History holds lessons for public health insurance option
Protesters demand health reform at a rally outside Blue Cross headquarters in Los Angles last month.
Nothing about health care reform has inspired more overheated rhetoric than the so-called public option.
Opponents say it would unleash a government juggernaut against which no insurance company could compete. Supporters envision the public option as a nonprofit insurance company that would offer lower-cost health coverage.
If that sounds vaguely familiar, there’s a good reason: For decades, most Americans got health benefits through just such a company. It enrolled everyone who applied, something it considered part of its social mission.
It used what’s called “community rating” to set reasonable rates for all. And it offered the same standard benefit package across the country.
Its name? Blue Cross/Blue Shield.
These days, many of the “Blues” have either turned themselves into for-profit insurance companies or consolidated and begun operating exactly like their investor-owned competitors.
How that happened, and why, has important implications for health care reform.
Health insurance hasn’t always been dominated by corporations bent on maximizing profits and minimizing “medical losses,” their term for money spent on patient care. The first plans were sold by nonprofits that operated like community service organizations, the same as most hospitals.
A former school superintendent named Justin Ford Kimball, then head of Baylor Hospital in Texas, created the first plan in 1931. He called it Blue Cross.
Mr. Kimball’s idea was to make the cost of hospital care less worrisome to families — and create revenue for hospitals.
Blue Cross was later supplemented by a plan that paid for doctor visits, called Blue Shield. The idea spread across the country; local affiliates opened in every state.
In those early days, commercial insurance companies weren’t interested in health care coverage. Unlike life and casualty insurance, they couldn’t figure how to do the underwriting.
Blue Cross initially used a simple formula to set premiums. Executives estimated how many members would need care in the coming year and how much it would cost. They then divided those expected expenses by the number of “subscribers.” That’s called community rating. (See page 21 of this report.)
When commercial insurance companies got into the market after World War II, they used a different system based on actuarial tables, like life and casualty insurance. They tried to identify who was most likely to get sick and charged them higher rates.
While nonprofit Blues made money by enrolling more people, for-profit companies found they could make more by excluding people who were more likely to become sick. That left someone else — relatives, hospitals and eventually the federal Medicaid program — to cover the sick and the poor.
Market segmentation eventually spelled trouble for Blue Cross. Unless it also segmented markets and excluded the sick, it couldn’t match prices charged by other insurance companies.
Nonprofit Blues tried merging, (see page 35 of this report) building ever-larger companies that spread across several states. But that didn’t control costs. So beginning about 20 years ago in California, Blue Cross plans started transforming themselves into for-profit companies.
The lesson for health reformers is clear: Despite opponents’ dire predictions, for-profit companies are the ones with the power to drive out nonprofits like a public option plan.
That power is enhanced when the public option can’t use its great market clout for tough price negotiations with doctors and hospitals. And it’s enhanced when private insurers can attract the healthiest people for their plans, leaving the sickest to the public option.
The Congressional Budget Office has estimated that the relatively weak public option in the House health reform bill actually will have to charge higher premiums than private health insurance. And, it says the public plan would attract “a less healthy pool of enrollees.”
The history of the Blues shows that’s a recipe
How’s the public option going to be driven out of the market, when they’ve got the US taxpayer to fund their shortfalls? Just look at how the medicare program is a huge money loser, yet isn’t going to be filing for bankruptcy anytime soon.
It would be like the Post competing against a paper that isn’t concerned about losing money and also writes the rules of the game. Or when the ref is also a player the other guys odds of winning are slim to none.
Interesting read.
There are other examples - Hawaii and Massachusetts have elements of government medicine; how solvent are they? Hawaii supported [all] kids and bailed out after all of the privates said we can’t compete – as I recall. Whatever happened to the kids… dunno.
This article is pretty much on the mark, but it omits a crucial item. In those early days, Blue Cross never tried to set prices on what it paid doctors, or what price drug companies should charge for medicines they invented. Both HMOs and the government option do exactly that.
Private insurers are already following medicare “guidelines” for reimbursement, typically written by medical school graduates whose only practice experience is that of residency. It’s already driving the formation of “boutique” clinics that don’t accept insurance at all, and make the patient responsible for the paperwork involved. The best doctors are going to flock to these things.
The solution is not a government option - the real solution is to put teeth in the SEC, to prevent the incredible executive and board room pillaging that is occuring at the expense of patients, and stockholders. Again - no parachutes, no stock options, and limit executive/board compensation to no more than 30x average non-executive salary. We need to start focusing on long term corporate health, instead of “quarterly numbers”.
The bureaucracy governing reimbursement guidelines needs complete reform. Not reimbursing secondary infection treatment costs for placing catheters in immunocompromised patients is but one example of the lunacy of the “med student guidelines” insanity that’s already out there.
Medicare costs $500 billion for 50 million people/year. Obamacare would expand a this type of program to 300 million people. We’re going to have to get creative to raise $3 trillion in revenue each year. I’ve got just the answer:
Tax the rich. Tax them hard. 90% isn’t too much to pay when you have millions. Tax the big corporations hard. 90% isn’t too much when your company takes in billions in revenue. When in doubt, the government should tax. 50% of people don’t pay any income tax. Tax them up the wazoo. It is time for us to sacrifice. If we get in a bind the government will be there for us.
Another gem from Carlton and Company. A few problems with your analysis:
1. Treatment for catastrophic health events has become much more expensive (and more effective) than it was in the “good old days.”
2. The cost of treating chronic diseases has increased dramatically. For example, the cost of treating diabetes increased from $6.7 billion in 2001 to $12.5 billion in 2007.
