Most of us have insurance coverage – whether it be through an employer, purchased individually, or accessed through Medicaid or Medicare. This coverage is commonly administered by a third-party organization, such as an insurance company, or a private administrator contracted by Medicaid and Medicare.
Insurers serve as a proxy for their policyholders by being given cryptic authority to act on their behalf in the purchase of healthcare. As the surrogate for those who pay insurance premiums, insurers negotiate the prices and terms of access with doctors and hospitals who then provide healthcare services to their insureds.
Do policyholders know the specific terms that insurers negotiate on their behalf? Most often, they do not.
Opaque Contract Terms
Agreements between insurers and their contracted in-network providers are kept under lock and key, leaving out those that actually foot the bill – the REAL payers. Similar to most other industries, healthcare is a profit-driven sector. The terms of provider agreements become THE economic advantage that insurers and their contracted providers have within the local marketplace they operate. Opaqueness of these terms cement any competitive advantage for their own interests.
A fundamental question to ask: Should the REAL payers of healthcare, e.g. the policyholders, have access to the specific terms of these agreements? This is a valid question, especially given the latest Federal Trade Commission investigation of hospital contracts.
By far, the U.S. spends more per capita on healthcare – almost 20 percent of its gross domestic product – compared to other developed countries in the world. This mammoth spending is not because Americans consume more healthcare per capita than their foreign counterparts, but rather, the prices Americans pay are often grossly higher than elsewhere. Part of this has to do with opaque prices and terms REAL payers must accept through their hired surrogates, the insurers.
Market Power vs. Patient’s Best Interest
Through a ‘keyhole,’ a September article in the Wall Street Journal (WSJ) attempted to peek inside the terms some insurers have with their contracted healthcare providers. What they found was actually not too surprising. Hospital systems attempt to exercise their market power with insurance companies by demanding contract agreements that prevent having competitively-priced networks within the insurance marketplace. Depending on how limited a network of providers will be, the cost savings can range from three to ten percent – possibly more.
Largely known as anti-steering clauses, these restrictive hospital-insurer agreements secretly limit insurers from steering their policyholders to other providers that improve the quality of care and keep costs lower. Even large purchasers that should have market clout, such as Walmart Inc. and Home Depot Inc., are kept in the dark from such agreements when trying to incentivize their employees to use high-quality/low-cost providers.
Other provider contracts may be constructed to not allow insurers to lower copayments to incentivize patients to use less-expensive or higher-quality providers. Additionally, hospital contracts might stipulate that the insurer will always keep that hospital system within the preferred network – even though their prices may be considerably higher than other competing hospital systems. Do we have such contracts in Iowa? Hard to know.
For their part, insurers will concede to these demands because they desire to attract more policyholders to enroll in their health plans. Having more policyholders can provide added leverage for insurers to negotiate more favorable contracts in the future, while hospital systems continue to grow by purchasing other types of providers. A recent Journal of Health Economics study found that the price of physician services increase an average of 14.1 percent after being purchased by hospital systems. The ‘dueling leverage’ escalation seldom benefit the REAL payers, who will eventually pay the inflated cost through higher premiums. This perverse incentive happens without the REAL payers having this knowledge.
To justify this behavior, hospitals say patients should be able to choose their healthcare provider without having financial pressure from their insurers or employers.
Secret Agreements Now Challenged
Lawsuits are occurring around the country regarding these restrictive contracts. The Justice Department is suing a large North Carolina hospital network, Atrium Health, because it “uses its market power to impede insurers from negotiating lower prices with its competitors…”. Sutter Health, a large hospital system in northern California is being sued by the California attorney general for anticompetitive practices.
On October 10, Iowa Senator Charles Grassley, Senate Judiciary Committee Chairman, sent a letter to the Federal Trade Commission to investigate whether contracts between insurers and hospital systems are limiting competition and pushing up healthcare costs. This letter was prompted by the WSJ article mentioned earlier.
Pending review by the FTC and the various lawsuit outcomes, what recourse do the REAL payers of healthcare around the country have to keep costs more affordable?
According to a November 4 WSJ article, watching the state of North Carolina might be a good start. North Carolina’s employee health plan covers about 727,000 people, which includes teachers, university workers and state police. North Carolina’s state treasurer announced in October that it wants to pay hospitals’ and doctors’ rates that are pegged to Medicare’s reimbursement schedule. The state treasurer said the new rates – beginning in 2020 – would average around 177 percent of Medicare’s fees, which is lower than the current reimbursement average of 213 percent – projecting an annual savings of $300 million. The N.C. hospital community is predictably pushing back to keep this from happening.
According to an article in ProPublica, the state of Montana pursued a similar approach a few years ago, and has found the program is now saving healthcare costs for its employees (and taxpayers).
