Krugman on Health Care Expenses

On Friday, Paul Krugman, the New York Times’ economics op ed writer, published a story,”The Health Care Racket,” that without saying so, appeared to be in response to the Wednesday Wall Street Journal page one story, “Fights Over Health Care Claims Spawn a New Arms Race” (see our analysis here).

The WSJ story delved into the operations of the “denial management” business, an activity in which insurers seek either not to pay or to minimize payment on claims, putting doctors and patients in the position to have to fight simply to get what is contractually due to them. The author estimates that insurers and doctors each spend $10 billion annually on denial management (meaning the total is $20 billion). One example from the article:

Peggy Encinia of Houston was visiting her daughter near Port Arthur, Texas, last July when chest pains woke her in the middle of the night. An ambulance rushed her to the nearby Medical Center of Southeast Texas, which didn’t have a contract with Mrs. Encinia’s insurer, UnitedHealth’s PacifiCare. The bill from her 12-day stint in the hospital and treatment for heart failure came to more than $104,000. But PacifiCare paid only $4,100 initially, explaining that because the hospital wasn’t in its network, its policy was to pay only the standard Medicare rate.

Instead of going after Mrs. Encinia for the balance, the medical center commissioned its claims auditing service, PPO Check Ltd. of Houston, to fight the insurer. PPO Check argued that Mrs. Encinia’s policy specifically states how out-of-network claims should be calculated for payment. After several rounds of appeals and disputes, PacifiCare agreed to pay an additional $70,000, close to the going rate other hospitals in the area would get for the same service.

Here we have one, perhaps two, levels of duplicity. First, the insurer asserst that its “policy” differs from its contractual agreement (and oh by the way, that policy is to pay tens of thousands of dollars less). Second, which is implied but not stated, the contract stipulated a formula for calculating out-of-network payments, but it appears that instead of applying that standard, the insurer, UnitedHealth, instead came up with another standard which is used to minimize payment.

Americans have gotten so used to being short changed by their health insurance companies that most people don’t react to stories like these, because we’ve all experienced this behavior ourselves (hopefully with lesser amounts at stake). But it’s outrageous, and perhaps it’s time we got angry about it.

Krugman gives other examples of health insurers behaving badly, to the point where the same UnitedHealth is being sued for racketeering. He argues that claims denial is a “clumsy” way to collect premiums and not pay claims. Better to insure only people who are healthy.

Health care is one of Krugman’s areas of interest, and I wish he had put pencil to paper on the latter question, the economics of claims denial from the insurer’s perspective. Given that health insurance in America is provided primarily through employers, I am not sure they can red line that cleanly. And I am also not certain about his assertion of the relative profitability of insuring healthy people (who presumably command lower premiums) versus incurring higher expenses to underpay claims people who aren’t so healthy (and therefore pay higher premiums). I have a sneaking suspicion that the difference in profitability is not as great as Krugman believes.

But he is right that a huge amount of money is wasted, money that could go a considerable way towards covering the uninsured:

….two hospitals accuse UnitedHealth of operating a “rogue business plan” designed to avoid paying clients’ medical bills. For example, the suit alleges that patients were falsely told that Flushing Hospital was “not a network provider” so UnitedHealth did not pay the full network rate. UnitedHealth has already settled charges of misleading clients about providers’ status brought by New York’s attorney general: the company paid restitution to plan members, while attributing the problem to computer errors.

The legal outcome will presumably turn on whether there was deception as well as denial — on whether it can be proved that UnitedHealth deliberately misled plan members. But it’s a fact that insurers spend a lot of money looking for ways to reject insurance claims. And health care providers, in turn, spend billions on “denial management,” employing specialist firms — including Ingenix, a subsidiary of, yes, UnitedHealth — to fight the insurers….

Of course, rejecting claims is a clumsy way to deny coverage. The best way for an insurer to avoid paying medical bills is to avoid selling insurance to people who really need it. An insurance company can accomplish this in two ways, through marketing that targets the healthy, and through underwriting: rejecting the sick or charging them higher premiums.

Like denial management, however, marketing and underwriting cost a lot of money. McKinsey & Company, the consulting firm, recently released an important report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excess administrative costs, with more than half of the total accounted for by marketing and underwriting — costs that don’t exist in single-payer systems.

And this is just part of the story. McKinsey’s estimate of excess administrative costs counts only the costs of insurers. It doesn’t, as the report concedes, include other “important consequences of the multipayor system,” like the extra costs imposed on providers. The sums doctors pay to denial management specialists are just one example.

Incidentally, while insurers are very good at saying no to doctors, hospitals and patients, they’re not very good at saying no to more powerful players. Drug companies, in particular, charge much higher prices in the United States than they do in countries like Canada, where the government health care system does the bargaining. McKinsey estimates that the United States pays $66 billion a year in excess drug costs, and overpays for medical devices like knee and hip implants, too.

To put these numbers in perspective: McKinsey estimates the cost of providing full medical care to all of America’s uninsured at $77 billion a year. Either eliminating the excess administrative costs of private health insurers, or paying what the rest of the world pays for drugs and medical devices, would by itself more or less pay the cost of covering all the uninsured. And that doesn’t count the many other costs imposed by the fragmentation of our health care system.

Which brings us back to the racketeering lawsuit. If UnitedHealth can be shown to have broken the law — and let’s just say that this company, which is America’s second-largest health insurer, has a reputation for playing even rougher than its competitors — by all means, let’s see justice done. But the larger problem isn’t the behavior of any individual company. It’s the ugly incentives provided by a system in which giving care is punished, while denying it is rewarded.

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