Using a bigger net

Right now, one of my company’s competitors is running a series of radio ads.  The ads tout that in the small and medium group market segments, 90% of their groups renewed last year.  The implication is that 90% of their customers/decision makers are happy, so your small company should buy their product.

Being an employee of a major competitor what I hear is 10% of their customers are pissed off enough to engage in the very expensive, time consuming, disruptive no-fun task of changing insurance companies, but hey, that is just me. 

As a policy blogger, I also hear the reasoning why so many preventative care procedures weren’t covered in the pre-Obamacare world.

The theory of change for preventative care as a cost control measure is that wide spread but small costs to treat a population in order to prevent a small number of people from that population from requiring very expensive treatment leads to a net cost reduction.  There were two problems with this idea from a pre-Obamacare insurance company business model perspective. 

The first problem is that quite a bit of preventative care has significant social cost savings that the insurance company can not capture as reduced claims payment. For instance, sending a diabetic to a wound care training, and regular podiatry check-up visits will lead to greatly  improved quality of life for the individual.  The benefits from a wide angle cost benefit analysis clearly outweigh costs at almost any non-parabolic discount rate.  However most of those benefits acrue to the individual through improved quality of life, the individual’s employer through better attendance and fewer accomodations, and cost avoidance via fewer amputations requiring long term rehabilitation and nursing care.  The insurance company captures a very small portion of the benefits in the first year or two through reduced claims.  There is a good chance that from the insurer’s point of view, costs have gone up in the first year or two as the amputation and attendant rehab probably won’t occur in the first few years of disease management.

In a pre-Obamacare world, the only preventative benefits that reduced pay-outs in a short time period made sense to cover at low or no cost share.  This is why insurers were very willing to cover flu vaccines as the period where the insurance company would see a cost “win” would be eight months or less but why insurers were reluctant to pay for vaccines where the “win” period is a lifetime. 

And if an insurer paid for long term “wins”, that leads to the second business model problem.

People churn through health insurance companies.  Going back to the radio ad at the top, a 90% retention rate implies (with certain assumptions about indepedence of variables), that a company will only retain half of its original groups in a seven year period.  Paying for preventative care with multi-year claims reduction pay-offs means a good chunk of the actual pay-offs are going to competitors who picked up groups that left the original insurer who paid for the one time preventative care.  The insurance company has a serious problem of actually capturing economic gains from promoting long term better health.

In most cases, long term preventative care that is voluntarily provided by an insurance company means the insurance company that is paying for the care is making the risk pool of another company better in the years where the pay-offs occur.  It is a classic collective action problem.

Obamacare is getting around this collective action problem by mandating every plan cover almost all preventative care that has a high degree of confidence in producing systemic cost savings and population health improvements (birth control is the one major exemption from the “all”).  The goal is to remove the incentive of a company to free ride on general population health improvement measures while still benefiting from a healthier long term risk pool.

The theory of change is if everyone pays, everyone benefits from a healthier population over the long term.  The long term benefits may not immediately accrue to lower medical spending (although there is a good chance of that happening) but that is okay when analyzing a program from a national perspective if the benefits show up in improved quality of life, improved attendance/performance at school/work, or fewer hospital stays. From a federal perspective, any of these things are wins.

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34 replies
  1. 1
    bcw says:

    Another issue is that I am not the customer for my insurance company; my employer that selects the plans I can sign up and is the customer. All my company cares about is that is gets a plan that looks competitive compared to plans offered by others in my industry. I can’t ask for particular coverage or even necessarily stay with a plan I like – each year my company negotiates to get the cheapest deal for my company that still looks like a plausible part of its pay package.

  2. 2
    Emerald says:

    Just yesterday I had my very first doctor’s appt. under my spanking new Obamacare Kaiser policy. Really liked the doctor, who did a thorough physical that was not rushed, especially as I haven’t had any of this for over 12 years (I was an unpaid caregiver for my Dad during most of that time and no good deed goes unpunished). Ordered blood work (after I’ve fasted for 12 hours so it’s my call as to when), and a mammogram.

    My copay for all this: $0.00. Nothing, nada, zilch.

    I’m pretty happy.

