Trendspotter: Why Do We Need Insurance Companies?

What are insurance companies good for? That’s the interesting question that health wonk and consultant Joe Paduda raises in a recent blog post. Paduda believes that in return for getting millions of new members as a result of the healthcare reform law, health plans should “manage care and control costs.” Otherwise, he says, they don’t have much of a purpose. But insurance companies are unlikely to have much more impact on spending growth than they’ve had for the past few decades. The real question about insurers’ role in health care is why they’ll be needed if providers can form organizations that are accountable for the cost and quality of care.

Paduda’s essay reflects on some comments about the Massachusetts reform law by Lora Pelligrini, president of the Massachusetts Association of Health Plans. While that 2006 statute has led to 97 percent of state residents getting health coverage, Pelligrini noted, it has failed to control skyrocketing healthcare costs. That’s why the state’s major health plans raised rates so much this year in the individual and small business markets - increases that Massachusetts Gov. Deval Patrick tried but failed to roll back. Because the Bay State’s program is the template for the insurance provisions in the Affordable Care Act, the state’s inability to get a handle on spending contains an obvious lesson for the nation as a whole.

Paduda doesn’t dispute Pelligrini’s point that the market dominance of certain hospital systems and physician groups enables them to demand higher payment rates from insurers. But he wonders why the health plans just pass on those rates to consumers and employers. Instead, he suggests, they should form narrower networks of the most cost-efficient providers and sell less expensive plans that use those networks for customers.

Paduda’s argument ignores some real world experience. For the past decade, employers have required insurers to provide broad networks of doctors and hospitals, responding to their employees’ desire for freedom of choice. And in areas like eastern Massachusetts, no plan can do without “brand-name” academic institutions such as Massachusetts General Hospital. Some insurers have tried to profile physicians on quality and efficiency - with inadequate measures and to great protests from doctors - but employers have generally rejected narrow networks.

Paduda also skips over the fact that physicians resist health plans’ efforts to manage care. You prize your independence, and you know far more about individual patients than insurance company staffers following preset rules do. Moreover, some health plan policies - such as requiring pre-authorizations to cover certain drugs - are purely designed to save money. That doesn’t excuse the refusal of some doctors to follow evidence-based guidelines that have been shown to benefit patients and save lives. But physicians basically don’t believe that health plans have the moral authority to tell them how to practice - and patients agree.

The Affordable Care Act tries to keep insurance premiums down in two ways: by setting up state insurance exchanges that will help small businesses and individuals shop for insurance; and by establishing a minimum percentage of the premium that health plans must spend on patient care. (That’s 85 percent for large-company plans and 80 percent for individual and small-group plans.) It remains to be seen whether the state exchanges will significantly limit premium increases; in Massachusetts, they have not. And it’s also unclear whether the floor on “medical loss ratios” will force health plans to reduce their administrative costs or their profits significantly. Conceivably, they could just raise insurance rates to maintain their profitability.

None of this really matters compared to the provisions of the Affordable Care Act that would restructure the healthcare delivery system. By changing how doctors and hospitals are paid, concepts like payment bundling and accountable care organizations could create real incentives for providers to hold down costs. But if providers form larger organizations and take financial risk, it will be increasingly difficult to understand why we need insurance companies at all.