Some things that I learned about the health insurance business

Some of the stuff that I learned about the health insurance business during a month at Harvard Medical School (earlier this year)…

Forcing people to get a second opinion prior to surgery was a “a stupid idea” and did not change costs or outcomes. [I don’t understand why. “Christopher had 323 doctor visits and 13 major surgeries. Here’s why his mom was arrested” (Fort Worth Star-Telegram) is an unfortunate story about a healthy child enduring a lot of medical torture. Wouldn’t he have had a lot fewer surgeries (maybe none?) if second opinions had been required? The media blames the mom, but could this even have happened in a country where doctors are on fixed salaries rather than being paid fee-for-service? And how much could have happened with a two-opinion system?]

The normal profit margin for health insurance is 1-2 percent (except for ACA/Obamacare, where the expectation is to lose money so it makes sense to withdraw). The Holy Grail for health insurers is to find an unregulated corner of the health care market in which high growth and high profit margins can be obtained.

Customers on the ACA/Obamacare exchanges are much more likely to go to the Emergency Room (“ED”), which represents a disaster for an insurer. (There are some differences in ER/ED usage due to age and gender ID. This article says “about 20 percent of women said they went to the ER, compared with 16 percent of men”. Young people are more likely to go as well, presumably because they can’t be bothered to put down their videogames for the hours of phone calls that it would take to find a non-ER solution.)

Insurance companies have limited outcome/health data. They know if a customer was readmitted to a hospital, but in a world where consumers are chased with surveys they never call up or email members to ask “How is your health?”

Much of “health insurance” is actually “healthcare billing administration.” The headline “health insurer” is not taking any risk. They are just negotiating rates with providers, haggling over bills, etc., on behalf of the real party at risk: your employer. If you’re upset because “the insurance company doesn’t cover X” it is actually your employer who decided that X wouldn’t be covered.

Employers (“plan sponsors”) start out wanting to cover everything. Then they find out what their generosity will cost and change their minds. In-vitro fertilization (IVF) is a good example. The employers are initially thrilled to help add more children to Spaceship Earth. Then they find out that 30% of IVF births are multiple, that the risk of prematurity is higher with multiple births, and that an average triplet birth is a $300,000 event compared to $11,000 when one baby emerges. IVF generates 1.6% of US births, but 16% of all twins and 38% of all triplets.

(Which plan sponsors are so stuffed full of cash that they don’t care about these costs? Universities and the U.S. military’s TRICARE.)

Why are premature babies so expensive? A NICU bed averages $3,000 per day on average (times 3 with triplets!). Advances in technology enable extremely premature infants to survive.

[There are new ethical questions to go with the new tech. For example, it is legal to abort a pregnancy up to 24 weeks of gestation in Massachusetts, but some of these would have been viable babies if born. Massachusetts also says it is legal to abort a child after that if it will harm the mother’s mental health. But what is more harmful to mental health than having a kid around? (see also: abortions sold for cash in Massachusetts)]

Enormous sums could be saved if patients could be moved around a little. There is at least a 2:1 ratio in cost of knee replacements, with the same quality, between higher cost and lower cost geographical areas. IVF is $25,000 in New York City; it is $7,000 in Baltimore (two and half hours away by AMTRAK Acela).

Enormous sums could be saved if patients could be redirected away from hospitals. The inefficiency of hospitals is truly staggering. In what other industry does buying the same service from a bigger enterprise cost 10X as much? Getting a shot or a pill at a hospital could cost 10X what it costs at an urgent care center such as a CVS clinic. But if you go to a big Petsmart you don’t pay 10X for dog grooming compared to what a local one-groomer shop would charge. The insurance companies spend a lot of time thinking about how to keep patients away from the ER/ED, but maybe it would be worth looking at why stepping through the front door of a hospital costs $1,000.

14 thoughts on “Some things that I learned about the health insurance business

  1. Very interesting post. Would be interesting to have more detail on the economics of health insurance since the profit margins seem awfully low to attract capital. Wonder what their return on invested capital is and how they generate that return. Also why the insurance companies are unable to force down hospital costs since they too know that costs are unreasonable.

  2. I always wondered where all the money goes. Let’s take an appendectomy. My German health insurance says it costs them between $3000 and 4200 to do it here. The average price in the US was $33000 in 2009 ( Where does all the money go? Even when you accept that nurses and doctors earn 2-3 times what they earn here, that doesn’t explain why it’s ten times of what it costs in Europe. Where does all the money go? Profit?

  3. The movie industry claims to have no profit. Everyone else wishes they could be inefficient enough to claim 1% profit. They don’t do very badly.

  4. 1-2% sounds small until you put it into the context of being 1-2% of 18% of our entire GDP! …minus presumably private health care spend, the VA and medicare.

  5. Sickcare (I refuse to call it healthcare) is so screwed up that “price” is difficult to define, much less compare. philg is correct that the employer is usually the principal in the coverage, and the admin hell it puts them in is unreal. My particular plan does surveys, telephones me and recommends “wellness” lifestyle choices, but these are scraping at the margin.