  3. 3
    Richard Mayhew says:

    @bcw: yep, the customer from the insurance company point of view is the decision maker(s) at the employee groups. So that is Karen in HR, or Joachim in Benefits, or Hassam the owner, not Bill the line worker…. and that definately has an interesting impact on product offerings. However on the individual market, your voice is too disaggregated to hear any reliable signal as well.

  4. 4
    Villago Delenda Est says:

    what I hear is 10% of their customers are pissed off enough to engage in the very expensive, time consuming, disruptive no-fun task of changing insurance companies, but hey, that is just me.

    Man, that 10% must be really upset to overcome natural inertia and throw all that effort into switching companies.

  5. 5
    Fred Fnord says:

    Another element of this was that if an individual employee got really, really expensive in a small-to-medium group, the insurance company could simply get them fired. This is, of course, illegal, but you hear about it happening nonetheless, including to someone I once knew: the insurance company tells the company, ‘Oh, we’re raising your rate by 340% next year. Don’t bother shopping around, with employee X on your payroll nobody will take you for much less. But if you didn’t have that employee, well, I can’t see your rates changing much…’

    Why do preventative care when you can just induce the company to get rid of the ‘bad apples’?

  6. 6
    Villago Delenda Est says:

    @Emerald:

    Well, obviously you’re not thinking this through enough and don’t love free markets or freedom or anything like that if you’re pretty happy.

    You’re a zombie. A willing slave of the Kenyan socialist usurper.

  7. 7
    Fair Economist says:

    the benefits show up in improved quality of life, improved attendance/performance at school/work, or fewer hospital stays. From a federal perspective, any of these things are wins.

    From EVERYBODY’s perspective, these are wins. Even the insurance company (which can even charge a fair price for covering the preventative treament now). It’s just that in the free market, the free rider problem you describe stopped us from getting them, and it took government action to fix the problem.

  8. 8
    Villago Delenda Est says:

    @Fair Economist:

    EVERYONE winning means that someone may not win as much.

    And that cannot stand, for that someone. Never mind the overall benefit, I’m not getting enough.

  9. 9
    japa21 says:

    See, I told you yours would be better. And the shortsightedness of the old view, which always struck me as incomprehensible, was that, yes, many of these people would be other people’s problems down the road, but at the same time, many of those problem patients the other carriers were dealing with would become this company’s problem down the road as well.

    It became a game of betting that the problem patients we lose will be more than the problem patients we gain later. The universal preventative care actually takes that risk out of the equation.

  10. 10
    japa21 says:

    BTW, your comment about how there are benefits to encouraging certain care early that don’t necessarily show up on a company’s bottom line, but definitely have advantages for society as a whole reminded me of a time in the 90’s when I was wroking for a carrier different from the one I work for now. They, like most large compaies, had a monthly newsletter going out to all employees. Every month, some employee of the company would be featured in an article.

    One month, the employee featured was that company’s lobbyist in DC. One line in particular, jumped out at me. “Mr. X is there to make sure that legislation passed is in the best interest of our company.”

    As I said to a fellow employee, “Notice how it doesn’t say ‘In the best interest of the country’?”

    Corporations, as a whole, have no sense of civic duty and are truly only out for themselves.

  11. 11
    WereBear says:

    This was a huge factor for me last year, when we moved to a new system. There was a great deal of what can only be described as rampant incompetence and/or lack of training on the part of people who were explaining how to get reimbursed. But then, they know the people they are dealing with don’t have any chance of stomping off and using someone else, do they?

  12. 12
    Seth Owen says:

    Generally, the ‘best interest of the company” is considered the ONLY proper consideration when you are dealing with corporations — fiduciary duty, etc.

    This is why ‘the market’ inherently cannot be reasonably expected to act for the common good — that’s not its job. Free market absolutists are fools.

  13. 13
    Villago Delenda Est says:

    @Seth Owen:

    Free market absolutists are fools.

    Free market absolutists have never read, much less understood, The Wealth of Nations

  14. 14
    JGabriel says:

    Richard Mayhew @ Top:

    Going back to the radio ad at the top, a 90% retention rate implies (with certain assumptions about indepedence of variables), that a company will only retain half of its original groups in a seven year period. Paying for preventative care with multi-year claims reduction pay-offs means a good chunk of the actual pay-offs are going to competitors who picked up groups that left the original insurer who paid for the one time preventative care. The insurance company has a serious problem of actually capturing economic gains from promoting long term better health.

