Should the U.S. ditch private insurance?

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Elizabeth Warren has gotten tight with Ady Barkan, a brave ALS patient and advocate for Medicare for All. In the July 30 debate, she told his tale:

The guy who has ALS, this isn’t this is somebody who has health insurance and dying. Every month he has about $9,000 in medical bills that his insurance company won’t cover. His wife Rachel is on the phone for hours and hours and hours begging the insurance company please cover what the doctors say he needs.

Barkan, in his turn, tweeted during the next night's debate: 

Every candidate on stage who doesn’t want to get rid of private insurance should have to explain what a company like Aetna adds to our health care system. How do they make patients’ lives better? #DemDebate

— Ady Barkan🔥🌹 (@AdyBarkan) August 1, 2019

Fair enough. Whether to preserve private insurance, and how to reform it if so, are the questions that divide Democratic candidates' approaches to healthcare reform, at least theoretically (what each of them would truly aim to accomplish via legislation introduced in 2021, and how they would balance their healthcare goals with other priorities, are questions they should be asked). 

In any case, let's look at the rap sheet against insurance companies -- and set it against their claims to add value to our healthcare system.

The raps

• Divided and conquered: All but uniquely among wealthy countries, the U.S. leaves private insurers to each separately negotiate payment rates with healthcare providers. The fragmented payer universe gives providers outsized bargaining leverage, particularly in areas with dominant hospital systems or provider shortages.  Accordingly, commercial insurers pay hospitals about 189% of Medicare rates, according to a Congressional Budget Office estimate, and 241% Medicare according to a more recent RAND study. Commercial rates for doctors are about 128% Medicare, according to MEDPAC. 


• Administrative cost: Providers often deal with dozens or hundreds of insurers and health plans, each with its own payment rates, prior authorization requirements, and other administrative headaches -- including wrestling over payment codes and amounts.


• Coverage denials: Like all insurers, health insurers are paid up front via premiums and have considerable leeway when it comes to paying claims as they arise. To a degree, the less they pay out in claims they more they earn, though you'd never know from listening to presidential candidates that the ACA requires them by law to spend at least 80% of premiums on claims in the individual and small group markets and 85% in large group. Still, you don't have to go far to encounter stories of cancer patients denied coverage for prescribed treatments and drugs, patients forced to jump through onerous prior authorization hoops year after to year to stay on the same drugs, incapacitated people denied custodial care by managed Medicaid insurers, and many other horror stories about coverage denied or delayed.


• Billing games: Private insurers rely on government for much of their revenue -- e.g., in Medicare Advantage, managed Medicaid, and the ACA marketplace. In all of these programs, revenue depends on risk rating, i.e. how the insurers characterize and classify patients according to their health and needs. MA plans overbill by billions each year -- by $9 billion collectively in FY 2018, according to CMS. Managed Medicaid insurers have their own games, such as classifying enrollees as in need of long-term care services when they receive no such care. 

Before moving to the plus side of the ledger, let's note that many countries that deliver universal health coverage through private insurers (usually on a nonprofit basis for primary insurance) avoid the first two ills through so-called "all-payer" billing regimes. In such systems, all insurers pay the same rates for care, whether set through collective bargaining, government fiat, or some combination.  In the Medicare universe, the federal Center for Medicare and Medicaid Services (CMS) accomplishes the equivalent with private Medicare Advantage plans by estimating the per-person cost of traditional Medicare in each service area and paying plans on a per-enrollee amount based on that cost. Those "capitated" payments constrain MA insurers to pay providers rates that are very close to those paid by traditional Medicare.

A healthcare reform bill that has had a shaping influence on the health plans introduced by Joe Biden and Kamala Harris,  The Medicare for America Act introduced  in the House by Rep. Rosa DeLauro (CT-03) and Rep. Jan Schakowsky (IL-09), would create a de facto all-payer system in the United States. Medicare for America creates a public option, deemed "Medicare," that any American can buy into on an income-adjusted basis, even if they have access to affordable insurance offered by an employer or other source. The plan would pay adjusted Medicare rates to providers (110%, with extra bump-ups for primary care providers and rural hospitals) -- and stipulates that provider have to accept the same rates from employer-sponsored plans and Medicare Advantage plans.  Medicaid would be folded into the new program, removing another source of rate variance.  Employer plans would have to cover at least 80% of the average enrollee's yearly costs -- a standard that most meet now, but that would eliminate a subset of skimpy plans. 

