Having started my career at the bedside of a teaching facility, we were taught to treat patients with the supplies and resources at our fingertips and did not think of what each item or service costs. The patient coming for care, especially in an acute/intensive setting, is prioritizing getting better over what the bill will look like at the end of treatment. It is likely you could not imagine how expensive healthcare could be if you’ve never seen a healthcare bill before. The idea of health insurance in the past has been synonymous with the term managed care, which is also thought of as restrictive care. Why do we even need health insurance, and how can managed care differ? It may help if we understand the history of health insurance, what would happen if we didn’t have it, and how can the historical model of health insurance improve in an evolved model.
The Origins of Health Insurance
The origins of health insurance have been documented to start around the same time in the late 1800s/early 1900s in potentially several places throughout the United States during a pre-Internet era with hazardous workplaces and less advanced medicine. In the late 1890s, lumber companies in Washington state paid doctors 50 cents per month to care for their injured workers. Between 1910 and 1915, 32 states created a worker’s compensation insurance program to pool money for legal defense and potentially medical costs for employer negligence. In 1929, teachers in Dallas, TX pooled $1 per month to cover lost pay when a teacher was out for a serious illness. These models stemmed from the idea that it is easier to pool money from a larger group than an individual to save enough money for emergency medical costs and that doctors found employers to be more reliable sources of medical payment absent of employees pooling money together.
What Would Healthcare Look Like Without Insurance?
Do you feel you have enough savings for medical emergencies if you didn’t have health insurance? If we were to pay out of pocket without health insurance:
- For a doctor office visit, we would expect to pay between $100-150.
- An urgent care visit could be a few hundred dollars.
- A visit to the ER would likely start around $500 to the thousands.
- If we were admitted into the hospital for more intensive care, we can expect to pay in the several to tens of thousands of dollars and chronic illnesses can amount to over a million dollars
To pool enough money to cover those individual costs requires an intermediator for those transactions between those funding the pool (i.e., premiums) and payment to the healthcare provider when needed, which is the role of the health insurance company.
Why Managed Care Was Created
To stay in business, the health insurance company needs to ensure there is always enough money in the pool. Without restriction, it is highly likely there will be individuals that will overindulge themselves with overusing services than they need. Therefore, the health insurance companies created a deterrence to prevent such over usage, called member liabilities. Member liabilities are additional payments by an individual when using the pool of health insurance money, such as copays and coinsurance. Even though the pool of funds is being used for a service, the individual is deterred from overusing the funds due to the additional payments they need to make every time they elect to use the health insurance money.
Employers, who are often on the hook for paying the majority of the monthly premiums for their employees to fund the pool, eventually tasked health insurance companies to take ownership of controlling premium costs in exchange of receiving profits in excess (i.e., fully insured model). Under the Affordable Care Act, that margin opportunity for profit is 15% or 15 cents of every premium dollar less medical costs. This means if medical costs equaled 95% of every premium dollar, the insurance company can only earn 5% or 5 cents per premium dollar to cover operational costs and profit margin. To further deter overspending by its customers, health insurance companies have evolved their models with higher member liabilities, such as deductibles where the individual has to pay all medical costs until they hit a dollar threshold (e.g., individual would pay all medical costs up to $1,000 before the health insurance starts to share partial payments in addition to copays/co-insurance).
The Rise of Member Liabilities and Deductibles
The evolution of health insurance has created incentives for health insurance companies to create barriers to care and grow as large as possible to achieve larger profit from smaller margins through a larger number of people. The levers of health insurance also include paying less to the healthcare providers to reduce costs, ensuring health insurance companies hit their highest potential margin. The lower reimbursements to healthcare providers create an incentive for higher utilization of services with more patients to achieve more revenue. For the healthcare provider to have time to fit in more patients in a day means spending less time with each patient and lowering the quality of care provided. The patient then has a rushed experience when seeking care with the possibility of having something missed (e.g., having a more serious condition than what was diagnosed).
The Impact on Healthcare Providers
With the majority of individuals still not having enough savings to cover medical expenses when needed, health insurance is an overall necessity by most. However, the increasingly higher premiums of insurance companies and healthcare costs in the U.S. inflating to over 4.5 trillion dollars is creating an unsustainable trend that is causing employers and government programs (i.e. essentially the premium paying like employers for Medicare and Medicaid) to find an alternative solution to the existing structure. Some large employers have moved to a self-funded model, where the large employer is making the decisions and taking the risk of high healthcare costs and using health insurance companies for their back-office operations only, called Administrative Services Organization model, with varied success. Managed care started with the health insurance companies attempting to limit costs with failures of over limiting and creating the outcomes described earlier. This earlier model was strictly transactional trending with employers and individuals paying more money, providers making less money, and insurance companies losing customers to alternatives.
The Shift Toward Value-Based Care
Managed care is now evolving to a value-based model, where health insurance companies are incentivizing healthcare providers by sharing in the cost savings to improve quality of care with appropriate care versus the pay for each office visit (i.e., fee for service) model. For example, one avoidance of a $500 ER visit would allow the doctor a $250 incentive in a 50/50 shares savings by the health insurance. Multiply that by the number of ER visits that were trending in historical years, which should result in those going to the ER likely being a real emergency and not because they weren’t able to be fit in an already packed doctor’s schedule. The downstream effects also means doctors do not have to pack their schedule if they can be compensated for better care management, ultimately reversing the healthcare cost trend from higher to lower.
Why Managed Care is Still Necessary
The health insurance industry was created out of necessity for the community to support each other when one of us is in need of medical care. That doesn’t mean what was created out of necessity is the answer for sustainability. All stakeholders need to benefit from the right model. An imbalance benefiting one more than the other has shown to not work. Unrestricted access to the collective pool allows overuse of services, underpayment of healthcare providers encourages more quantity and lesser quality of care, and more restrictions by the health insurance companies may also restrict appropriate care and reduce the ability of healthcare providers to do their work. A managed care model that seeks to benefit all with appropriate payments to healthcare providers for appropriate levels of care at appropriate costs resulting in healthier, happier customers and overall healthier community.
