Ever want to know how the health insurance industry improves their profits? They do it by stacking the deck. Cherry picking the healthiest and shifting those with chronic illness to the taxpayers. We should end the high cost of Insurance and provide real health care for all Americans, a fair equitable, single payer not for profit health care system.
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It is not very difficult to understand health insurance and how it works if you have ever been to Las Vegas. Think of health insurers like the big casinos. They are like the “house” and you are like an individual “bet”. The house is betting that you are not going to “win”, at least not “win” repeatedly. In fact, most people know that when they go to Vegas the odds are stacked against them. The house has calculated the odds and knows precisely what they can expect to win based on a predetermined volume of activity. They may lose occasionally or even have a short losing streak to a lucky winner but the long-term odds are in favor of the house.
In fact, most of us know that in the long term the house CANNOT lose. The long-term odds are enormously stacked in their favor. That’s why Casino’s can afford to hand out free drinks and why they own all the big tall shiny buildings.
While most people understand the odds when they go to Vegas, and know that the odds are stacked against them, they play anyway for the fun and excitement of it. They are playing for the “potential” win. And, some people do win. And for most people that don’t lose too much, its fun. Overall, however, the odds are in favor of the casino and everyone knows it. That’s why casinos are so enormous and why most people leave Vegas with less money then they had when they arrived.
What most people don’t realize is that in some ways Health Insurance operates in the same way. Many people think that it is some kind of a pay as you go system. They pay in all their life and at some point in the future if and when they need it, it will be there for them, but it does not work that way at all. When you can pay to the insurance companies all your life, and once you stop paying, you’re out. In fact, there are a lot of situations that can happen that can put you “out” of the insurance game.
Health Insurance companies, like the big casinos, have the long-term advantage. The odds are stacked in their favor and they do a lot to make sure it stays that way. Insurers calculate the statistical probabilities of paying out claims. In fact, insurance companies have large staffs of actuaries and underwriters. The underwriters assess the risk of each insurance policy written and the actuaries are continually recalculating future payment trends and payouts. They do everything in their power to keep the healthy people and shift those that are the sickest to someone else.
Health insurers are in the business of collecting premiums, not paying out claims. Health insurance companies, in order to stay in business and make a profit, must take more revenue in (premiums) then they pay out (in claims). Any good business person understands that concept. You have to take more money in (in the form of revenue) then you pay out (in the form of expenses).
What some people don’t understand is that in the case of health insurance companies, their largest expenses are the “cost of care”. It means that to the extent a Health Insurance company can pick healthier people and select lower risk insurance groups and minimize the payouts by shift the sickest to someone else, they can make more money. All of these cost-shifting maneuvers increase the profitability of the health insurance companies. In our casino comparison, it would be like the house stacking the odds in their favor. It would be like having the casino prescreen you in order to play. They would look at your winning history, the amount of money you play and the odds of you losing before letting you in the game. If you happened to be a consistently lucky winner they wouldn’t let you play.
Insurance companies reduce their risk of paying out high health care claim dollars by “cherry picking”, “cream skimming” and “cost shifting” to US taxpayers. By picking the best hands and by shifting the sickest populations, health insurance companies decreases the likelihood that they will pay out more than they took in on the premiums paid. They are stacking the odds in their favor and by doing this. They are maximizing their profits by eliminating the sickest of the population. It’s a great way to make a lot of money but a horrible system for a nation that wants to protect everyone and provide for their population when they become ill.
“We the people” the ultimate stakeholders in our national health care policy, need to understand how Health Insurance companies are doing this so we can stop paying, paying and paying again for health care. Health Insurance companies “cherry pick”, “skim the cream” and “shift the sickest” in order to maximize their profits. Make no mistake, the profits insurance companies make on the backs of anyone that has every paid a premium dollar are theirs not yours. Actually, they are the shareholders that own these mega corporations and those shareholders are singularly focused on profit and shareholder value. It’s a horrible way to run a health care system for a nation, especially a democracy of the people.
Cherry Picking
Cherry picking is when a health insurance company picks out the most profitable customers leaving the more expensive customers for someone else. Health Insurance companies blatantly participate in cherry picking by insuring healthy people and refusing to insure those that are less healthy. They use a number of different tactics to pick through the population of people seeking insurance and weed out the people with a higher risk of potential claims. The most common practice is through disqualifying people that have any kind of a pre-existing health condition. Insurance companies also use lengthy questionnaires that applicants are required to fill out and disclose not only health issues they have been treated for but also any personal habits they have that may be unhealthy. Cherry picking is designed to make insurance companies more profitable by insuring the healthy and denying the sick. Nothing precludes an insurance company from eliminating the sick from their insurance pools, in fact it is encouraged, all insurance companies participate in the practice and shift the sickest to the public (taxpayers). That’s right, taxpayers already pay for the sickest populations in our society, no insurance company will touch them.