    A medical school is a strange place to study cost – physicians are famously guild-oriented and not interested in expanding their own ranks. A lot of the competent immigrant physicians would never be admitted to a med school in the U.S. I shouldn’t single them out, their sector is no crazier than hospitals or pharma. There is just an uncanny clustering of crazy in sickcare.

    The system cannot be sustained as is. I predict corporate America will ultimately demand a single payer (public,govt, socialist, take your pick) plan. The first politician openly supporting it has just been elected, and vague “studies” are emerging showing such a plan would overall cost less. The transition from the present tangled payment system to a tax-funded scheme will be tough. It is truly the elephant in the room, devouring (distorting?) 20 percent of the economy. Employers will probably demand a front-loaded takeover so that patients/employers are not paying both premiums/providers and sickcare taxes. There will be another trillion-dollar debt bulge but hey what’s new? Timewise, it’s probably for today’s grandchildren but things can move pretty fast when the tide changes.

  6. Last year my dentist referred me to a periodontist. The periodontist told me my gums were receding and I needed massive work to ensure my teeth would stay healthy for the rest of my life (I’m 50). I’ve had dentists comment in passing about my gum recession for the past couple of decades, so it wasn’t entirely out of the blue. But this guy wanted to do procedures on a quarter of my teeth at a time, with two month’s recovery in between each procedure. So that was going to be eight months of misery, with a price tag around $20K out of pocket.

    I looked up another periodontist based on reviews, and got a second opinion. He found a couple of places he wanted to work on, but no surgery. The thought the first guy was crazy.

    I then found a third periodontist (I’m a trumpet player, he’s a trumpet player, my trumpet player friends who I told this story to unanimously told me to go to him). He also had a couple of minor concerns, and wanted some deep cleaning in a few places…. but also thought the first guy was crazy.

    My moral: Second (and third) opinions are important. Yes, there are butchers out there.

  7. Sam: standards at all medical schools are way too high for me to be admitted as a student! Also, the one kind of diversity that I hope we can all agree is terrible is age diversity (old people running around a school).

  8. You forgot to mention that TRICARE covers all because their costs are much lower (they run their own system: doctors, negotiated medication prices, etc.). In other words, they are much closer to real prices (as in Europe and rest of the world) than typical US inflated healthcare costs.

  9. The question I have is, when did all this over run in cost started and what lead to it? Understanding the history of the issue is as important and coming up with a fix.

    This high cost of medical care was not as crazy as it is today back in 1970’s or 1980’s or maybe even 1990’s. Or do I have it wrong?

  10. Has anyone thought about bringing ER under the umbrella of public safety / “first responders”? If emergency rooms are creating financial distortions in healthcare costs and spending, perhaps they should be removed from the equation before we can even start bending the cost curve.

  11. @George A
    The topic obviously it exceeds the scope of a single book, but I like this narrative of how development of the medical profession and health care in the US differed historically from elsewhere:
    The Social Transformation of American Medicine: The Rise of a Sovereign Profession and the Making of a Vast Industry by Paul Starr

    There are many differences in medical practice, financial structure and demographics between the US and Europe, but in short, the cost explosion really took off with Medicare in 1965 through the 80s.

    I think the real causes are at least partly evident to most of us:
    * lack of price signals
    * limitation and misallocation of physician training
    * specialization and bureaucratization of the medical profession substituting referrals and tests for critical thinking
    * an explosion of paperwork and complicated incentives as parties try to control rising costs
    * lack of appreciation for the low or negative benefit of many expensive end-of-life measures
    * poor preventative care
    * segmentation of the population into separate but fluctuating risk pools (think of the allocation of major lifetime expenses such as child delivery, chronic conditions, and end-of-life care as someone selects pass self-selected through various private and ACA plans to medicare)
    * vanishing personal and community responsibility for one’s health

    A slogan like single payer might touch on a handful of these points but the reality is that it’s an ugly political problem (because enough groups do alright with the status quo) and it’s going to need real leadership from within all the involved parties.

  12. Tiago: Are you sure that TRICARE runs its own clinics and hospitals? says

    Historically, health care for military personnel and their dependents was provided in military medical facilities as promised by the military, and through a referral system, by civilian medical personnel where military physicians were not available in a certain specialty, or when and where overcrowding of a military medical facility occurred.

    In the late 1980s, because of escalating costs, paperwork demands, and general beneficiary dissatisfaction, DoD initiated a series of demonstration projects. Under a program known as the CHAMPUS Reform Initiative (CRI), a contractor provided both health care and administrative-related services, including claims processing. The CRI project was one of the first to introduce managed care features to the CHAMPUS program. Beneficiaries under CRI were offered three choices – a health maintenance organization-like option called Tricare (CHAMPUS) Prime that required enrollment and offered enhanced benefits and low-cost shares, a preferred provider organization-like option called Tricare (CHAMPUS) Extra that required use of network providers in exchange for lower cost shares, and the standard CHAMPUS option that continued the freedom of choice in selecting providers but required higher cost shares and deductibles known as Tricare Standard.

    ——————- explains how a civilian physician can sign up to get paid by TRICARE. See also

Comments are closed.