Insurance policy

Jeffrey Kivi, PhD, was receiving monthly infusions of Remicade to treat psoriatic arthritis, an autoimmune disease he’d had since childhood. The drug enabled the high school science teacher to stand all day in his classroom and to walk down the school’s hallways. Each monthly infusion cost $19,000, which his insurance covered.Then his doctor switched hospitals.The cost of Kivi’s infusions ballooned, soon surpassing $132,000 a month. He still wasn’t responsible for any of the cost, but he was stunned. What could account for this disparity in price?

Plenty of factors, writes Elisabeth Rosenthal, MD, in her new book An American Sickness. The new hospital spent more on amenities and marketing. It held the patent on Remicade, and stood to benefit from its administration if profits were high enough. And Kivi’s insurer didn’t push back against the higher price — instead, it paid three-quarters of it. Kivi was so appalled he switched to a medication he could take at home.

The United States spends almost 20 percent of its gross domestic product on health care, and if we want to reduce that, Rosenthal argues, we’re all going to have to be more like Jeffrey Kivi. Rosenthal, editor-in-chief of Kaiser Health News, itemizes the ills that have befallen health care, including opaque and inequitable pricing, perverse financial incentives and an ethos of putting profits before patients. She then writes a prescription for reform, including short-term strategies to reduce costs and long-term policy goals.

In this excerpt, Rosenthal explains how the transformation of the United States’ health care economy began: with the creation of insurance companies and their evolution into for-profit entities:

The very idea of health insurance is in some ways the original sin that catalyzed the evolution of today’s medical-industrial complex.

The people who founded the Blue Cross Association in Texas nearly a century ago had no idea how their innovation would spin out of control. They intended it to help the sick. And, in the beginning, it did.

A hundred years ago medical treatments were basic, cheap and not terribly effective. Often run by religious charities, hospitals were places where people mostly went to die. “Care,” such as it was, was delivered at dispensaries by doctors or quacks for minimal fees.

Disease was very time-consuming. Without antibiotics and nonsteroidal medicines, or anesthetics and minimally invasive surgery, sickness and injury took much longer to heal. The earliest health insurance policies were designed primarily to compensate for income lost while workers were ill. Long absences were a big problem for companies that depended on manual labor, so they often hired doctors to tend to workers. In the 1890s, lumber companies in Tacoma, Washington, paid two enterprising doctors 50 cents a month to care for employees. It was perhaps one of the earliest predecessors to the type of employer-based insurance found in the United States today.

As medical treatments and knowledge improved in the early 20th century, the concept of insurance evolved. The archetype for today’s insurance plans was developed at Baylor University Medical Center in Dallas, Texas (now part of Baylor Scott & White Health, since it merged with another health system in 2013, forming a giant health care conglomerate), which was founded in 1903 in a 14-room mansion by the Baptist Church.

A devout cattleman provided the initial $50,000 in funding to open what was then called the Texas Baptist Memorial Sanitarium, “a great humanitarian hospital.” By the 1920s, more and more Texans were coming for treatment. When Justin Ford Kimball, a lawyer who was Baylor’s vice president, found out that the hospital was carrying a huge number of unpaid bills, he offered the local teachers’ union a deal. For $6 a year, or 50 cents a month, teachers who subscribed were entitled to a 21-day stay in the hospital, all costs included. But there was a deductible. The “insurance” took effect after a week and covered the full costs of hospitalization, $5 a day, which is about $105 in 2016 dollars.

Soon, employees for the Dallas Morning News and local radio stations were also signing up for what we today would call catastrophic care insurance. It was a good deal. The cost of a 21-day hospitalization, $525, would have bankrupted many at the time. In that era, given the treatments available, within 21 days you were likely dead or cured.

Within a decade, the model spread across the country. Three million people had signed up by 1939 and the concept had been given a name: Blue Cross Plans. The goal was not to make money, but to protect patient savings and keep hospitals — and the charitable religious groups that funded them — afloat. Blue Cross Plans were then not-for-profit.

