Several weeks ago, the Dallas Morning News reported about negotiations between Blue Cross Blue Shield of Texas (BCBS) and Southwestern Health Resources (SHR), an alliance between Texas Health Resources and UT Southwestern Medical Center. What made the story seemingly noteworthy was the amount under negotiation was reported as, an unconfirmed, $900 million. What 90 percent of the public doesn’t know is this was nothing more than theatrics performed for public consumption.
This blog is the first in a four-part series pulling back the curtain about how medical costs are developed and flow down to employers and consumers in the form of increased premiums. The above story provides an excellent opportunity to look at the interrelationships within the worlds of big medical insurance and big health care providers. Including the misperceptions, the public has about these relationships. The intended purpose of these blogs is to educate the consumer on how to make better informed healthcare decisions.
But let’s skip to the resolution of the negotiations. As expected, and because this is a recurring “magic act” that’s occurred numerous times before, the outcome was 100% predictable. The parties came to an agreement, the details of which remain undisclosed, and thousands of Texans rejoice their medical insurance coverage has miraculously been saved by mere mortals. Just at an undisclosed higher cost. As negotiations reached their conclusion, appropriate dignitaries provided obvious generalized postmortem comments for public consumption. Of course, no meaningful details were provided like financial impact to employers or employees. This illusionary story plays out all over the United States every year between payors and providers. With the public under the impression, payors are acting in an agency role to help control insurance costs and providers are attempting to control medical expenses. Nothing could be further from reality.
Let’s start this journey with some insurance terminology. A common-used term in health insurance is “medical loss ratio.” Simply defined the medical loss ratio represents the amount of health insurance premiums insurance companies spend on medical claims and efforts to improve quality. To somehow improve healthcare, our elected government officials through the Affordable Care Act added requirements regarding the medical loss ratio insurance companies must follow. Without going through agonizing details, the summary is insurance companies must spend 80% of their premiums on medical claims. Leaving 20% for profits, salaries, marketing, and administration.
On the surface, this would appear to be a logical way to ensure an adequate amount of money is spent on medical care. This would be true in a normally competitive market environment. Unfortunately, the healthcare marketplace is neither normal nor competitive. The government’s 80% requirement effectively made the only way insurance companies can improve their profitability is to increase premiums. Given these types of economic incentives insurer have no incentive to lower premiums and providers have no incentive to be efficient. The financial relationship is very codependent with no one accountable to the consumer.
Lesson #1 The vast majority of traditional healthcare incumbents are financially motivated to make as much money as possible.