We all know “Flo” from the Progressive commercials. She is the lady that cheerfully helps you get your auto or boat or truck insurance. When I suggested that health insurance was similar, the responses were, well, very strong. I, apparently, am crazy. I know nothing about health insurance. A quarter century as an ERISA and employee benefits expert, a stint on my company’s Employee Benefits Plan Committee and a longer stint as counsel to such committee apparently left me brain dead about insurance.
I know in the simple views of many that health insurance covers all medical procedures you want. It doesn’t. It probably doesn’t even cover all ordinary and necessary procedures you want.
A few basics. No insurance policy tells you what care to have or not have and what doctor to see or not see. It will, however, tell you clearly (hopefully) whether or not you will be reimbursed. See, health insurance is very much like auto insurance. With auto insurance, you have an accident. If it is covered by your policy, they pay to have your car repaired (less any deductible). With medical insurance, you incur a medical expense and, if it is covered, they pay your claim less any deductible.
Now, medical insurers go a bit further than car insurers in negotiating rates with providers so that the maximum charge is established. So auto insurers actually do the same.
Just as you walk down the aisle with Flo and her barcode reader as she builds the auto policy you can afford, your health policies are pretty similar. Whether it is employer coverage, continuation coverage, conversion coverage or individual coverage, you usually have several choices as to what will be covered, what the deductible will be, what co-pay applies and even whether precertification is required.
You can go from bare bones (legal minimum in car insurance and catastrophic major medical in health) to the prime plan (no deductible replacement coverage for your car or full indemnity for health).
The cost will vary with coverage. The stronger the coverage, the more the cost.
With auto insurers, the cost to repair automobiles makes a big impact on the underlying premium. What you pay is based on the various coverages as well as any limitations on the total coverage (say 100,000/300,000 for bodily injury).
The case is the same for medical. It really is. You select various things that are covered. Basic medical. Surgical. Dental. Mental health. Preventative care. Alternative care. There are many variables. You also select among co-payments and deductibles. You also have lifetime caps.
All of these help to shape your premium. The lower the coverage, the lower the cost. The biggest factor in deciding your cost, of course, is the underlying cost of medical care. With a self-insured employer plan, there is no profit on experience (premiums paid versus claims made) so you see the pure insurance cost plus an administrative fee for the administrator.
Yet, we have heard many horror stories about insurers denying claims. You must group denied claims into at least two groups. Some are denied, others allege, simply to drive up insurance company profit. They say these claims are valid and the insurer routinely denies them simply to keep down costs. To the extent that is true, the insurer should not be selling insurance anymore and the government should act. The second set of denied claims are those that are simply not covered. For example, it may be an elective cosmetic procedure that the insurance doesn’t cover or you may not have coverage for dental or mental health. If you don’t have coverage, the claim will not be paid. Then again, you haven’t paid a premium on it either.
There are times when an insurance company will get it wrong. That is why plans have appeals procedures and employee plans have a process defined by ERISA. An example might be a breast reconstruction after mastectomy. The insurer may routinely deny these procedure codes thinking they are elective plastic surgery. Typically, the appeal process will clear that up.
So, when we talk about denied claims, we need to be clear. Was the coverage in fact available but not purchased? Was the coverage in place but the reimbursement still denied? Two very different issues.
Health care advocates take aim at lifetime maximums. They say there should not be any. Well, if you remove the lifetime maximum, then everybody does pay more for insurance. Instead of pricing based upon a $1 million cap, if the insurer must price based upon no cap, your rates go up. It isn’t a big change, because it isn’t a very common exposure, but rates go up. It is like when I raised my personal liability umbrella from $1 million to $2 million. The premium does not double, because most claims will be well below $1 million but they need to price in the possibility that there will be a $2 million claim. Likewise, if instead of a $1 million cap on medical coverage, the insurer needs to cover you without a limit.
It is all simple math and actuarial tables. You add coverage or increase the maximum exposure and the cost increases. You decrease coverage or decrease the limit and the cost goes down. For the 99% who never reach the $1 million limit, this is a good deal as their rates are lower. For the 1%, it is not. What we must realize is that if you eliminate lifetime limits, everybody pays more to provide that coverage.
Then there is the major bugaboo about pre-existing conditions. If my house burns down, I can’t call up and say I want home owners insurance to cover it. Health insurers have done the same thing. They price their policies on actuarial probabilities that the person or group covered will develop a certain condition and require a treatment.
Let’s say that 10% of the population develops a certain disease. Simplistically, the insurance is priced based upon each insured incurring 1/10th of the costs of the associated treatment. Let’s say that you develop prostate cancer at a time when your group has a 10% probability of doing so. Actuarially, 9 others are likely not to contract it. The insurer is ok on its experience because it priced 1 prostate treatment for every 10 subscribers. But, you leave that plan and want to get coverage elsewhere. Well, you have a 100% chance of needing prostate treatment. If the insurer covers you under a plan that assumed a 10% chance, the insurer has absorbed an experience loss. They have two ways of addressing this. They can deny you treatment for that illness or they can charge you a premium that assumes the certainty of prostate cancer.
Advocates think this is unfair. As a matter of health CARE it is. As a matter of health INSURANCE it is not. You can’t effectively insure against something that has already happened. You can’t insure a car after it has already crashed (except for future crashes). You can’t get life insurance after death. You can’t insure your home after the flood hits (except for future floods). Likewise you can’t insure against the need for prostate treatments after you have developed the cancer.
So, why do we have such a hard time translating simple insurance concepts to health insurance? First of all, it is very emotional. It deals with health and well-being and often with survival. Second, we tend to misconstrue health insurance as a guarantee for all health care that is necessary, but that isn’t what the contract covers. If our car has an accident or our house is hit by a falling tree, the first thing we do is check to see if we are covered. When health insurance is involved we automatically assume we should be covered and the insurer has a moral obligation to cover us. Nothing is further from the truth. Health insurance is every bit a contractual relation as is car or house insurance.
So, we can insist on policies that cover everything---if we are all willing to pay for it.
We can insist on policies without lifetime caps—if we are all willing to pay for it.
We can insist on policies that cover you despite a pre-existing condition—if we are all willing to pay for it.
We can insist on coverage for Viagra, gender reassignment, mental health, dental, yoga, hypnotherapy, hydrotherapy, etc., etc. ---if we are willing to pay for it.
In the end, our coverage, whether from a private insurer or the government, will be priced based upon what coverage we choose. There are no free rides. There are no increases in coverage without an increase in premiums. Until now, we as Americans, have been free to choose to have coverage or not, to go with minimum coverage if we were young and healthy and rolling the dice, and to keep our rates low by capping coverage or even by having a high deductible plan (catastrophic coverage). HR3200 and other reforms will take away some of those choices. To the extent it leads to everyone having access to health care, that is good. But we all need to understand that we are taking on a collective risk in all of this which may or may not be what we want. It is simple math and actuarial science.
Health Care
Comments
<applause> Very clearly stated. Thank you Ken!
There is at least one difference between health and automobile insurance. Health insurance companies can and will deny you coverage at any price if they figure the risk is too great.
In some states, anyone can get car insurance. You may be categorized as a special risk with awful premiums, but you'll get insurance somewhere. In Maryland, for really bad drivers it's though the state via MAIF and there is an upper limit to how bad the rates can be. Thus, no driver is insurable.
RS,
Absolutely. I have mentioned high risk pools erlsewhere in that vedry contexty. They work for auto. They can work for health. Basically, that is what federal flood insurance is.
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