How Health Insurance Providers Make a Profit 3: Cost Control
So far as Wonks Anonymous has been following the Health Policy debates he has noted a common theme: Health Care in this country costs too much and the particular policy changes being proposed will help to lower these costs. Sometimes Wonks Anonymous wonders how much is too much? He never hears anyone talking about making the war on Islamowhatever more efficient, after all. This, however, is beside the point. In this post Wonks Anonymous would like to consider past efforts by Health Insurance Providers to control health care costs and their outcomes.
Health care cost control is most closely associated with the HMO, a type of health plan that became popular and then universally reviled in the past two decades. In his discussion of HMOs, Wonks Anonymous would like to distinguish between the original type of HMO, the "staff model" HMO, and its more recent relative and evil twin, the insurance HMO.
The staff model HMO, for example Kaiser Permanente, is a partnership between a medical group and an insurance provider. The partnership provides health care and health insurance. The medical group provides integrated health care services including outside referrals when the group is not able to provide services. The insurance company handles the underwriting and marketing of prepaid health plans to individuals and employers. The difference between prepayments for health care and actual expenditure on care helps to determine the profits of the medical group and the annual bonuses of the doctors in the group.
In this model, doctors make money by delivering care at low cost, avoiding expensive procedures, tests and medications and taking advantage of technology and communications within the medical group. At the same time the doctors are restrained in their desire to cut costs by professional integrity and the desire to practice state of the art medicine.
When the bargaining positions of the medical group and the insurance provider are relatively equal, the outcomes of this model can be very good. Kaiser has used electronic medical records for over twenty years and has been at the forefront in scientific evaluation of medical treatments. Its hospitals were also the first in California to meet and exceed mandatory nurse/patient ratios. It has a pretty good record for cost control and quality of care.
In all honesty, Wonks Anonymous must note that even with the best modern technology and cost conscious medical practice the medical care produced by the staff model HMO has still been quite expensive. Sadly, the staff model HMO lacks the competitive edge of other insurance providers. These providers have been able to free themselves of the baggage of professional integrity and turn their energy to the pursuit of profits. In the last two decades, insurance HMOs have exploited the methods of cost control developed by staff model HMOs to the fullest and have pioneered new methods to keep costs low.
Staff model HMOs relied on MDs to make care decisions. This used expensive doctor time and often resulted in approval of costly treatments that might have been foregone. Insurance companies could employ case mangers with more limited training to make these decisions and found that their own employees would be less likely to be swayed by extraneous considerations. As a result they could more effectively limit the total quantity of care delivered.
More important, pure insurance HMOs could assume a more traditional relationship with medical professionals, hospitals and clinics. They cut through all the ambiguities of partnership and joint governance to put things on a pure contractual basis. They gained a further advantages because they could deal with each provider as an individual rather than bargaining with all providers together. One of their most important contributions to cost cutting was a dramatic reduction in compensation for providers, hospitals and clinics.
Indeed, things were working quite well until unfortunate misunderstandings provoked a rather extreme public reaction to Managed Health Care. Here in California this has led to general regulation of HMOs' contracting and payment practices and to additional scrutiny of their care decisions. As a result the costs savings gained by the more innovative HMOs have been reduced more or less to those achieved by the old fashioned, staff model HMO.
Wonks Anonymous will conclude here that, for all the discussions of costs savings, we probably cannot expect to get quality medical care in the US for an amount much less than the cost of a Kaiser Permanente traditional group HMO policy. If you have one now, ask your employer how much that is per month.
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