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Pay Attention To Health Insurance Non-Benefit Costs!



November 16th, 2011
by Merton Bernstein

The McKinsey Global Institute reported in 2007 and 2008 that the United States spends twice as much for health care as for food. According to Census and Department of Agriculture data that pattern continues. Yet millions remain outside the protection of health insurance and many nominally within its bounds are seriously underinsured. Millions of individuals and thousands of businesses stagger under the cost of health care, many state and local communities find them unmanageable and some businesses find them a handicap or unaffordable. Alas, health insurance premiums continue to rise – on average another 9 percent in 2011. Medical care costs can change direction if policy makers stop whistling past a significant contributor – non-benefit costs.

These very substantial outlays include: payments by providers and insurers to prepare and process about a billion non-Medicare bills a year; pay to health provider personnel preparing records of services rendered as a prelude to billing; fees providers pay contractors to assemble their bills; fees that large employers pay contractors to administer their plans; provider payments to bill collection companies, largely in vain, to squeeze past due payments from patients, many already wrung dry by the costs of illness and income lost by family caregivers; lost time and pay for dickering with insurers seeking to minimize reimbursements; efforts by insurers and self-insurers to shift the duty to pay to other insurers and entities; and expenses for seeking reimbursement from other plans (a zero-sum endeavor which adds to costs without any overall savings).

Non-benefit costs also include fees, usually not counted in the total cost of care but nonetheless real, that employers pay consultants and the time executives expend in selecting plans; insurer Wall-Street-style executive pay and bonuses; commissions to sales agents, with repeat payments on renewal; advertising and other promotional activities like payments to physicians for speeches and “consulting;” reinsurance fees to hedge against large “losses;” investment expenses; and, not least, insurer profits. Don’t omit provider and insurer outlays to promote and protect tax breaks and other arrangements favorable to private plans.

All such expenditures end up, in whole or considerable part, some with a mark up, in the prices charged by providers and insurers and then folded into the prices of what we buy or increasingly cannot afford – for example, home heating and higher education. Moreover, when U.S. companies pay up to twice as much for medical care than their foreign competitors, as they typically do, they lose business and American workers lose jobs.

The Factors Behind Non-Benefit Costs

Those costs are larger than necessary due to how we arrange (I almost wrote “organize”) health care. Over 1,300 enterprises sell or administer employment-based medical care insurance or medical benefit plans. The thousands of plans covering tens of millions employees vary in countless ways that must be taken into account in the labor intensive activities of preparing bills and processing them. The bills themselves consist of charges for innumerable procedures, services and supplies. Bill preparation and processing may be even more complicated and costly than many realize, not least because providers and insurers negotiate a variety of price lists.

But “variety” doesn’t capture the multiplicity of plan provisions; “unnumbered,” “countless,” “unknown, possibly unknowable,” or “lots” are more like it. A Health Affairs article by Uwe Reinhardt calls medical care pricing “cockamamie” and “madness.” One experienced administrator notes, “The average provider – doctors or hospitals – has between 5 and 10 reimbursement rates for the exact same procedure… [A] hospital chain may have 150 rates for the same procedure.” A highly regarded expert, Paul Ginsburg, comments that “observers outside of health care would be stunned by the degree of price variation.”

How come? Providers and insurers seek to attract profitable groups, that is, employers with large numbers and low-risk employees. They offer advantageous rates to such clients whose own bargaining power varies and so the rates charged them vary. Less desirable customers – such as small employers, high risk people like women of child- bearing years and older people – get higher prices. The resulting potpourri of prices introduces another complicating dimension for legions of clericals preparing provider bills who must apply the details of the deal reached by the particular provider/insurer/employer/client involved.

Insurers with their multiple negotiated price lists go through the same process, but in reverse, when they process bills, sometimes seeking mistakes so as to deny or delay payment. Computerization does not solve the problems that arise in processing bills submitted electronically when, as can frequently happen, the recipient computer program finds errors and objections to bills submitted. The provider staff or contractor must address the problems individually. The bill preparing process is slower, more complicated, more error prone and costly than if rates were uniform for each particular service. The plethora of plan variations prevents preparers from becoming sufficiently familiar with plan provisions to readily recognize and avoid errors.

