Wednesday, March 18, 2015

Improving Customer Knowledge on Health Insurance

One of the tenets of the Affordable Care Act (ACA) is that a consumer will lower healthcare costs by comparing and contrasting prices for both insurance and medical procedures spurring competition between these respective agencies. Unfortunately the strategy is marred by the fact that the current marketplace only focuses on insurance provider characteristics in a limited capacity (co-pay, out-of-pocket limits, deductibles, etc.) and there is no information on cost relationships between insurance companies and a given hospital. Also there is no meaningful existing marketplace that focuses on medical service providers (MSPs) where a customer can compare the costs of a MRI between hospital A 134 miles away from his home or hospital B 46 miles away from his home. There are numerous independent groups that attempt to produce a meaningful “shopping environment”, but despite these efforts there is limited overall information, there is a lack of universal regionality, and most customers are unaware that these sites even exist with the exception of a random annual story about them on a blog. Without the ability for healthcare consumers to identify the best medical service prices it is difficult to expect them to be intelligent consumers and aid in the reduction of healthcare costs.

One of the biggest obstacles to producing a more transparent medical pricing environment is the arrangements negotiated between various hospitals and insurance companies. These deals create medical service institutions that are “in-network” and “out-of-network”. Insurance companies cover “in-network” providers because they are able to produce a lower controlled product using their economies of scale versus their inability to do so with out-of-network providers. In theory one would think that insurance companies would value a transparent marketplace because it would force MSPs to compete against each other to acquire customers thereby lowering costs for the insurance industry. Clearly it is assumed that the insurance company would have a price ceiling for each type of service, but few MSPs would exceed this limit, if reasonable, because it would lead to a significant number of services rendered without proper financial redress, which would put them out of business. If more medical transparency would theoretically benefit insurance companies, why is there no push from insurance companies to produce such an environment?

Three immediate reasons jump to mind when attempting to explain resistance by both MSPs and insurance companies to more transparent pricing, which is representative of the free-market principles that these groups claim to support:

The first reason for opposing transparency can inherently be viewed as the most plausible where there is a highly complicated and competitive relationship between MSPs and insurance companies in which these agencies work together to ensure proper prices with a sufficient customer base so that both parties profit. In such a relationship if significant transparency is developed it will add a third major component to this relationship, the decisions and tendencies of potential customers. Without understanding the nuances of the negotiation and the economic obligations of both the insurance companies and MSPs the customer pool will make sub-optimal decisions that will result in inefficiencies, which will produce increased costs reducing profits and even possibly endangering certain businesses.

While there is some truth to the level of complexity associated with this relationship, the above philosophy flies in the face of the general tenets of capitalism. Never has any real capitalist argued that a potential customer pool should be divided among a group of businesses without genuine competition. Instead the mindset has always been for businesses to produce advantages in their produces/services that will attract customers and if they are not able to produce enough advantages then that business folds up shop.

Some could argue that because buying health insurance and having access to medical care is more important than buying a hamburger it cannot be judged by the same principles as regular commerce. Unfortunately for its proponents the validity of this idea appears quickly dismissed when recalling the ruthlessness and questionable tactics that insurance companies have engaged in to deny coverage to their customers on technicalities as well as the excessive charges most MSPs levy against their patients that are “negotiated away” by insurance agreements. If MSPs and insurance companies want the above structure of “secret balance” then they should become non-profit organizations, which would at least justify the above argument.

The second reason for opposing transparency would be concern about divulging trade secrets regarding how prices are negotiated. The “trade secrets” argument is old hat for corporations attempting to avoid transparency. In some cases it is actually a legitimate argument; however, in the case against medical transparency it is not valid because the idea of medical service transparency is simply the declaration of a single price for a given service, i.e. standard single knee replacement, along with a general quality rating from an independent auditor. There is no expectation to produce a methodology regarding how a particular price was produced. In addition it is inappropriate for either insurance companies or MSPs to suggest that by simply knowing the price for a given service that competitors receive a negotiating advantage. Even if they could receive an advantage then all parties would have the same advantages in an environment where all service prices are publicly available, thus there is no reason to be concerned about the revelation of trade secrets.

The third reason for opposing transparency is the most obvious and more than likely the correct one in that the insurance industry and MSPs in general are happy with the current system because they are able to make large amounts of profit and are uncertain if a new transparent and more competitive system would decrease or increase that profit. To better understand how this uncertainty arises one must study the potential changes that occur in a more transparent environment.

In a more transparent environment one of two possible scenarios will emerge between the MSPs and insurance companies. In the first scenario insurance companies will maintain their existing relationships with MSPs and simply be competing against other MSPs and their insurance provider relationships. Basically insurance companies will keep their provider “zone(s) of control”, but consumers will be able to better understand the economic benefits from moving between those zones to best meet their needs.

In the second scenario the new competitive environment may cause MSPs to “unbind” themselves from insurance companies eliminating some to most of the provider control and its associated power. Without provider relationships insurance companies would lose their “zone(s) of control” which could lead to a mass exodus of individuals from one insurance company to another. For example open competition between MSPs would disallow any guaranteed business due to these zones of control, thus MSPs would not be beholden to insurance companies, thus insurance companies would have to compete for business without guarantees. Clearly this second scenario is much more dangerous to the profitability of both insurance companies and even MSPs because they would have to compete as well, just on a lesser extent.

On a political level both Republicans and Democrats should accept and support increasing transparency regarding medical procedures. Republicans should support such a measure because the existing lack of transparency is anti-American and anti-capitalistic as it restricts choice and freedom of individual consumers along with increasing distortion in free markets. Democrats should support such a measure because it will lower government costs and could reduce income inequality by reducing individual costs through a reduced price. Medical care is typically a fixed cost, thus it weights more on poor individuals versus rich individuals.

