There is no industry more important to individuals, or society as a whole, than the healthcare industry.  In the debate over universal health insurance, it has been estimated that the healthcare industry is responsible for one-seventh of the United States' gross domestic product.  On an individual level, health insurance comprises a significant portion, if not the majority of the expense, associated with most employee benefit plans.  Almost everyday there is a news story about: an insurer being sued for claims denial practices, doctors being forced to moonlight in their local emergency room to make “ends meet,” large employers trying to dump their healthcare plans on the government, employers who are firing their obese and/or smoking employees, etc...  One can also not go a week without hearing about another politician and their plan to solve the “healthcare crisis” with a government program.  This article discusses how the “crisis” developed, and how consumers can actually solve the problem of healthcare hyperinflation.

    Like many other industries or markets where the federal government has injected itself (e.g., college tuition, home mortgages, etc...), healthcare costs did not begin to skyrocket until the introduction of Medicare and Medicaid in the 1960's.1  Once the federal government started these programs, it realized that the cost of the programs was significantly higher than projected, and as such, the government instituted unilateral cost control measures.  One such cost control measure was to dictate to healthcare providers what the government would pay for a given procedure or consumable.  In order to prevent healthcare providers from refusing to perform unprofitable procedures or take unprofitable patients, the government instituted rules that required healthcare providers to take all the patients in a particular government program (e.g. Medicare), or none at all.  This resulted in healthcare providers shifting the loses incurred from the government's unprofitable patients to private payors.

    With the advent of the Preferred Provider Organization (“PPO”), private insurers gained “negotiating” power similar to the government.  The PPO started off as a way for insurers to control costs by securing discounts from a provider's normal rates by steering patients to the medical providers in the PPO network. While the PPO was mutually beneficial at first, once the vast majority of insured individuals were in PPOs or similar organizations, the PPOs informed providers that they could either accept the PPO's fee schedule, or have very few insured patients.

    In addition to imposing unreasonable fee schedules on medical providers, insurers started: automated bundling, downcoding and flat out denial of reimbursement for certain procedures because the insurer, without reviewing the insured's medical records for the visit, decided that a given procedure was not necessary.  An example of this recently appeared in the Wall Street Journal, where the insurer received a bill for a physical and flu shot.  The insurer decided that a flu shot does not require a physical, and therefore decided to pay only the discounted amount for the flu shot and nothing for the physical.  Never mind the fact that the purpose of the visit was a physical, a full physical was performed, and that the flu shot was an afterthought and incidental to the physical.  We also regularly hear from physicians that insurers are refusing to pay for certain procedures unless the procedure is performed with other procedures.  While this should not be a problem, most insurers are constantly changing, without disclosing the change(s), what the additional procedures needing to be performed are.  Through these games, insurers manage to underpay legitimate claims that have been properly submitted.  This has forced medical providers to incur additional costs in retaining additional office staff or services to audit insurer payments and appeal wrongful denials and incomplete payments. However, all of these methods of recovering full payment increase the healthcare providers costs, so even when a provider prevails after the appeal(s), they have still lost in that they often have spent more than the value of the payment, to recover the payment.  This forces medical providers to find alternate sources of income.

    While some medical providers have decided to moonlight in the local emergency room, many have closed their practices, merged into larger groups, or taken on more patients than they can reasonably handle. Another option that seems to be gaining increasing acceptance in the medical community is to charge each patient an annual fee in order to be able to be seen by that medical provider.2  While the law prohibits a medical provider from pursuing a PPO member for the difference between the provider's normal rate, and the discounted rate the PPO receives, there is no law that explicitly prohibits a provider from levying an annual fee.  However, even in the absence of an explicit prohibition, medical providers may be breaching their contract with the PPO because they are not in fact willing to treat PPO members for the discounted rate called for in the PPO's contract with the provider.  The fact that providers are being squeezed by PPOs and insurers does not entitle the providers to squeeze their patients.  Finally, the PPOs may be committing fraud if they are listing providers as being in their network, when the PPO knows the provider will not see their members without an additional charge.

So What To Do?

    The first thing NOT to do is to turn to the government for universal health insurance;3 the only thing “universal” about universal health insurance is that it is universally poor.  If those proposing universal health insurance thought such a system would be adequate or well received, their proposals would not also criminalize the providing of medical services in a private system for those willing and able to bypass the government's healthcare system.  One also need only look to Canada, France, England and other countries with socialist medical systems to realize that not only is treatment poor, but that those who can afford private healthcare, usually obtain private healthcare.  Rather than turn to the government that created the problem in the first place, consumers should look to the private sector and marketplace reforms to solve the problem.

    Part of the reason health insurance is so expensive is that there are very few sellers of individual policies.  In Illinois there are about five health insurance companies selling individual policies, with Blue Cross/Blue Shield and Humana having 80% of the market.4  Part of the reason there are so few insurers selling individual policies is a lack of demand for health insurance outside of the employment relationship.  Employer plans are popular because in addition to being subsidized by the employer, employees can pay their premiums with pre-tax dollars.  With the growth of employer sponsored health care plans after the enactment of ERISA,5 the market for individual health insurance policies decreased substantially.  This smaller market caused consolidation and less competition, which in turn caused the problems consumers are currently experiencing (i.e., higher prices and/or less service).

