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Why Efficiency Is Bad For Health Insurance Companies

March 5th, 2010 by DrRich in Better Health Network, Health Policy, Opinion

DrRich is pleased to note that events have so quickly confirmed the explanation he gave, in his last post, regarding what the health insurance companies are up to by choosing to massively increase insurance premiums at this critical juncture.  The insurance companies, to repeat, are willfully embracing their assigned role as “villain,” in order to get apparently stalled healthcare reforms back on track.

A mere few hours after DrRich had posted, Kathleen Sibelius issued a press release angrily documenting several additional requests for large rate increases by health insurance companies all across the land, and pointedly reminding us regular folks that healthcare reform would prevent these greedy companies from committing such abusive and harmful acts. And thus has the administration now officially established runaway health insurance premiums as the crisis of the moment.

Then this morning, President Obama’s new “compromise” health insurance plan (which is a compromise in the sense that it mediates between Democrats and some other Democrats) specifically listed controlling health insurance premiums as an important new goal in his reforms, and proposed the establishment of a new federal agency to do it. It would appear that this latest healthcare emergency has been nicely orchestrated from end to end.

So, dear readers, once again the health insurance industry has handed reformers a fine new crisis, just when they needed it, in order to get faltering healthcare reform back on track.

Republicans (who are certifiably clueless) must be wondering why their stalwart allies in the health insurance industry are once again stabbing them in the back. Of course, Republicans have not understood the health insurance industry for several years now. They certainly don’t understand that the insurance industry absolutely relies on healthcare reform to bail them out of their failed business model.

In fact, DrRich suspects that (despite this latest evidence) these unfortunate Republicans are heading into President Obama’s Health Care Summit on Thursday with the very same plan they’ve had all along – to set things up so that health insurance companies can compete with each other more robustly (across state lines, &c.), since, don’t you know, such competition will create the efficiencies we need to bring down the cost of healthcare.

This is truly a crazy idea.

One might forgive Republicans for failing to understand that the business model of the health insurance companies is irreversibly broken. After all, the insurance companies themselves can’t admit that is the case. If they did, their shareholders would not take it well. (Indeed, to see that this is the case, one must ignore what the insurance companies say, and watch what they do.)

But there is no excuse for failing to understand that “efficiency” and “health insurance companies” should never appear in the same sentence. It has been amply demonstrated for well over a decade that a chief and essential component of the health insurance business is inefficiency. Indeed, inefficiency is how they make their money, and the insurance industry has long acted to terminate with extreme prejudice any attempt to eliminate inefficiency in their practices.

Consider, for those who have forgotten, the sad experience of Mr. Jim Clark, one of the founders of WebMD. Clark, widely acknowledged in the 1990s as one of the first Internet visionaries (having started – and sold – both Silicon Graphics and Netscape), originally envisioned WebMD as an electronic clearing house that would streamline various complex transactions within the healthcare system. Companies would sign up for WebMD’s transactional processing services and save millions; WebMD would take their cut; everybody would be happy.

The first big target for WebMD was to be health insurance claims processing.

Clark’s proposition to the health insurance companies seemed solid. In fact, it was obviously too good to pass up. Whereas processing a typical claim costs an insurance company $7.00, WebMD offered to do it for only $0.70 – a savings of 90%. Since the big insurers process multiple millions of claims each month, their potential savings would be colossal. This business model seemed compelling, and indeed, it was this very proposition that attracted most of the original investment capital that got WebMD started in the late 1990s.

But by early 2000, it became obvious that the insurance companies simply refused to play with WebMD, despite the astounding savings they stood to gain. WebMD – which for a long time refused to believe that actual businesspersons would act in a way so obviously counterproductive to their own interests – was eventually compelled to move on to different (far less lucrative) pastures. And to this day, the handling of insurance claims transactions remains, well, inefficient.

So what happened?

What happened is that Clark and WebMD failed to recognize that insurance companies have a lot to gain by making the fulfilling of claims as difficult and as inefficient as possible. Inefficiency is how they make their money.

Health plans just weren’t interested in making claims processing efficient or cheap. If they had been interested in doing that, they would have done it themselves. After all, instantaneous, electronic transaction processing had been in common usage for over a decade in other industries, well before Mr. Clark (or the Internet) showed up. What Clark failed to realize is that, in contrast to, say, the banking industry, the best way for health insurers to increase shareholder value is to make claims processing less efficient, not more efficient.

While Clark was not an expert in healthcare, he should have been suspicious. He should have recognized that in today’s world, abounding as it is with efficient electronic transaction processing services, it’s not easy or cheap to lovingly maintain systems as complex as those of the insurance industry. The fact that claims processing remained so slow and expensive, despite the considerable effort, expertise, and expense it must have taken to keep it that way, should have raised red flags – even if the reasons were unclear to him.

There are, in fact, plenty of reasons to keep claims processing inefficient. The most obvious benefit is that, when a legitimate claim can be delayed for 90 or 180 days, the insurance company gets to keep the money in their massive investment portfolio for that time. It’s like an interest-free loan. This, in fact, is a major profit generator for insurance companies (second only to figuring out ways of not spending the money on healthcare at all), and constitutes a cornerstone of the industry’s business model.

But there are many other benefits to inefficiency. If you can make it sufficiently inconvenient or expensive for doctors to chase certain claims, they’ll just stop trying, and the money is yours forever. Even better, doctors will eventually stop providing the services for which they know it will be difficult to get paid, so you’ll get to keep the money without even having to engage your expensive stalling processes.

The industry accomplishes all this by employing byzantine rules, by strictly enforcing unintelligible requirements that shift like the sands, by establishing arcane appeals processes, and, when all else fails, by generating a series of black holes into which claims mysteriously disappear, so that (if the doctor still insists on being paid) the claims process must be initiated all over again. DrRich calls it the “Chutes and Ladders” model of claims processing.

Now, into this scene of managed care nirvana, imagine someone like Mr. Jim Clark arriving with some cockamamie scheme to make claims processing quick, simple and cheap. His doom was foreordained. (One is reminded of the final scene in Butch Cassidy and the Sundance Kid.)

More than one otherwise brilliant entrepreneur has gone down in flames with schemes that somehow rely on the healthcare industry to behave “rationally.” Rationality depends on your perspective. As it happens, the healthcare industry is indeed behaving rationally. But it’s only rational from the correct perspective.

And that perspective, of course, is the perspective of covert rationing. Complexity, inefficiency and byzantine processes (lovingly maintained) are essential components of any system that – like the health insurance industry – is founded on covert healthcare rationing. If you want to do business within the healthcare industry – or if you need to rely on some component of that industry (whether private or government) to behave in a certain way – you’ve got to figure out what their real business model is, not the one they put in their mission statements and quarterly reports. And please, don’t expect them to just tell you what it is, when it’s covert rationing. If they told you it wouldn’t be covert anymore.

DrRich sincerely hopes his Republican friends will rethink their proposals for healthcare reform, all of which require health insurance companies to behave like typical businesses and thus to embrace the concept of efficiency, before they embarrass themselves and their friends Thursday on C-Span.

But DrRich is not holding his breath. His Republican friends didn’t listen to him when he explained why the insurance companies would somehow find a way to bail out healthcare reform, either.

*This blog post was originally published at The Covert Rationing Blog*

Tags: Claims Processing, Health Insurance, Healthcare reform, Managed Care, Rationing, Sibelius