings with me in terms of reduced premiums.

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