The Magnitude Of Non-Benefit Costs

Non-benefit costs of private arrangements consume 8 percent to 30 percent of private plan total costs. In contrast, the simpler, more standardized coverage and pricing provisions of Medicare, Medicaid and the Children’s Health Insurance Program (CHIP) result in lower non-benefit costs. Medicare’s administrative costs are regularly in the 3 percent range; Medicaid’s and CHIP’s costs are somewhat higher due to the periodic application of means testing needed to repeatedly determine the eligibility of millions of patients. But both programs incur lower non-benefit costs than private insurers. Non-benefit costs merit serious attention – about the only thing not now paid.

The 2007 McKinsey analysis concluded that the U.S. non-system is “intrinsically more expensive” than those of many of the 34 OECD [Organization for Economic and Cooperative Development] countries. And McKinsey’s 2008 version observed that “multi-payer systems (and a multi-state regulated system) create extra costs and inefficiencies in the form of redundant marketing and management overhead tha[n]…countries which have a less fragmented payment system…” (Page 21) Non-benefit costs, though largely hidden in prices, count in what must be paid. The multiplicity of public programs, though less numerous and varied than private programs, also increase non-benefit costs. They too could and should be simplified.

The 2007 McKinsey analysis assigned $147 billion of the cost above the expected level based on our country’s comparative wealth “to operational expenses and support functions” and “$98 billion …in administration and insurance” out of 2006 total health care outlays of $1.9 trillion. Given our larger totals since then, most recently $2.48 trillion, those excessive costs now must be significantly higher.

We pay more than necessary for health insurance while too many people get left out, primarily because of costs. Even many with “coverage” do not seek benefits because discouraged by deductibles and co-insurance. Many pay for non -benefit costs in more than money.

We should cease being distracted by ideological debate and start paying attention to the realities of non-benefit health insurance costs. Until we do, we will not fully understand how health care costs are savaging our economy, federal and state treasuries and personal budgets. Until we have a realistic diagnosis of the dimensions and characteristics of non-benefit costs, we will not have a practicable prescription to reduce them.

Addendum – The Volume Of Non-Medicare Claims

Despite long and extensive efforts, I did not find any studies or reports showing the number of claims made by providers and processed by insurers or other plan administrators. Inquiries to friendly experts yielded responses that did not have such information. Then I came upon Best’s Aggregates and Averages, Life/Health 2008 edition (page 309). Exhibit of Premiums, Enrollment and Utilization, for the U.S. Health and HMO Industry. That reports over a billion “Ambulatory Encounters” in 2007. The total of 1,042,811,297, was composed of 707,834,804 physician encounters and 334,976,492 non-physician encounters. After subtracting the 195,145,992 Medicare Supplemental and Medicare events, 564,046,655 non-Medicare physician encounters and 343,618,451 non-Medicare non-physician encounters remained. In addition there were 75,985,336 non-Medicare in-patient admissions.

It is reasonable to deduce that each of the non-Medicare physician encounters resulted in at least one billable event and that all of the Inpatient admissions resulted in at least one billable event, for an assured total of 564,046,655 billing events for physicians and 6,185,316 hospital event billings. – totaling 570,231,971. In addition, the likelihood is that most of the 343,618,451 non-Physician encounters (lab tests and rehab) also generated bills, producing a total of at least 913,800,000 bills in 2007. Many of the physician encounters probably generated more than one bill because, it is likely that some significant number of the initial bills were found wanting in some respect (a common occurrence) and so led to at least one additional billing episode for many of them.

Moreover, the unexpectedly small number of Medicare bills strongly suggests that the Best’s data do not represent the universe of non-Medicare bills. It follows that about one billion non-Medicare bills are generated and processed each year, very possibly more.

A note about insurance company profits. They usually result, not from insuring, but from investment of premiums and other income that remain on hand and thus available for investment. Insurance companies quite often set premiums and other charges quite low, often at a “loss” on underwriting, so as to maximize investment when investment returns are good. When investment returns shrink, insurers quite often raise premiums and other charges to offset the lower investment income when other prices rise but incomes lag. As a result, insurers raise charges at an inopportune time for the rest of the economy.

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1 Response to “Pay Attention To Health Insurance Non-Benefit Costs!”

  1. R Lande Says:

    Good posting. We need to continue to be reminded of the heavy costs associated with the complexity of private insurance plans. Even other countries such as Germany with multiple insurance plans are less costly than our system because prices don’t vary and coverage is universal.

    Indeed- computerization of claims and payments does not solve the problem..it is more fundamental than that.

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