3. Because (1) and (2) have greatly increased healthcare costs, we now have the choice of either requiring young and healthy people to pay substantially more for health insurance so that older and less healthy people can get care, or finding other ways to pay for the care.
4. Community rating socialized the cost of care for older and less healthy people through insurance premiums. When care was less expensive, and chronic disease less prevalent, health insurance socialized modest costs without inflicting too much pain.
5. Today, life expectancy is much longer, in great measure because older people are able to survive catastrophic health events like cancer and heart disease by spending a ton of money. Since the elderly are much better off today, socializing the cost of their healthcare through community rating is a less popular option.
6. Many other chronic diseases are the result of lifestyle choices. Socializing the cost of healthcare for the obese, smokers, and substance abusers, is something many would not approve.
No surprise that the Post-Dispatch “analysis” would find that commercialization of health insurance is responsible for all our problems, and that only a complete federal takeover can return us to the glory days of the 50s. Have another donut, guys.
“In those early days, commercial insurance companies weren’t interested in health care coverage. Unlike life and casualty insurance, they couldn’t figure how to do the underwriting.”
It was a big mistake to allow this industry to become a for-profit industry. It is killing this society.
Someone I know recently was let go from her job and must now through COBRA pay $1000.00 per month for her and two children every single month. The cost of insurance has become ridiculous, how can the average family afford to pay $1000.00 per month and also living expenses?
In otther words the Govt. will use the worst possible Business Model to administer Tax payers money. Perfect.
Good Editorial. As an “evil insurance company” employee, I want to point out that the insurance industry’s opposition to the public option (as described in the original House legislation) is based on some slightly different parameters than listed here.
The public option has been given 7 very specific advantages over a private insurance company that we consider insurmountable. In fact, I’ve volunteered to be CEO of the public option when it comes, and have guaranteed my Congressman to run all private insurance out of business within three years. Unfortunately, I’ll have to destroy the primary care delivery system to achieve my goal (which is ultimately what will happen).
Here are the 7 orders the public option was given:
1. Pay docs and hospitals Medicare Rates (or Medicare plus 5). Currently, Medicare, on average, pays docs and hospitals 23% less than private carriers are able to negotiate. Since insurance company profits average 2% (check the SEC’s website for confirmation) they cannot hope to make up this cost advantage. Public Option gets to sell the same products and services, but will buy them for 23% less. Imagine how much cheaper premiums will be?
2. Have immunity from legal action as Medicare does. In other words, the public insurance plan cannot be sued for negligence or malfeasance when they deny coverage and a person is harmed by that denial. Private insurance companies maintain scores of compliance employees and legal staff to make sure they don’t screw up. Public option doesn’t have to have these employees at all.
3. Do not pay any state taxes or fees. This gives another 2-5% cost advantage to the public plan that private plans cannot match.
4. Ignore state mandates for coverage. Every state has its own mandates, which are specific coverages a plan has to offer. The public option is ordered to ignore state-specified levels of coverage, which will save it another 2% per year. Private plans must continue to honor those mandates.
5. Keep no reserves, or risk-based capital funding. The public option is ORDERED to keep no funds for reserves or bad modeling. This means they can spend every cent they get their hands on. Private non-profit insurance companies (like Blue Cross traditionally) are REQUIRED to keep a few months of claims dollars in the bank for emergencies.
6. Operate without MLR limits. The public option will not be subject to reviews to determine how much of it’s premiums it actually spent on medical costs, so if they want to spend 50% on salaries, they can. Private plans are ordered to spend 85% of all premiums on medical, thus limiting their overhead (after taxes) to a maximum of about 10%.
7. Operate without premium reviews. Private plans will have to receive authorization for any premium increases from the Fed under the new reform bills, and justify and account for every cent they spend on expenses other than medical to a federal reveiw panel. The public option is immune from tracking this data or reporting it. That will save millions.
In the latest version of the House Bill, item #1 has been changed to “negotiate” rates with docs and hospitals based on some pretty tight limits (again that private plans don’t have access to), but that will be changed as soon as the public plan begins to understand how expensive it is to negotiation, and then we’ll be back to #1.
You see, it isn’t rhetoric, or protecting profits that have motivated insurance companies of all stripes to oppose the public plan. In the face of the House’s version of a public option, private insurance really will cease to exist.
WellRead29
Blue Cross Blue Shield is a murderer plain and simple. My father a long time employee of Wagner Electric died from neglect. He was exposed to asbestos and other toxins at his place of employment for nearly 30 years. He died of lung cancer that spread to his liver. He would have benefited greatly from long term treatment for alcoholism but his employer, his family, and most of all his medical provider and insurance company looked the other way in order to save money. Companies do this by threatening to terminate sick employees. My father performed his function at work but suffered in his personal life like many power figures. No one attempted to stop him from being harmed by profiteers who cared not if he lived or died. This after a life time of service to employer and support of his family. Ronald Reagan and George Bush were out to assault their victims for profit instead of dutifully performing their duty to regulate business. My father died from defending the United States and it cared not for his life.
dwalker-
make sure your friend researches alternatives. I got laid off in July and my cobra was $600 for myself and one child. I did have the luxury of a spouse who took over our daughter’s care ($100/mo)…I then signed up for short term insurance (6 mo) for myself at $86/mo. Your friend should weigh the risks…$12000 a year for insurance versus $2500 (catastrophic care). Does she (kids) go to the Dr. often, does she have to? what does an actual visit cost out of pocket? $150? Some thoughts for her to consider.