America's Private Health Insurance Industry

What's the big picture on this industry?

It represents about one-third of all health care spending in the United States.

Most of it is provided by employers; about 60 percent of non-elderly Americans get their health coverage through work. About half of this employer-provided coverage is purchased through insurance companies. But larger employers tend to self-insure -- they just set aside company funds to pay claims, and most large insurers will hire an insurance company to administer the claims.

Is our private health insurance system working? ...

No. There are millions of people who have health insurance today who probably will be in severe trouble if they do get sick. That's because there are millions who have inadequate insurance. Or they're people -- who knows how many? -- who have insecure coverage, who may find that their policy is challenged or taken away if they start to make claims. It's rescinded.

There are people who have coverage who may find that the ability to hang on to coverage in the future, when the renewal premiums come in, it's no longer possible for them, because now that they're sick, the insurance company wants more money.

It's a terrible system, and it's designed to cut out on you right when you need it most.

Understanding the Costs and Profits

In the insurance industry, what does "medical loss ratio" mean?

It's the ratio of claims paid out to premiums that come in. So an insurer wants to have a medical loss ratio of less than one -- 0.7, 0.8. So for every dollar in premiums that comes in, they're happy if they're only paying 70 or 80 cents in claims.

Do you have a feel for what the average medical loss ratio is? How much are administrative costs?

That also varies by type of coverage. In group coverage, I think a loss ratio of around 85 to 90 percent is pretty common. And that makes sense, because there are economies of scale to selling one policy that covers a lot of people.

Individual health insurance is kind of like buying toothpaste one squeeze at a time, so it's less efficient, just for starters. Each policy has to be marketed and taken care of and billed and invoiced every month. It's much more likely to see loss ratios on the order of [roughly] 70 percent in the individual market.

So that's administrative costs of 30 cents on the dollar.

Administrative costs and profit. There's a lot of guarded information about the profitability of the individual health insurance industry. But carriers have been entering it at a pretty remarkable clip over the last few years ... so I think there's some money to be made there.

You said administrative costs in the health insurance industry range from 10 to 30 percent, depending on the plan, etc. How does Medicare do on the issue of administrative cost?

Medicare is very efficient. About 98 to 99 percent of their revenue goes out in paying claims.

Some politicians have suggested that we make Medicare available to people of any age if they can't get private insurance.

That would be one way to go. The Medicare program has its own issues, and it would probably need to be shored up. The Medicare program, for example, doesn't have an out-of-pocket limit on how much cost sharing you owe. So Medicare covers you 80/20. It pays 80 percent of the bill; you pay 20 percent of the bill.

So if I have a million-dollar bill for a [premature] baby's intensive care --

You could owe $200,000. So a lot of people go out and try to buy supplemental coverage to fill in some of those gaps. But that's a whole other problem we could talk about. The Medicare program, until recently, didn't cover prescription drugs. And now it does, but with really hefty cost sharing, way beyond what you see in most private plans.

So Medicare would need to get kind of beefed up, I think, for it to meet the adequacy test for everybody. But after that, I think it could work with folks. It's generally available to people. Some 98 percent of seniors qualify for Medicare. It's always there for you. Nobody's Medicare gets cut off because they make claims or because they miss a payment. It's affordable. It is highly, highly subsidized for people, and even more so for low-income folks.

So it certainly could meet that test. And most doctors and hospitals participate in Medicare. It's actually a major source of income for many providers in the country.

But they all gripe about the fees they get.

Yeah, they do. It's not perfect. I mean, nothing's perfect. ...

If people of any age had the choice to buy Medicare, what would happen to the private market? Would people still buy private insurance, or would it dry up?

It's a good question. I think Medicare always will win, hands down, on the economies of scale. It's already got 30-plus million people in it. And doctors and hospitals know what that is. So I would imagine that private insurers would be a little nervous about competing with Medicare.

Medicare doesn't need to make a profit. I would think private insurers would be nervous about that. But it mostly works really well for folks. My mother was thrilled when she got to 65.

But there's a lot of theology that gets involved in all of this, too. "Big-government health care" is sort of one of the worst things you can say in health policy circles.

The Rescission Issue

One of the scariest things I've discovered, looking into this, is that if you have insurance and you're paying your premiums and you get hit by a truck, then they look for a reason to cancel your coverage?

They might.

How does this work?

[It works] particularly in underwritten policies, particularly where you had to show eligibility to get into a policy. It happens most in the individual insurance market, but it can happen in group policies as well.

Once you make a big claim, particularly in the first year or two of coverage, there's an incentive for the insurer to go back and investigate and see, is there any reason why you shouldn't have been in this policy in the first place? Maybe the claim is for a brain tumor, and the insurer can go back and comb through your records and realize: "Oh! Six months before you bought this policy, you complained to the doctor that you were having headaches. That's a symptom. This was pre-existing. Had I known you had a brain tumor when I sold you the policy, I wouldn't have sold you the policy, and so I'm taking it back, and I won't be paying the claim"; or, "I'll declare that this tumor was pre-existing. You can keep the policy, but I won't pay the claims related to your pre-existing condition."

Or they may find out you weren't eligible. I heard a story once about somebody who made a claim for their child, and she was remarried. Her husband was not the child's father, and the policy that he had through work didn't cover stepchildren. And no one had really asked about child/stepchild when they applied, and they were perfectly happy to get the premiums while nobody was making claims, but once the kid got sick, this got investigated, and retroactively he was taken off the policy.

