Why the Health Insurance Industry Supported Obamacare

DrRich | July 29th, 2010 - 5:52 am

Why Big Health Insurance Supported Obamacare, Part II

Podcast:

The fact that the health insurance industry supported Obamacare from the very beginning was entirely missed by the mainstream press. This is perhaps understandable, since a) the mainstream press does not understand the dynamics of the healthcare system, and b) during the Obamacare drama, the health insurance companies had been assigned, and had graciously accepted, their vital role as the Forces of Evil. To the famously credulous members of the mainstream press, it was easy to imagine that the insurers were actually among the opposition.

But the insurance industry supported Obamacare from the start – and even before the start. During the Presidential race of 2008, for instance, managed care companies donated far more money to both Barack Obama and Hillary Clinton than to any Republican candidate, even though both of these Democratic candidates publicly castigated the insurance companies for producing most of the problems in American healthcare, and promised to institute reforms that would drastically cramp their style and reduce their profits.

Why would the insurance industry support the very candidates whose chief healthcare strategy was to demonize them? Quite simply, it was because the insurance industry had nowhere else to go.

By the time Mr. Obama became president, the once proud, self-confident, and even arrogant American health insurance industry had been completely humbled. Like the old Soviet Union twenty years earlier, it still may have looked formidable from the outside, but it was really an empty shell.  The industry had run out its string; it was entirely bereft of ideas. Its business model was completely broken, and it desperately needed an exit strategy. And it was due to the need to find a serviceable exit strategy that the industry supported Obamacare.

To understand what landed the insurance industry in this sad state of affairs, it is necessary to review its recent history.

The Rise of the For-Profit HMOs

When the Clintons set out to reform the American healthcare system in 1993, the health insurance industry initially claimed to support them. The Clintons had promised them a vast new market – the millions of heretofore uninsured Americans whose premiums would be paid, presumably, by the government.

But the alliance fell apart the moment the insurance industry began reading the massive tome of regulations the Clintons finally produced, and found in it much they didn’t like. Chiefly, they they didn’t like the parts that ceded full control of their industry to the government. So Big Health Insurance immediately turned against the Clintons, and spent millions of dollars introducing us to Harry and Louise (a “typical” American husband and wife who were viewed in numerous TV commercials discovering various appalling provisions of the Clinton plan). In the end, when the Clinton’s reform plan went down to ignominious defeat, the powerful health insurance industry, appropriately, got most of the credit.

Most of us Americans were happy at the time that the Clintons’ plan had been defeated, but during the debate over healthcare reform we had become convinced that the old way of doing healthcare wasn’t any good either. The healthcare system, we all knew by now, was bankrupting us.  And something needed to be done about it. But with the Clinton plan off the table, what were our options?

In the ashes of the Clintons’ failed effort, the health insurers saw their golden opportunity.  And they presented the American people with a savior. The savior was, of course, them.

The insurance industry made its pitch in a new guise which we Americans had never seen before. For the big fee-for-service insurance companies had transformed themselves into HMOs, and had fully assimilated the language of managed care. These were not the touchy-feely, non-profit HMOs that had been puttering around in the healthcare system for a decade or so.  These were meat-and-potatoes, for-profit HMOs, run for the most part by hard-nosed business executives, and newly formulated for a new era of American healthcare.

And here is what they said: “Citizens! We all – employers, patients, physicians, hospitals, manufacturers and insurers – have just dodged a bullet. Thanks to us, the frightening socialist reforms of the Clintons have been soundly defeated. But where does this leave us? We stand now between Scylla and Charybdis, between the specter of nationalized healthcare on one hand, and the continued profligacy of traditional fee-for-service medicine on the other. And we cannot countenance either. But here,” they continued, “is a third way. A painless way, based on the sound principles of managed care, open markets, and free enterprise. Let healthcare become a business like any other business, and the market forces will find ways not only to cut costs but also to improve quality, and with no government intervention.”