    Alternately, one could read it as the insurance companies having a serious problem with pissing off ten percent of their customers enough to change insurers every year.

    Okay, yeah, I’m being a little glib here … but it seems like preventative care with multi-year claims would be more profitable for the insurance companies if they put a little more effort into keeping their customers happy.

  15. 15
    Kylroy says:

    @japa21: Right, but that involves the other companies covering preventative care for my future customers. Everybody benefits if everybody does it, but individual players can benefit even if they don’t do it; moreover, the amount I (well, ok, my theoretical insurance company) benefit is only tenuously connected to the amount of effort I put in.

    Like Mr. Mayhew said, a classic collective action problem, and one that is solved by a top – down directive.

  16. 16
    HinTN says:

    Since insurance companies work on the proposition of spreading the risk over a population over a reasonable time horizon, other than the investor rate-of-return mindset I don’t get their reluctance to embrace preventive care. Plus, why not see an opportunity to get the healthier client versus losing them?

  17. 17
    HinTN says:

    Since insurance companies work on the proposition of spreading the risk over a population over a reasonable time horizon, other than the investor rate-of-return mindset I don’t get their reluctance to embrace preventive care. Plus, why not see an opportunity to get the healthier client versus losing them? PS: very good wonkery!

  18. 18
    HinTN says:

    PFUI – no edit or delete capability on de droid

  19. 19
    negative 1 says:

    @Villago Delenda Est: Not necessarily. I buy health insurance for my company, it’s so expensive to the company anymore that even a 4% difference in cost is a huge number. Also factor in that we carry post-retirement healthcare on our books as a long-term liability, that 4% is practically astronomical. As long as most folks can keep their primary care physician and the level of benefits doesn’t change too dramatically, I’d switch in a heartbeat. I don’t think people realize that pre-ACA healthcare had eaten profit and loss statements whole.

  20. 20
    negative 1 says:

    @HinTN: Because there is no “other than investor rate-of-return mindset”. That’s true of every other industry, as well.@Fair Economist: I don’t understand why this was a win for doctors in the previous scenario. Actually, for the most part don’t doctors and insurance companies have an inverse relationship relative to profits in the old “wild west” healthcare days?

  21. 21
    Arclite says:

    Damn, I love these posts. Thanks Richard.

  22. 22
    NonyNony says:

    The ads tout that in the small and medium group market segments, 90% of their groups renewed last year.

    Just imagine this kind of marketing in other industries:

    McDonald’s – 90% of our customers come back for another hamburger!
    Amazon.com – 90% of our customers buy a second book from us!
    US News & World Report – 90% of our customers renew their subscriptions!
    Dr. Coldhands – 90% of my patients come for a second office visit!

    It all sounds pretty crappy. The only example I could think of where that model sounds good is the airline industry. “90% of our customers fly with us a second time” is probably a pretty good return rate for airlines in the US…

  23. 23
    gratuitous says:

    If I understand your point about people churning through their insurance companies properly, it doesn’t make economic sense for an insurance company to provide low cost or no cost preventative care to diabetics (to use your example), because the care doesn’t pay off in a short enough term to benefit the insurer.

    But isn’t an insurance company more likely to hang onto a policyholder if they provide that sort of preventative care that pays them off in the long run? If so, it would make sense for insurers to work on policyholder retention, but that was clearly not the case, so the industry had to be reformed.

  24. 24
    Ruckus says:

    @HinTN:
    As Richard explained the company is trying to make a 90% renewal rate sound grand. But take the longer view as also explained, they have 100% turnover in a relatively short time. But and this is the big issue, with so much turnover over a few years any money they can save year to year is profit. Insurance companies are not in business to pay for your health care they are in business to make money. Full Stop. Even a 1-2% savings goes right to the bottom line.
    Now add the ACA to the mix. Now all insurance companies gain equally in the risk pool from better preventative care, so overall costs can go down and the countries health can be better. It’s a win win that was never going to happen in an open market.