Despite this, before World War II, when most treatments were still relatively unsophisticated and cheap, few Americans had health insurance. The invention of effective ventilators, breathing machines that moved air in and out of the lungs, enabled a vast expansion of surgery suites and intensive care units. That meant more people could be saved, including soldiers injured during the war and victims of polio outbreaks.

Transformative technologies rapidly spread across the developed world. Abbott Laboratories made and patented the first intravenous anesthetic, thiopental, in the 1930s. Massachusetts General Hospital started the first anesthesia department in the United States in 1936. The first intensive care unit armed with ventilators opened during a polio epidemic in Copenhagen in the early 1940s.

Five dollars a day and a 21-day maximum stay were no longer enough. Insurance with a capital I was increasingly needed. A private industry selling direct to customers could have filled the need — as it has for auto and life insurance. But a quirk of history and some well-meaning policy helped etch in place employer-based health insurance in the United States. When the National War Labor Board froze salaries during and after World War II, companies facing severe labor shortages discovered that they could attract workers by offering health insurance instead. To encourage the trend, the federal government ruled that money paid for employees’ health benefits would not be taxed. This strategy was a win-win in the short term, but in the long term has had some very losing implications.

The policies offered were termed major medical, meaning they paid for extensive care but not routine doctor visits and the like. The original purpose of health insurance was to mitigate financial disasters brought about by a serious illness, such as losing your home or your job, but it was never intended to make health care cheap or serve as a tool for cost control. Our expectations about what insurance should do have grown.

Blue Cross and its partner, Blue Shield, were more or less the only major insurers at the time and both stood ever ready to enroll new members. The former covered hospital care and the latter doctors’ visits. Between 1940 and 1955, the number of Americans with health insurance skyrocketed from 10 percent to over 60 percent. That was before the advent of government programs like Medicare and Medicaid.

The Blue Cross/Blue Shield logo became ubiquitous as a force for good across America. According to their charter, the Blues were nonprofit and accepted everyone who sought to sign up; all members were charged the same rates, no matter how old or how sick. Boy Scouts handed out brochures and preachers urged their congregants to join. By some accounts, Blue Cross Blue Shield became, like Walter Cronkite, one of the most trusted brands in postwar America.

But the new demand for health insurance presented a business opportunity and spawned an emerging market with other motivations. Suddenly, at a time when medicine had more of value to offer, tens of millions of people were interested in gaining access and expected their employers to provide insurance so they could do so. For-profit insurance companies moved in, unencumbered by the Blues’ charitable mission. They accepted only younger, healthier patients on whom they could make a profit. They charged different rates, depending on factors like age, as they had long done with life insurance. And they produced different types of policies, for different amounts of money, which provided different levels of protection.

Aetna and Cigna were both offering major medical coverage by 1951. With aggressive marketing and closer ties to business than to health care, these for-profit plans slowly gained market share through the 1970s and 1980s. It was difficult for the Blues to compete. From a market perspective, the poor Blues still had to worry about their mission of “providing high-quality, affordable health care for all.”

By the 1990s, the Blues, which offered insurance in all 50 states, were hemorrhaging money, having been left to cover the sickest patients. In 1994, after state directors rebelled, the Blues’ board relented and allowed member plans to become for-profit insurers. Their primary motivation was not to charge patients more, but to gain access to the stock market to raise some quick cash to erase deficits. This was the final nail in the coffin of old-fashioned noble-minded health insurance.

Many of the long-suffering Blue plans seized the business opportunity. Blue Cross and Blue Shield of California was particularly aggressive, gobbling up its fellow Blues in a dozen other states. Renamed WellPoint, it is the biggest of the for-profit companies descended from the original nonprofit Blue Cross Blue Shield Association; today it is the second-largest insurer in the United States. Most of its plans still operate under the name Anthem BlueCross BlueShield, but in New York the plans operate under the Emblem brand. The insurer for New York City teachers, which reimbursed about $100,000 for each of Jeffrey Kivi’s outpatient infusions, has evolved a long way from its not-for-profit mission and $5-a-day hospital payments.