The offer, in other words, was to turn healthcare over to the business professionals now running the New Model HMOs, who were cocky with the certainty that they could harness the efficiencies of the marketplace to control costs, make a big profit at the same time, and be feted as saviors to boot. Because we’re Americans and we know the benefits of capitalism, and because the other choices we faced looked even worse, we all said, “Go for it.”

This change led to the most rapid transformation the American healthcare system has ever seen, and within a few short years, the majority of Americans were enrolled in HMOs, or some other species of corporate managed care.

So HMO executives set out to control the cost of American healthcare, and to make a spectacular profit doing it. And for a few years, they seemed successful. Healthcare inflation slowed dramatically in the late 1990s, and HMO profits soared.

But it was all an illusion.

The Fall of the For-Profit HMOs

The initial impressive profitability of New Model HMOs was due to the one-time reduction in cost you always get when you implement efficiencies of scale (made possible by merging enterprises), and by instituting the new standardization techniques favored by managed care theory. These steps reduced the cost of healthcare for a while, but the underlying rate of healthcare inflation (which is mostly caused by new medical technologies and an aging population, neither of which are cured by managed care) was pretty much unchanged. So by the early 2000s, when these one-time cost reductions had been fully realized, healthcare inflation was right back on the same unsustainable trajectory it had been on before.

Unfortunately for the HMOs, the big profits they enjoyed throughout the 1990s could not last. Their rapidly expanding valuations were attributable not to their efficient management of healthcare, but instead, to the frenzy of mergers that rapidly ensued, and to the acquisition and privatization of not-for-profit public assets for a tiny fraction of their true value.

So not long after the turn of the century the for-profit managed care companies were getting very nervous. For the very first time in their history, HMOs were faced with the prospect of having to earn their profits, profits sufficient to satisfy their shareholders, by actually managing the healthcare of sick people. This is something they had never accomplished before, and, by the time the election of 2008 approached, they knew they never would.

By that time they had tried everything. Beginning in 1994, filled with confidence and enthusiasm and cheered on (initially, at least) by the public and by public officials alike, the health insurance companies had more than 15 years of more-or-less unfettered freedom to institute any efficiencies they wanted to. In the ensuing years insurance companies tried all kinds of legitimate ideas for reducing healthcare costs, such as managed care, gatekeepers, clinical pathways, disease management programs, pay for performance, wellness programs, medical homes, and even a ruthless consolidation of the industry to achieve “efficiencies of scale.”

They also tried every sneaky and underhanded idea they could think of for reducing costs, like cherry-picking the healthy patients, treating chronically ill patients like pariahs so they would go away, making access to specialty care as inconvenient as possible, forcing doctors to sign “gag clauses” to prevent them from telling their patients about certain treatment options, browbeating primary care physicians into zombie-like compliance with handed-down care directives, refusing to cover expensive-but-effective medical services, and canceling the policies of tens of thousands of patients after they get sick, based on trumped-up technicalities. Indeed, they tried everything short of dispatching teams of Ninjas in the dark of night to slaughter their most expensive subscribers in their beds.  And finally, when all else failed, they instituted huge and unsustainable annual increases in premiums, to the point of driving their customers out of the market. (This latter move, of course, was an open acknowledgment that the industry had entered its death spiral.)

All these efforts were to little avail. The cost of healthcare continued to skyrocket, entirely unabated. And by 2009, when President Obama began his push for healthcare reform, the insurance companies knew they had no prospect of long-term profitability. Their business model was no longer viable, and, while telling soothing stories to avoid shareholder panic, they were urgently casting about for an exit strategy.

A drowning man will cling to any piece of flotsam that comes his way.  What the insurance industry found floating by was Obamacare.