  25. 25
    Ruckus says:

    @gratuitous:
    But that customer will have known health care issues that will/can get worse. Getting rid of the patient with known long term issues in a short term monetary industry is a profitable move. Now that preexisting conditions is no longer usable as a profitable out for the insurance companies, keeping that customer is not.

  26. 26
    Richard Mayhew says:

    @gratuitous: It might work in an individual market (the problem is most people churn through the individual market as they jump on and off group plans). The key point is the “customer” for the insurance company is not me or you, it is the decision maker in HR or the owner or the CEO. Making me happy is nice but not too relevant if making me happy pisses off HR or Accounting.

  27. 27
    Betsy says:

    @Emerald: I am so thrilled for you — what a wonderful thing to hear.

  28. 28
    Betsy says:

    @Fred Fnord: Don’t you know that the unemployed deserve to suffer?? What is wrong with you?? s0ci@L1St!

  29. 29
    jayackroyd says:

    For those watching at home, I just want to point out these perverse incentives don’t exist in a universal care environment.

    It’s called “social” insurance for a reason.

    [This is NOT any area of disagreement with RM,btw]

  30. 30
    japa21 says:

    @Richard Mayhew: At the same time, if an employee is at a high enough position at a company and the insurance company screws the employee and he or she goes to higher management, it does become a problem. It isn’t as important in this job market as it used to be, although hopefully that will change, but insurance coverage was one of the benefits employers used to entice prospective employees.

    If the insurance company was not taking care of its employees, that company would lose its business. So once upon a time quality of coverage was as important to employers as price of coverage. Now, though, cost is about the only thing that matters.

  31. 31
    jl says:

    Thanks for another very good informative post. I don’t have time to get the references now, but there is a body of research that strongly suggests that interruptions in coverage, and frequent switching of insurance plans, increases costs in the long run. The ‘patch ’em up and hand ’em off to Medicare’ policy that private insurers use for older adults is a prime example of of the problem. And that I have heard actuaries and medical directors discuss this as a necessary policy for them to compete in annual open enrollment tournaments.

    One ‘free market health care’ approach that has been suggested to solve this problem is to create a side market where insurance companies are required to make payments for the change in expected future costs of coverage that their enrollees experience while covered by the insurance company. So, if an enrollee’s expected future costs decreased while covered by insurance company X, and that enrollee decides to change to company Y, company Y makes a payment to company X to get the patient. If the enrollee’s expected future costs have increased, company Y gets some money from company X when the enrollee changes. Current state and federal insurance regulations forbid this practice.

    If the GOP were serious about proposing a free market alternative to the ACA, they would be talking about ideas like this to solve existing market failures in U.S. health insurance. I have no idea whether such a scheme would work, or whether it would be disaster due to gaming by the insurance companies, but at least it would be an interesting new idea. At any rate, that is one approach to solving the externality that RM talks about in this post.

  32. 32
    jayackroyd says:

    @gratuitous:

    This was the theory that underlay the first PPGP/HMO proposals offered by people like Alain Enthoven in 80s. In the event, it doesn’t work like that. People want a family doctor, to see the same surgeon for the other knee. As providers shift networks, patients follow.

  33. 33

    “There is a good chance that from the insurer’s point of view, costs have gone up in the first year or two as the amputation and attendant rehab probably won’t occur in the first few years of disease management.”

    The problem is not churn, the problem is a systemic failure of ethics. The government did not act, with “conservatives” who were aware preferring this to continue. The insurance company management did not act: it might even cost them money. There is another economic problem: if prevention worked, it would reduce industry profits, since less care would be needed, and competition would drive down insurance prices.

    That the sentences I quoted above can be written in a calm political debate is to say that we are deep in an ethical gutter. The sensible thing is to get out of the gutter, not study the walls.

  34. 34
    LosGatosCA says:

    Corporations, as a whole, have no sense of civic duty and are truly only out for themselves.

    When Rmoney said corporations are people, he meant they are Republicans.

    Republicans, as a whole, have no sense of civic duty and are truly only out for themselves.

    Party before country, money above all.

    Corporations and Republicans together since the collapse of feudalism.

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