WellPoint’s first priority appears no longer to be its ​patient/​members or even the companies and unions that choose it as an insurer, but instead its shareholders and investors. As in any for-profit enterprise, executives are compensated for how well they perform that financial function and are compensated well. In 2010 WellPoint had intended to hike premiums in California by 39 percent, before an attorney general effectively nixed the plan. CEO Angela Braly received total annual compensation of more than $20 million in 2012, despite the fact that she resigned under pressure that year because the company revenues were down. Joe Swedish, the new CEO appointed in 2013, is a longtime health care executive who served at the for-profit Hospital Corporation of America. His starting salary and bonus totaled about $5 million, not including stock options.

Then, in August 2014, WellPoint announced that it planned to change its name to Anthem Blue Cross (pending approval by shareholders), presumably to take advantage of whatever nostalgic good feelings patients had retained toward the Blues, before raising premiums on some of its California ACA policies by 25 percent in 2015. Dave Jones, California’s vocal insurance commissioner, accused Anthem of “once again imposing an unjustified and unreasonable rate increase on its individual members.” Using his bully pulpit to publicly voice his objections was Jones’ only recourse, since he, like many state insurance commissioners, can make only nonbinding determinations and has no legal authority to deny rates. To express their collective frustration, members gathered signatures for a MoveOn.org petition: “Anthem Blue Cross: Stop Playing Politics with Our Premiums.” They urged their insurer “to stop spending corporate funds on political campaigns, disclose everything it has spent directly or indirectly on political campaigns, and use the money to lower rates for Anthem policy-holders and California taxpayers.”

In 1993, before the Blues went for-profit, insurers spent 95 cents out of every dollar of premiums on medical care, which is called their “medical loss ratio.” To increase profits, all insurers, regardless of their tax status, have been spending less on care in recent years and more on activities like marketing, lobbying, administration and the paying out of dividends. The average medical loss ratio is now closer to 80 percent. Some of the Blues were spending far less than that a decade into the new century. The medical loss ratio at the Texas Blues, where the whole concept of health insurance started, was just 64.4 percent in 2010.

The framers of the Affordable Care Act tried to curb insurers’ profits and their executives’ salaries, which were some of the highest in the U.S. health care industry, by requiring them to spend 80 to 85 percent of every premium dollar on patient care. Insurers fought bitterly against this provision. Its inclusion in the ACA was hailed as a victory for consumers. But even that apparent “demand” was actually quite a generous gift when you consider that Medicare uses 98 percent of its funding for health care and only 2 percent for administration.

Why did EmblemHealth agree to pay nearly $100,000 for each of Jeffrey Kivi’s infusions, even though they cost only $19,000 at another hospital just down the street? First, it’s less trouble for insurers to pay it than not. NYU is a big client that insurers don’t want to lose, and an insurer can compensate for the high price in various ways — by raising premiums, co-payments, or deductibles. Second, now that they suddenly have to use 80 to 85 percent rather than, say, 75 percent of premiums on patient care, insurers have a new perverse motivation to tolerate such big payouts. In order to make sure their 15 percent take is still sufficient to maintain salaries and investor dividends, insurance executives have to increase the size of the pie. To cover shortfalls, premiums are increased the next year, passing costs on to the consumers. And 15 percent of a big sum is more than 15 percent of a smaller one. No wonder 2017 premiums for the most common type of ACA plan are slated to rise by double digits in many cities, despite economists’ assurances that the growth of health care spending is slowing.

To some extent insurers do better if they negotiate better rates for your care. But that is true only under certain circumstances and in a limited way. “They are methodical money takers, who take in premiums and pay claims according to contracts — that’s their job,” said Barry Cohen, who owns an Ohio-based employee benefits company. “They don’t care whether the claims go up or down 20 percent as long as they get their piece. They’re too big to care about you.”

From An American Sickness: How Healthcare Became Big Business and How You Can Take It Back by Elisabeth Rosenthal, published by Penguin Press, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © 2017 by Elisabeth Rosenthal.