What Health Insurers  Get From Obamacare

In return for its support in the healthcare reform battle, President Obama offered the insurance industry the graceful exit strategy it so desperately needed.  Under Obamacare, for at least a few years the insurers hope to get One Last Windfall – namely, profits from the influx of previously-uninsured Americans whose premiums will be paid, or at least subsidized, by taxpayers.  Here, the insurers are relying on the likelihood that the inflow of new premiums will, for a year or two at least, greatly outweigh the outflow of money they will have to spend caring for these new subscribers. Obviously, they will use every trick in their well-worn book to stave off expenditures for these new subscribers for as long as they can, but if they actually knew how to avoid paying healthcare costs indefinitely, they wouldn’t be seeking a government bail-out today. In any case, an inflow of new subscribers will be a very temporary source of profit for insurers. Hence, at best it is One Last Windfall.

What happens to the insurers after they exhaust this last windfall is still up in the air. Obamacare may, of course, eventually transition to a single-payer system, an outcome which many conservatives desperately fear, and many liberals fervently desire. In this case, there may very well be some final compensatory buy-out (or a buy-off) for the insurance companies. But more likely, the insurance companies under Obamacare will continue to exist essentially as public utilities. That is, they will exist as companies chartered by the government, which administer healthcare under the direction of the government, with the products they may offer, the prices they may charge, the profits they may keep, and the losses they may incur, determined solely by the government.  It’s not glorious, but it’s a living.

And it’s much better than where they would have ended up without Obamacare. Which is why they supported it from the start.

Now that we know why the insurance industry supported Obamacare, in the next post we will explore how the industry, at no small cost to its own public image, supported the President when it counted most.

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Why Big Health Insurance Supported Obamacare

Part I – Another Reason He Should Have Kept the Bust

Part III – How the Health Insurance Industry Saved Obamacare

Part IV – What It Means That the Health Insurance Industry Saved Obamacare

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Now, read the whole story.

DrRich explains it all in, Fixing American Healthcare – Wonkonians, Gekkonians and the Grand Unification Theory of Healthcare.

Now on Kindle!

13 Responses to “Why the Health Insurance Industry Supported Obamacare”

  1. PeterW says:

    Good read. One thing I wonder, though, is why the HMO system failed to control costs. After all, it contained many features that free-market reformers want to see happen in healthcare. A single entity prescribes treatment and absorbs cost. Patients indirectly see the costs of their treatment (via their monthly payments). Yes they were perhaps too large to make cost-conscious treatment decisions that were as conscientious as you and I would prefer, and yes to an extent they grew to become local monopolies. But both these factors should make them *more* profitable, not less.

    So what went wrong here? And what are the implications for the free-market reforms that share some of their features with HMOs?

    • DrRich says:

      PeterW,

      I actually wrote a whole book about this, explaining it in detail. But the short answer is: The health insurance system as currently constituted is not anything like a free-market system. It’s the Tooth Fairy model (where doctors and patients decide how much money to spend, and the Tooth Fairy picks up the tab).

      If we’re going to pay for all healthcare from a centralized pool of money, then it doesn’t really matter whether that pool of money is controlled by health insurance companies or the government. We’re not going to be able to put enough money in the pool to pay for every bit of healthcare that has some chance of benefiting every person in the land. Our current healthcare reform simply proposes to accelerate the process of transferring control of the money from the companies to the Feds.

      Either way, there will be covert rationing. And either way, the rationing will be extraordinarily destructive to doctors, patients and society. Unlike the insurance companies, however, whose only tools of coercion are to withhold healthcare or withhold payment, the Feds can coerce “correct” behaviors by the legal, measured application of violence wherever necessary. So, personally, as nasty as the insurance companies are, I’d rather have covert rationing by them than by the Feds.

      But that’s just me. Many Americans have undying trust in the fairness and benignity of a powerful government that has lots of control over our personal lives.

      Rich

      • PeterW says:

        Sure, I agree with everything you write above. But at an organizational level, HMOs did *not* operate on a tooth-fairy model: costs were accounted for internally and the patient picks up the tab, smoothed out over monthly payments. Of course this limitation led to moaning but it should have restricted costs. Why did it not?

