How Insurance Got So Soulless
Here’s how insurance ostensibly works; a person signs an insurance contract with an insurer which stipulates that the policyholder pays an amount per month called a premium in case of a specific event like an illness or a house fire. Should the event occur, the insurer has the responsibility to recoup the financial losses of the contract holder in whole or in part, depending on the type of insurance and policy details.
Insurance operates on a set of principles. Good faith means that both parties have to be acting with integrity toward one another. Indemnity stipulates that the insurer is to pay the amount required to pay the full value of the claim, not more (claimant shouldn’t profit), not less. An insurer doesn’t meet this principle when they leave the claimant worse off than they were before. The fiduciary principle means that insurance has some of the same obligations as a bank, the insurer acts as a trustee. They have an obligation to act on a claim promptly.
These principles exist among others to balance the power between insurer and policyholder. A person who is coming to insurance with a claim is in a very vulnerable position, maybe the most vulnerable they’ve been in their life. People get insurance so that if they are mauled by a bear or they lose their business in a wildfire, they’ll have some little peace of mind knowing that they aren’t entirely ruined.
For much of its history, insurance companies and the people who work for them were mindful of these principles. We all want to live in a society where insurance functions as insurance, rather than a vehicle for personal enrichment. A person operating in good faith isn’t coming to insurers without being in a painful, often traumatic, situation.
Modern health insurance began in Dallas, Texas. In 1903, the Baylor University Medical Center was established in a 14 room mansion with financial support from the Baptist General Convention of Texas. As people became aware of the hospital and more and more people went there for treatment, by the 1920s it came to have numerous unpaid bills. Justin Ford Kimball, during his first year as a VP at Baylor University, developed the first health insurance. Patterned after the prepayment plans offered to lumber and railroad workers, for 50 cents a month or $6 a year, all costs of a 21 stay in the hospital would be covered. The insurance would take effect a week into one’s stay at a cost of $5 above the prepaid coverage a day, a deductible.
The plan was popular with the Dallas teachers union and eventually the whole country, becoming the first iteration of Blue Cross by 1939. Blue Cross plans were not for profit. The intention was to keep patients and hospitals afloat. In time, Blue Cross partnered with Blue Shield, which covered doctors visits, and enrolled everyone who needed them. From 1940 to 1955 the number of Americans with health insurance rose from 10 percent to over 60 percent.
Blue Cross Blue Shield became a symbol for good in America. They operated as if they had souls, covering anyone who wanted to sign up with them, regardless of their age or health. They charged everyone the same rate.
During World War 2, facing a labor shortage and a national wage freeze that prevented employers from offering more money, employers began offering health insurance to attract workers. The federal government thought this was a good idea, and made employee insurance costs tax-deductible. Overlapping this development were dramatic increases in medical technology, like the development of anesthesia and the ventilator. As technology grew, what medicine could offer grew along with it, as well as the costs.
The marriage of health insurance to employment began as a temporary wartime measure. In 1947, it was more permanently codified into law with the Taft Hartley act which identified health insurance as a condition of employment, making it subject to union negotiations. As medical technology expanded and the tens of millions of people covered by employment wanted access to it, for-profit insurers began to move into the health care space.
For-profit insurers had long provided maritime, life, and causality insurance. Insurers saw Health insurance as uninsurable for a long time. How do you quantify health or sickness? What’s to prevent anyone from claiming they are sick? But commercial insurers found a way. Instead of offering health insurance, they would offer hospitalization coverage, since that was something that was a definite event.
With the attachment of health insurance to employment and the increased demand for more coverage, beginning in the 1950s commercial insurers began covering a larger portion of the population. Commercial insurers were more familiar with business than health, and more mindful of profit than helping people. Whereas Blue Cross operated with a community rating, meaning that the premiums all went into a single pool which was paid out of, commercial insurers used an experience rating.
Experience rating is the categorization of people into groups by the profit which can be extracted from their lack of need for health coverage. For example, someone who is young and fit and has a low-risk job in middle management presents a low risk of taking any of the profit from the commercial insurer. Therefore, commercial insurers focused their efforts on insuring low-risk people, whereas Blue Cross insured low, medium, and high-risk people. As Blue Cross lost its low-risk customers, left only insuring the sickest patients, they eventually had to move away from the community model, and by the 1990s they had to abandon their non-profit approach.
With the for-profit model getting more prominence, the culture of hospitals began to change as well. Coinciding with the proliferation of companies like Aetna who expanded from life insurance into health care, hospitals began using the chargemaster system; a master list of prices to be used as a starting point for negotiations. Hospitals overseen by religious organizations became infected with the for-profit spirit. Administrative roles whose sole purpose is maximizing income became a central part of the hospital bureaucracy.
