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Why Is The Healthcare Insurance Industry The Villain?

Stanley Feld M.D.,FACP,MACE

As soon as President Obama’s healthcare reform law passed, rules and regulations had to be made by non-elected state regulators to interpret the new law.

For the healthcare insurance industry, the fight is now over the details. The healthcare insurance industry has graciously volunteered to help regulators craft these regulations.

Senator John D. Rockefeller IV, Democrat of West Virginia, sent a letter to regulators expressing his concern that the insurers could have too much influence on how the regulations were being drafted.

“The health insurance lobbyists failed to beat the health care reform bill in Congress — but with billions of dollars at stake, we cannot and we should not expect them to throw up a white flag and start looking out for the livelihoods of American families,” Senator Rockefeller said in a statement. “They’re working every angle of the implementation process to shirk their obligations under the new law.”

As stated in my last blog entry, the healthcare insurance industry is already increasing premiums without justification for a rate increase except actuary anticipation.

The individual State Boards of Insurance are supposed to regulate rates. The State Boards of Insurance have acted as if they are impotent in the past few years. President Obama has just given State Boards grants to regulate the new law.

“Senator John D. Rockefeller IV fears that insurers are affecting how regulators interpret the recent health care legislation.”

“The new law requires health insurers to spend at least 80 cents out of every dollar they collect in premiums on the welfare of patients, a critical issue for the companies’ bottom lines.”

State regulators are drafting the new regulations to reflect the laws mandate that 80 cents of every healthcare dollar be spent for patient care. This should result in a decrease in healthcare insurance rates.

In the past, Medical-Loss ratio meant a percentage of the healthcare dollars applied to medical care after the healthcare insurance industry’s administrative services expenses.

The healthcare insurance industry wants to keep it that way. They are going to do their best to help state regulators do the same.

Consumers are being ripped off. The healthcare insurance industry loads administrative services expenses with creative bookkeeping. The actual expenses are opaque. In 2008, administrative expenses in Minnesota were 65 cents of every premium dollar. After administrative expenses, if the healthcare insurance industry spent more than 90% of the remaining 35% of the healthcare dollars for medical care, the healthcare industry was permitted a rate increase by the State Board of Insurance.



Figure 1 Sixty five percent of private insurance dollars in Minnesota went to administrative services including brokerage fees. Only 15% went to physicians and 20% to hospitals. Figure 2


Figure 2

"The social contract for medical care should be between the physician and patient. Private Insurers aggregate 32.6% of the dollars that Americans pay in the hope of getting care, and insurers pay out only 4.9% of the money collected from the nation’s Consumers to physicians. Insurers pay out only 6.5% to hospitals.  Administrative service fees could not possibly add 15% value to the care of a patient. The administrative service fee can and must be reduced markedly."


Figure 3


Figure 4


The math is complicated. As pointed out by a reader, government officials are not anxious to uncover the creative bookkeeping for good reason.

“No career politician (Republican or Democrat) would touch attacking the Insurance lobby. Both the Democrats and the Republicans like the campaign donations from healthcare Insurance companies. Neither will the media attach the healthcare insurance industry because it biggest revenue comes from political advertisement. Who pays for this political advertisement in an era where the “media is the message.”

The healthcare insurance lobby and Big Pharma contribute heavily to political campaigns.

The good news is the traditional media is losing its impact on consumers in the era of You Tube, texting and Twitter. The cynicism is justified. Politicians are not interested in listening to the needs of the people.

As soon as a politician is sincerely interested in consumers’ needs, he will win. Many thought President Obama was that man. Unfortunately, he has another agenda.

What are the healthcare insurance industry’s administrative expenses it wants to include in the new regulations before it has to spend 80 cents for every healthcare dollar.

  1. The cost of verifying the credentials of doctors in its networks. This cost is opaque. It is automated but the healthcare insurance industry wants to charge full price year after year.
  1. The cost to ferret out fraud by identifying doctors performing unnecessary operations,
    procedures, and tests. Who should decide on unnecessary treatments? Peer physicians in local hospitals and local communities should decide. These physicians are usually not paid and are supposed to be immune from liability.
  1. The cost for programs that keep people who have diabetes out of emergency rooms.

The healthcare insurance industry should not be doing this. It should be paying physicians to develop Diabetes Care Teams to teach the patients to self- manage their disease. The healthcare insurance industry has not universally paid for Diabetes Education. The help desks maintained by the healthcare insurance industry are not effective. These help desks are not an extension of the physicians’ medical care. They tend to undermine physicians and the physician patient relationship.

  1. Healthcare insurers insist that typical business expenses should not be considered part of the Medical-Loss Ratio. The healthcare industry is not satisfied with a 20% profit on every healthcare dollar. It has managed expenses to receive 65% of every healthcare dollar by loading the administrative expenses.
  1. The healthcare insurance industry believes it should be entitled to expense sales commissions for insurance agents. The expense is already built into the premium. It wants to continue to expense the sales commissions.
  1. It wants to expense taxes paid on investments. These tax expenses should be subtracted before the 80% is calculated.

It is bizarre because the insurance industry bought the investment with profits. The profits were then leveraged with mortgages. Now it wants deduct the taxes as well as the interest paid on the mortgages. This is an excellent example of Wealth building 101.

  1. The healthcare insurance industry wants to expense the insurance reserves. What are the rules for calculating insurance reserves? There is a line in the financial statements reporting outstanding accounts payable. Are the outstanding accounts payable the difference between what physicians billed and the physicians’ reimbursement? Our regulators are not protecting consumers.
  1. It is essential to the healthcare industry to influence the rules for calculating for the Medical-Loss ratio.

The new law requires the healthcare insurance industry to provide a refund if it does not spend 80 cents on each healthcare dollar after administrative expenses. If the industry can achieve proper administrative accounting rules, it can continue to expense 65 cents of every healthcare insurance dollar.

Medicare and Medicaid do not escape this 65% administrative fee. President Obama claims Medicare’s administrative fee is only 2.5%. CMS’s administrative fee is 2.5%. The 2.5% is the fee to administer the outsourcing of administrative services to the healthcare insurance industry. Medicare pays 65 cents of every dollar to the healthcare insurance industry for these administrative services.

It sounds complicated. It is complicated on purpose. The goal is to keep the taxpayer stupid. The healthcare insurance industry can then blame hospitals and physicians for the rising healthcare costs. Hospitals and physicians become the healthcare insurance industry’s scapegoats.

I think Americans are starting to wake up.

If you’ve let your President and Congressmen know how you feel, tell them again and again-and again. It might help.

The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.

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