    The individual health insurance market could be reinvigorated in short order if Congress made it possible for anyone to purchase health insurance with pre-tax dollars.6  Additionally, for those individuals with employers who are willing to subsidize their health insurance expenses, Congress should allow employers to contribute tax-free to their employee's purchase of health insurance in the open market. Not only will this likely decrease the employer's health insurance costs, and remove the inherent conflicts between employers and employees that arise from the employer being the employee's health insurer,7 but it will enhance employee health insurance options and health insurance portability, as well as expand the market for individual policies.

    Admittedly, individual health insurance policies are not a panacea,8 but by removing intermediaries who often have a conflict of interest with the insured,9and giving individuals a greater ability, along with a greater incentive, to control health care costs, health care expenditures could be reined in.

    Another method of reining in health care expenditures is to encourage the creation of mutual health insurance companies.  If policyholders are the recipients of insurer's profits, there is an incentive on the part of policyholders to minimize their health care costs.10  For the insurer, there is no incentive to charge significantly in excess of expected costs because they will merely end up returning the surplus to policyholders.  Given the profits health insurers currently make, one could expect to see mutual health insurers offering equivalent policies at 20-45% off of current premium levels.

    Another method of making health insurance more affordable and available is to revise the federal law which has placed limits on the ability of individuals to form group plans.  One of the advantages of a group plan is that it allows members to join with less underwriting.  It also requires that all individuals within the same demographic be charged the same premium.  One perceived problem with group plans that are not sponsored by an employer is the lack of a single payor to cover any expenses above those covered by the premiums collected. This is not a problem since these group plans could purchase stop-loss policies just as self-insuring employers already purchase.

The Physicians' Response: “Great! Now that almost everyone has insurance we'll lose money on every patient!”

    Having dealt with the consumer side of health care financing, we return to the issue of health care providers being cheated by health insurers and PPOs. While many medical providers are not going to like our solution, the reality is that the only way medical providers are going to level the playing field is through organization and/or litigation.  Medical providers need to start sharing information with each other regarding insurers and PPOs that are not living up to their contractual obligations.11  Medical providers need to stop accepting patients from those insurers and PPOs.  While this may cause some strain in some physician-patient relationships, patients are going to understand that their medical provider needs to get paid what they are owed, and in a timely manner. After the first couple of insurers or PPOs start losing medical providers and their patients en masse, other insurers will realize that their customers are not going to tolerate their unlawful cost savings schemes any longer.  Admittedly this solution requires cooperation, sacrifice and will likely take several years before it bears any fruit.

    The other solution is for medical providers and/or insureds to rise up and file lawsuits against their PPOs and insurers.12  Depending on who serves as the Plaintiff, some potential causes of action include: antitrust, RICO, consumer fraud, common law fraud, and breach of contract.  Most of the foregoing causes of action carry the potential to deprive insurers and PPOs of more than their unlawful gains, and should serve as an effective deterrent to the abusive practices currently being engaged in by health insurers and PPOs.

1  While medical technology has improved significantly since the 1960s, and that new technology tends to be expensive, the technology usually lowers the overall costs of healthcare (i.e., It is less expensive to treat the tumor when it is small, and especially before it metastasises. MRIs and other new diagnostic technology advances the point at which the tumor can be discovered. Further, earlier detection may allow for treatment with a new medication, which may be expensive, but is likely significantly less expensive than surgery.)

2  In order to prevent any misunderstanding, the annual fee is just to receive treatment from the medical provider. There are no special services, discounts or guarantees of the physician even being available to see the patient.

3  The issue should be discussed in terms of universal health insurance, and not universal healthcare, because federal law already requires medical providers to treat medical emergencies. While the law leaves a gap in care since it only covers emergencies, there is no basis to conclude that universal health insurance would provide comprehensive coverage.

4  2005 Illinois Division of Insurance Complaint Statistics private health insurance (excluding HMOs) for 2005 (the most recent year available).

5  Employee Retirement Income Security Act of 1974 (Pub.L. 93-406, 88 Stat. 829, September 2, 1974).

6  Again this assumes that the tax code should be used for social engineering. We are not convinced that using the tax code for any purpose other than raising revenue for legitimate government activities is good for consumers.

7  Most employers who can afford to self-insure, decide to self-insure because ERISA provides significant tax and other benefits to those employers who self-insure. So while an employee thinks they are being insured by Aetna, Cigna, BCBS, or another insurer, the company listed on their insurance card is merely acting as a third party administrator of the employer funded plan.

8  The biggest problem with individual health insurance plans is the ability of the insurer to engage in individual underwriting and rating, however employer plans are not perfect either. If the employee's claim is wrongfully denied, under ERISA the employee is limited to suing for restitution (i.e., medical bills, but not consequential damages or non-economic damages). See 29 U.S.C. § 1132 as interpreted by the Supreme Court in Mertens v. Hewitt Associates, 508 U.S. 248 (1993).

9  While employers are subsidizing health insurance, they are nevertheless looking to minimize their expenditures.

10  The incentive to minimize costs would be further enhanced if the mutual health insurer offered Health Savings Accounts. With Health Savings Accounts, insureds have an incentive to minimize their expenses from the first dollar.

11  Note that we are only encouraging providers to share information about untrustworthy insurers and PPOs, not each provider's rate schedule(s). To encourage the later would be to encourage a violation of the antitrust laws.

12  Because of ERISA, the insureds that rise up will likely have to be individuals not insured through an employer sponsored health plan.