The example of insurers like Blue Cross has been very persistent. Today, many people still expect insurers to act as we traditionally expect insurers to act, rather than attempting to weasel out of reimbursing a claim because of their profit targets. Because many people don’t need to use insurance, the changes to policy have been slow to come into public consciousness. This was planned.
In his book, From Good Hands to Boxing Gloves, attorney David J. Berardinelli details the evidence accumulated during a lawsuit against All-State. Around 1992 All-State began working with McKinsey, a management consulting company known for advising companies on maximizing profit. They’re famous for many reasons, like their close involvement with Enron, or helping shape the sales strategy of Purdue Pharma.
As a standard, health insurers before the 90s used to pay out 95 cents of every dollar they took in, with the remainder applied to administration. Casualty insurers like All-State paid out 70 cents on every dollar. For some context, Medicare uses only two percent of what it brings in to pay its administrative costs. The ACA included a requirement that health insurers use 80% of the money they take in on claims. By 2006, All-State was paying only 47.6 cents on every dollar it brought in on claims. Here is the strategy that All-State and McKinsey used to accomplish this.
The plan McKinsey proposed was called a Core Processing Redesign. A key element was large financial rewards for executives to incentivize them to adopt the changes. This primarily took the form of stock options. An All-State proxy statement quoted in Boxing Gloves describes stock ownership goals established in 1996, revised in 2004, requiring the CEO to own stock worth 7 times more than their salary; Senior management executives to own stock worth 4 times their base salary, and other executives to own stock worth 2 times their base salary.
All-State would install a computer system called Colossus, calibrated on the performance of very conservative adjusters. The aim was to lower claim payments by 5 to 15 percent. Employees’ performance would become about their ability to get the claimant to agree to what the machine dictated. Failure to do this would jeopardize their job. Initially, many employees didn’t adhere to the dictates of Colossus, as they knew it was underpaying. McKinsey placed evaluation consultants in every claim office and developed performance measurements for both the adjuster and the evaluator. Paying to the amount Colossus determined became the only performance metric that mattered. This established a culture wherein the adjuster is in an antagonistic position to the claimant because if the claimant doesn’t accept less than their claim is worth, they are a threat to the adjuster’s job.
80% of the billions All-State pays on claims is in small amounts, between $1,500 and $15,000. These claims are where gains could be made. By forcing millions of claimants to accept $3,000 to $4,000 less on claims worth $8,000 to $12,000, All-State could save billions of dollars in profits. McKinsey created scripts for All States adjusters to adhere to through the initial 90 to 180 days written to keep the claimant waiting. The eventual offer would be at 60 cents on the dollar of what the claim was worth. If the claimant accepted the offer, there would be no more problems. If not, All-State would vigorously investigate the claim, take the claimant to court, do everything legally possible to make sure any victory the claimant has is Pyrrhic.
In business, when one person starts a practice that gets some success, it tends to spread. If everyone around you is selling a product at 99 cents, you’re simply going to lose if you’re the one guy selling at $1.00. The zero-sum mindset that McKinsey continually advises from is evident in administration across many insurers and many industries, particularly following the 1990s.
Aetna has never been a particularly ethical insurer, having offered insurance on slaves back in the 1850s. Even with their amorality established, the judgments in lawsuits describe a pattern of malice and fraud over the last 20 years that makes it hard to understand it as a legal business. Zero-sum is the only guiding ideology, whether it's a claimant, the state, physicians, or hospitals, anyone who could make their profit a dollar less is treated as an opponent.
This is a ubiquitous philosophy of management, but its application in health care and insurance is a particular danger to our lives. This mindset is also a corrupting force in the application of medical care and hospital billing.
The Trump administration was almost out the door when they passed the Hospital Price Transparency Rule, which went into effect on January 1st of 2021. Not only have most hospitals been refusing to comply with the rule, but the American Hospital Association also sued to overturn it several times. It’s no wonder. The hospitals that have posted rates revealed that there is no market price for any medical procedure or product. They’re charging whatever they think they can get.
In a story in the LA Times, a nurse showed the computer system computing the charge, simply multiplying the cost by 575 or 675 percent. This system turns a $73.50 antimicrobial solution into a $496.13 antimicrobial solution on the bill.
Within a hospital in Utah, a dose of a rabies drug can cost $1,284 with SelectHealth, $3,457 with Regence BlueCross BlueShield, $4,198 with Cigna, and $3,457 if you pay cash. At another hospital in Florida, the same procedure, a rabies shot, can cost from $16,953 to $37, 214. Only 14 percent of hospitals have complied with price transparency. Hearing the lawsuits from the Chamber of Commerce and the Pharmaceutical Care Management Association, the Biden Administration announced that they wouldn’t enforce transparency requirements.
Insurers program the computer system to lowball the claimant. Medical billing bureaucrats program the computer systems to gouge. In both industries, the customer base consists of people with their backs against the wall.