      • DrRich says:

        PeterW,

        Because the average monthly payments made by subscribers (premiums) is rapidly overtaking the average expenditures made by the insurance companies – despite all the legitimate and illegitimate cost-savings measures that have been instituted. With expensive new technologies and the aging of the population, all the cost-saving schemes they could muster have not slowed healthcare inflation, which approaches 10% per year. Healthcare expenditures in 2004 averaged $6280 per American, and it is much higher than that today. Insurance companies simply can’t increase their premiums fast enough to break even for much longer, let alone make a profit, and they know it.

        Rich

  2. Chad says:

    I’m a cynic and believe that Obamacare is a calculated iterative step towards single payer. When premiums and healthcare costs continue to skyrocket, the Dems will say, “See, we told you that market based solutions to healthcare don’t work because the evil insurance industry is only interested in profits-single payer is the only solution.” Why move to a utility model-it implies a regulated ROI ie profits which are anathema to the left’s “Healthcare is a right” paradigm.

    • DrRich says:

      Chad,

      Fundamentally I agree with you. And most of the Progressives, including, I think, Mr. Obama, would dearly love to see a single-payer system. But keeping the insurance companies around in a diminished capacity nonetheless has certain advantages for them, which I will discuss in a later post in this series. Basically, it would be an advantage to the Progressives to keep the evil (but castrated) insurance companies around so there’s someone to blame when the whole mess gets really ugly. For instance, don’t you think the Feds were happy to have private mortgage companies around to distract attention from Fannie and Freddie over the last 2 years?

      Also, I will take this opportunity to remind readers about another bugaboo of mine. Which is, under any single-payer system, the ability of individuals to spend their own money on their own healthcare must be forcibly restricted. Otherwise, that would be two payers.

      Rich

  3. Jupe says:

    I think when most American progressives say “single payer” they just mean some sort of NHS-like “free at point of service” tax funded system open to all. I don’t think any (well, many) US progressives would want to see paying for your own health care with your own money banned, even if that is technically a double or triple payer system.

    Of course, just because we Joe Schmoe progressives feel that way doesn’t mean the “progressive elite” strategists and decision makers would think the same way. And it’s not like those “think tank” types would be forthcoming (with anyone besides their political elite friends) with their plans and strategies, either. For that reason, it’s definitely something to watch out for.

    • DrRich says:

      Jupe,

      I am being very serious when I say that I am very glad that you and other progressives who are regular folks feel this way. Because (as I have elaborated upon at length) your elites do not. So please watch out for it, and when you see it (as you will), I hope you will join us non-progressives in fighting this particular aspect of the healthcare system.

      If we Americans can agree on this one point, I am confident we can work out the rest in a civil manner.

      Rich

  4. Jupe says:

    “If we Americans can agree on this one point, I am confident we can work out the rest in a civil manner.”

    I think so, too.
    On the bright side, if “the plan” is actually to Trojan Horse in a “literally single-payer” system (which, it might not be. It might not ever have been anyone’s plan. When it comes to liars, one can never be too sure who, exactly, is being duped…), the drug companies will probably help us out with illuminating the problems with that.

    I think it might have been the work of the drug companies that got those tyrannical laws repealed in the UK?

    • DrRich says:

      Jupe,

      I don’t know enough to say how much the drug companies themselves might have manipulated British policy. But as one who now earns his bread consulting with biotech companies (mainly on R&D matters rather than on policy, to be sure), I am confident in saying that we should not rely on industry to even recognize what’s going on politically, let alone to lead us out of the wilderness. We the people are going to have to monitor this, and do something about it if necessary.

      Rich

  5. [...] the health insurance industry supported [...]

  6. Nicholas Walrath says:

    Very informative and eye-opening series of posts. Should be required reading for all TeaBaggers since they love them some private healthcare…

  7. Gary Beene says:

    Dr. Fogoros,
    Thank you so much for the cogent background and interpretation of our current state of paying for health care.
    Best wishes,
    Gary Beene

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