If they rescind your coverage when you run up bills, do they at least give you back the premiums you paid?

Usually they do, although if they've paid any claims, they'll give you the premiums back, net any claims that they had paid.

Why is this legal?

You could ask that question about a lot of things in our health insurance system. It's legal because in a business sense, this makes coverage profitable. And maybe that makes sense in a business sense, but it doesn't make sense in terms of finding a best way to finance health care.

People should be nervous if they think they're securely covered, [because] maybe they're not. And that's just such a cruel way to finance health care.

Reforming the Health Care System

Everybody needs to have coverage. And when they go to get coverage, they shouldn't encounter barriers. They should just get right in.

And what does that get down to? Explain your formula, the "four A's."

To take care of you when you're sick, coverage has to meet four tests: Coverage has to be "Available" to you. Regardless of how healthy you are, regardless of where you work, who you're married to, where you live, there always has to be coverage for you, always has to be available.

If we're going to charge people a premium to get into coverage, that premium has to be "Affordable." No fair charging $1,000 a month per person -- it needs to be a pretty modest amount, and it needs to be certainly, at some point, sensitive to people's income so that low-income people don't have to pay anything at all.

The coverage needs to be "Adequate." Otherwise, you're walking around with a card in your pocket, and you're still going to be paying thousands of dollars or tens of thousands of dollars out of pocket for your medical care. Insurance needs to be your ticket to health care, and it needs to pay your bills. So $10,000 deductibles, $75,000 annual limit on what's covered, a policy that doesn't [cover] maternity care or pharmaceutical benefits, we can't have that.

And the coverage needs to meet all of those tests, "Always," not just for the first year when you bought the policy but over time. It needs to stay with you. Most of us are healthy most of the time. But something happens: You find a lump; you get hit by a car. So the coverage needs to protect you always. ...

The insurance industry has told us that they would offer a policy to anybody who applied if everybody in America had to buy health insurance. Does that lead us to a solution?

It can lead us to a solution, and that's, I guess, a new stance for the insurance industry.

They haven't said this before?

That is what was on the table in 1993 and 1994 [with the Clinton plan]. There was going to be an individual mandate, and everybody had to have coverage, and it was going to be guaranteed issue. And the insurance industry brought us "Harry and Louise," [a series of television commercials, paid for by the health insurance lobby, that was critical of the Clinton plan for health care reform].

They fought it tooth and nail.

They spent millions to kill that, so it's great if they've changed their mind. I've seen the plan that they've published, and I don't think they've promised yet on all four of my A's.

They're willing to guarantee issue up to a limit, and then they want the rest of the sick people to go someplace else. I don't think they've signed on to promising never to exclude pre-existing conditions, always to charge everybody the same, no rescissions, no nonsense on the claims payment.

But if they're willing to, I think that's great. That is the answer. If we're going to cover everybody and there's going to be a role for private insurance, that's what they have to do. They have to meet all the A's.

[You sound skeptical.]

I've just seen them fight it tooth and nail before. But people change.

"Single payer" is a bad word, too, isn't it?

Yeah. And I think there's this notion that somehow Uncle Sam is going to be in the exam room with you, or it's going to lead to some sort of nasty rationing. We haven't seen that in the Medicare program. We really haven't. We've seen people get access to terrific care and really to be able to lay down a lot of their worries about "Am I going to lose my coverage?" or "What's going to happen to me?" It's always there. So it doesn't need to be a bad thing, and it doesn't need to pay poorly. ...

We went around the world in our previous report on health care [Sick Around the World]. We saw many countries that have private health insurance, and all of them met your four A's. How come America can't do it?

If I knew that, I'd tell somebody, and we'd change. It is complicated. We've been struggling with this for a little more than a century. The first vote against universal coverage -- that went down in flames -- was in the New York Legislature in the early 1900s, so for a century we've been messing with this. Teddy Roosevelt was the first president to call for universal health coverage.

So why is it? I think we are a nation that was built on being skeptical of government, and that sentiment has certainly been driven home intensely since the 1980s. Politicians run against government now, so we're nervous about that. I think we are a country that likes to go it alone.

We're independent; we're entrepreneurial; we're cowboys. We like to explore out on our own, and financing health care, whether you do it through a public program or whether you do it through insurance, is inherently a collective enterprise. We all kick in to take care of the few of us who are sick in any given year.

And so maybe we've just got some natural tendencies that make it hard for us to do this. Our health system, for better or for worse, is running about $2 trillion a year, so changing it is stepping on somebody's toes. There's a lot of money and power backing the status quo.

We've kind of painted ourselves into a corner now. It is hard to go from where we are now in any direction, whether it's covering everybody through private plans or through a public plan or some combination. We can't get there without redistributing some considerable resources.

There have got to be some losers, some pain.

We have 45 million uninsured Americans, and they are overwhelmingly low-income people. And health expenditures, what we spend on health care per person in the United States, is about $7,000 a year.

So if you're going to have a policy that really covers everything you need, and you're going to make that available to 45 million people who don't have any money, someone's going to have to come up with that. Someone's going to have to pay more taxes, or we're going to have to crank down on what we pay to doctors and pharmaceutical companies and hospitals, and they're not going to like that.

But somewhere, in our very wealthy nation, we need to find the resources to bring everybody into the system. We're never, ever, ever going to do it for nothing. We're just not. And so we're probably always going to face resistance in trying to change. ...