On a public affairs level almost all individuals should support increased transparency of medical procedures. The first obvious reason for this support would be the reduced prices for medical care that would accompany increased competition. The second, less obvious, reason for support would be the ability to better prepare for future medical care. One of the biggest problems with the current system of care is that most of the focus is on elective or chronic procedures versus acute procedures. Basically there is little shopping when someone believes that they are in urgent need for medical care. In this situation a person can become justifiably emotional and scared reducing the ability to behave like a rational actor when it comes to procuring competitive medical services. However, in a transparent environment individuals will be able to plan ahead of time to determine what hospitals to attend if procedure A is needed versus procedure B eliminating the need to decide on the spot.

Unfortunately while increased medical transparency should have significant government support from both major political parties as well as widespread public support, any Federal law demanding significant transparency requirements from these institutions does not appear on the horizon and for reasons discussed above one should not expect insurance companies and MSPs to become significantly more transparent on their own. The small collective of state transparency laws are a positive step, but should not be expected to significantly lower national healthcare costs.

For example when discussing state required transparency, in 2014 Catalyst for Payment Reform and Health Care Incentives Improvement Institute judged that only Colorado, Massachusetts, Maryland, Maine, New Hampshire, Virginia, and Vermont had some form of sufficient law(s) requiring appropriate and useful price reporting in effort to support transparency. However, among these states only Massachusetts and Maine had suitable and consistently operating websites to host pricing information allowing consumers ease of access to the information and the ability to effectively utilize it in order to make informed healthcare decisions.1 Despite this deficiency in overall transparency, there is an important step that insurance companies can take to increase transparency that should not threatened any real profitability and not require state or Federal action, changing the format of how patients are informed of how their medical costs are covered after a procedure.

The breakdown of what medical procedures were performed, their costs and who/what is responsible for what payments are commonly detailed in an “Explanation of Benefits” (EOB) form. The biggest problem with the generic EOB form is ironically a lack of explanation. This lack of explanation is largely because the EOB is basically a form letter to the patient with various numbers and procedure codes thrown on a piece of paper. There is no unique explanation associated with the patient’s personal experience and the procedures executed. Initially it would be unreasonable to expect insurance companies to perform unique detailed explanations and evaluations for all successful claims. However, it is not unreasonable to expect insurance companies to produce a more clear and transparent document.

The core of this lack of transparency in the EOB is that insurance companies and even MSPs force too much onus upon the patient understanding both the intricate elements of his/her insurance policy and having the ability to use that understanding to interpret the EOB. This interpretation is made more difficult due to the lack of qualitative information in the EOB. Insurance companies could make it much easier on patients if they simply tied the insurance policy to the EOB and then used both qualitative and quantitative information to demonstrate step-by-step with words, not just numbers, how the policy was used to pay for and not pay for certain procedures. For example instead of simply stating that “sum x is to be paid by the patient due to the maximum coverage reached due to the condition of the plan for this service” the EOB should document the existing coverage value and how that coverage value was utilized to covered the applied care.

Such a change in strategy should not be difficult because insurance companies already use policy information to create the EOB for individual patients, thus the only real change would be the addition of qualitative information. For those who think such a change would be too difficult, cumbersome or expensive, the problem with this objection is that individualized plans do not really exist, thus there is only a small finite amount that must be addressed. For example if purchasing insurance was likened to purchasing a meal from McDonalds the customer would only have the ability to purchase a certain specific number of pre-assembled meals (i.e. value meals) instead of build their own meal experience from individual items (i.e. a la carte). There are no significant a la carte insurance plans, thus the overall cost increases for making these changes are minimal. In addition to the step-by-step analysis, which would use generic statements relative to co-pay and co-insurance, a more expansive EOB should include a small glossary to explain specific terms.

Some could argue that such a change would inconvenience insurance companies and it is the responsibility of the policyholder to know the extent and limits of his/her policy. In addition the Internet provides resources to “guide” patients through the general meanings of an EOB. On its face this argument is insufficient for multiple reasons. First, despite what some people want to believe not every individual has access to the Internet, thus looking online for assistance is not universally applicable. Second, arguing against the above changes to an EOB is an argument against efficiency and productivity. What makes more sense: insurance companies spending a single capital investment that would be less than 1% of total yearly profit to make their EOBs more useful friendly and easier to understand or millions of people spending two to six hours attempting to understand their EOB in its current form without a guarantee that they will? Suggesting that the latter makes more sense should only be answered with a silent and sad horizontal shaking of the head.

There is a big difference between an individual thinking he knows what his medical insurance covers and actually seeing what it covers. A more detailed and consumer-friendly EOB will help individuals better understand the actual applications of their medical insurance coverage and will increase transparency and consumer choice by producing better-informed consumers. It would be ideal if the Federal government would actually involve itself on this issue by producing legislation that would create a standardized EOB format instead of relying on companies to do it themselves or states producing individualized legislations that may not be uniform. Overall if one of the major goals of legislation like the ACA is to reduce medical costs then transparency is a key element to increasing consumer choice and lowering costs. While a truly transparent system seen in how most consumer goods and services are purchased may still be a while away, producing a more detailed EOB is an easy and straightforward means to producing more informed consumers and possible lowered medical costs.

1. Delbanco, S, Brantes, F, et, Al. “Report Card on State Price Transparency Laws.” Catalyst for Payment Reform and Health Care Incentives Improvement Institute. Mar 2014.

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