Employees and their employers must be resolute and insist that all insurance contracts are in the best interest of those who are the REAL payers of healthcare. As suggested in a recent Harvard Business Review article, employers may consider banding together to establish purchasing alliances. This is not a new concept, but the above circumstances may warrant a rebirth of this approach.
REAL payers do have legitimate leverage in the healthcare marketplace – they just need to act. Otherwise, we can only speculate what is hidden behind the keyhole.
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Tom Schuetz says
Excellent blog David and so true. As consumers we don’t accept this in any other part of our life and competition breeds improved products/services and frequently leads to lower prices. As consultants to employers don’t we have an obligation to educate employers about this an offer options? They may not take them but certainly need to understand. This really highlights the dilemma of suggesting we represent the employer and taking compensation from the carrier. Full disclosure of this to the employer has to occur. I like where you are going with this and it’s an approach we all must be willing to take if we are going to put the REAL payers in control. Thanks for stepping out on this.
David P. Lind says
Tom, your comments are spot on! Thanks so much for sharing your perspective on this important issue!
Anne Kinzel says
Very interesting article. I am curious about a few statements you make. When you say the “real payers.” I assume that you mean one of three groups, employees who are compensated in part by having employers purchase coverage on their behalf; taxpayers who support Medicaid and Medicare though taxes and copayment/deductibles; and persons who purchase in the individual marketplace.
I am not sure who the “policyholders” are in the employer procured situation. Are they the individual employees or is it the entity who enters into a contract with the insurer? Is an individual employee in a true contractual relationship with the insurer? Or is the contract between the employer and the insurer or TPA. Generally, a contract is defined as an agreement between two parties creating mutual obligations, expressed by an offer and an acceptance, with adequate consideration in the transaction. It goes without saying that the parties have to understand the terms of the mutual obligations.
I have never bargained for any of the benefits provided by being a “member” of Wellmark by virtue of my status as an ISU employee. I have never been privy to the arrangement between ISU and Wellmark. It would be interesting to find out how Wellmark views the status of State of Iowa employees who receive their coverage through the relationship between Wellmark and the state of Iowa to manage the state’s self insured system.
I do believe that my contact of employment provides that I will be part of the University’s arrangement with Wellmark. Should I decide to not be part of that arrangement, I do not get the value (some $13K/year) that the University provides Wellmark for having me be part of the self-insured program. this entire discussion is not really all dancing on the head of a pin. What this really gets at is the purported choice that Americans have (and for which they pay dearly) with respect to their healthcare in contrast with other citizens of the developed world.
When employers are the ones negotiating for their employees to be “covered” and apparently doing a crappy job, there is no competition and no choice. What their is is a plantation situation. We work, we have no say, and we get what the man says we should.
David P. Lind says
As always, Anne, you ask a very pertinent question: “WHO is/are the REAL payers of health insurance?” I will briefly respond to your question about “health insurance,” and not “healthcare.” Both are used synonymously with one another – but oftentimes, incorrectly. The REAL payers are indeed those you mentioned, but employers do pay a portion of the health insurance premium that is NOT an offset to the worker’s income. I don’t know the amount or percentage of what the amount is, as it will vary by organization (and their culture). Therefore, given the existing healthcare ‘system’ that we currently have, I WILL NOT rule out role of the employer being a ‘payer.’ In the employer-procured system we have today, the employer is the ‘policyholder,’ as they select the plan(s) that are available through the insurance market, deciding on the insurance vendor, broker (in many cases), type of plan(s) to offer and implement, and perform many reporting requirements on behalf of the employees. Because the employer and its’ employees jointly pay for health insurance coverage, I included the following sentence at the end of this particular blog: “Employees and their employers must be resolute and insist that all insurance contracts are in the best interest of those who are the REAL payers of healthcare.” Even though the employee is not technically the policyholder, they are a REAL payer and should be included in any reform discussion. Your line of thinking, Anne, is spot on with this given topic. Thanks again for commenting!
Ramona Boehler says
I recently discovered, as a Medicare Advantage patient, that some insurers have hush-hush contracts with their Specialists to refuse referrals from certain doctors offices. My Primary physician wrote a referral for an ophthalmologist on my plan and the ophthalmologist office refuse to accept his referral citing that they have a contract with the insurer not to accept specialists whose names are on a list provided by the insurance company. My Primary physician’s office denies that it is a capitation problem. After waiting months for this appointment, I have been denied care unless I self pay and must look for another specialist office. The specialist office couldn’t tell me how much the visit would cost if I self-paid. Welcome to Real World Medicine 2019. Secret contracts, denial of services, false advertising of services, bait-and-switch medicine.