The Upside

Private insurers claim, with some evidence in at least some markets, to manage care more efficiently than do government agencies, or in fact in partnership with government agencies. That is, through some combination of provider quality control (in limited provider networks), coordinated care, incentives for care recognized as "high value," disincentives for low value care, and oversight via prior authorization for various treatments, they minimize low value care (such as, say, unnecessary joint replacements or imaging), encourage care that reduces acute care episodes such as hospitalizations, and, in sum, improve patient outcomes. 

One market in which there's substantial evidence to back up such claims is Medicare Advantage, now serving a bit more than a third of Medicare enrollees (22 million). In an August 2016 Academy Health blog post, Austin Frakt, a healthcare economist at the VA and Boston University, cites five several studies indicating that MA plans not only spend less per enrollee than traditional Medicare -- they also have "spillover" effects reducing costs per enrollee in traditional Medicare in their area. That's presumably because "Providers care for both MA and TM patients in similar fashion, so that if MA succeeds in inducing efficiency enhancing practice, it applies to TM [Traditional Medicare] as well."  The first study* cited, for example, crunches seven years of Medicare survey data and estimates that

each percentage point increase in Medicare HMO market penetration leads to a one percent decrease in annual, per capita TM spending. The spending reduction is for both inpatient and outpatient care and is concentrated among TM beneficiaries with at least one chronic condition.

On the other hand...Frakt notes in a New York Times Upshot post (a year later) that while MA plans spend less per enrollee than traditional Medicare, they take in much more in fees than they pay in claims -- 30 percent more in 2010, according to a NBER study based on billing data obtained from three large insurers. Whether MA plans save or cost the federal government money on net compared to traditional Medicare remains unclear.  Maybe they're saving just enough for us to pay them the difference at break-even, give or take a little.

As noted above, most countries that deliver universal health coverage through private insurers require that primary, comprehensive insurance be offered on a nonprofit basis -- though insurers may be allowed to offer supplemental coverage (often through employers) on a for-profit basis. It may be that the U.S. health insurance industry, like every sector of  the U.S. healthcare system (very much including hospitals and many physician groups), is infected by pressures to maximize revenue and profit to a degree that adulterates whatever value it adds. On the other hand, it's been argued that stricter and more uniform coverage requirements in the employment sector in particular, and higher required "medical loss ratios" (the percentage of premium dollars required to be spent on medical care), enabled by reduced billing complexity in an all-payer system could reduce plan variance to the point where coverage is more like a utility, with revenue and loss volatility as well as opportunities for abuse minimized.

The model for reform embodied in the Medicare for America Act -- a "Medicare" buy-in available to both employees and employers, and provided free to low income people -- has been introduced in various forms in the U.S. since the early 2000s. Some proposals and bills along these lines envisioned the public plan leading to the phase-out of private insurance; others envisioned an equilibrium in which private and public plans co-exist and fruitfully compete, as is arguably the case now with traditional Medicare and Medicare Advantage. A candidate proposing a plan that more or less adheres to this model -- as Joe Biden and Kamala Harris arguably have done -- can credibly remain agnostic as to the ultimate fate of private insurance. 

That's an intellectually honest stance, and probably the most realistic. It's also prudent not to immediately pull the plug on an industry that has developed valuable care management and plan design skills in thousands of people. A broad-based national Medicare buy-in program is arguably the equilibrium point for system transformation that plays out over a viable time horizon with ongoing opportunity to adjust along the way.

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*  "Managed care and medical expenditures of Medicare beneficiaries," by Michael Chernew, Philip DeCicca, and Robert Town (Journal of Health Economics, 2008)