Cream Skimming
Cream skimming occurs when an insurer knows more about a customer’s potential costs than the consumer themselves know. The insurance company uses marketing or plan design to enroll attract and enroll a healthier than usual population. One example would be if a plan offered excellent obstetric care but offered poor oncology care. They would probably attract a healthier population than if the opposite were true. Lower cost health plans often keep their costs low by enrolling healthier people (or encouraging unhealthy people to leave the plan) rather than by providing better care to their enrollees.
Shifting the Sick
So, where do the “uninsurable” go when they need health care and who pays for them? People without insurance are more likely to get sick more often and die sooner than the insured. Those experiencing even a short interruption in coverage tend to have a decline in their health. Those that lack health insurance coverage have a greater probability of having poor health status and a greater chance of dying early and a poorer quality of life because of their poor health care. We may not see people dying in the streets so we assume the uninsured somehow manage to get the care they need. Evidence refutes that assumption. In 2000, it was estimated that there were over 18,000 deaths among the uninsured in the United States relating to lack of health care. People with some very critical conditions like hypertenstion, high cholesterol or diabetes if they are not continuously monitored and treated with medication, their health deteriorates very rapidly. 38.7 million Americans went without health coverage for all of 2000 according to the Census Bureau. They are more likely to be treated only once they become chronically ill and are shifted into the public system.
Underwriting
In order for Insurance companies to improve their chances, they assess each policy individually based on as much information as they can gather about the group’s potential claims (their risk). By risk assessing each group, they can stack the odds in their favor. They evaluate as much information as possible about the group (prior illnesses, claim trends, the age of the participants, their sex, their race) anything that will allow them to get a good handle on the potential of future payouts. Underwriters then estimate the odds on paying out claims on the group and calculate the total estimated claims based on overall population, trends and data collected. If the risk is too high and their state allows it, they will decline the group. If they are required by state law to offer a high-risk policy, they will increase the price as much as legally allowed.
In order to determine the appropriate premium to charge, each group policy is evaluated on its own merits and charged according to the risk of the group’s population. If they know someone in the group is sick, they adjust upwards the premium dollars to offset the known payout. If there have been high historic claim trends in the group, the insurance company may decline to offer a policy or will raise the premium to compensate for the additional risk of future claims. They do the same thing by looking at the age of the group.
The insurance company sets asides reserves to pay future claims. It pools some of the money received in the form of premiums together for that purpose. States requirements vary on the amount of reserves required. There are minimums and maximums and it is based on actuarial calculations and the probability of a claim.
Insurance companies try and vet out as much possible information on the health of a group as they are legally allowed. This improves their odds on paying out claims. By assessing as much risk as possible an insurance company can stack the odds in their favor. Insurance companies underwrite each policy based on the total risk of that policy.
Health insurance in the United States is primarily sold to employees in the form of group insurance through their employer. The insurance company looks at the combined risk of everyone employed at the company. They look at age, health, previous medical conditions and expected future medical conditions. Then they estimate the cost of claims for the year on the group of people as a whole. They then rate and rank the policy.
Groups with larger number of young people generally have lower cost insurance. Many insurance companies age base adjust premiums, since the older an individual is the higher the risk of loss.
In order for a health insurance company to underwrite an individual policy, they need to understand the risk of the individual. If there is any risk of paying out a claim on the individual, they build in the risk into the cost of the policy or they decline the coverage. Health insurance companies “cherry pick” healthier populations to skew the odds in their favor. That means, if the health insurance questionnaire filled out by an individual indicates a potential risk, like a pre-existing condition or a response to a question on a questionnaire that tilts the odds in favor of paying out a claim, they limit their risk by denying coverage to the individual.
If you have “Bad Odds”
Small groups and individuals with an “unhealthy population” often have no where to go. If an insurance company rates them unfavorably they generally join the ranks of the uninsured. Many states offer insurance to high-risk individuals through state mandated high risk insurance pools or policies. Insurance companies in some states are required to offer insurance to high-risk individuals or those that are deemed, “uninsurable”. Often the rates for these policies are high and many people cannot afford to purchase them.
Who pays for the “High Risk” individuals?
Taxpayers. Federal, State and local governments all share in the cost of those that are uninsured. That’s the kicker when it comes to insurance. Taxpayers are already paying for the most expensive of the sick. Those that become permanently disabled and the elderly are covered through Medicare and Medicaid. People injured in the military are covered by the military or veterans administration benefits and the elderly are covered under medicare. These are some of the most expensive claim groups in the country.
Sweet Deal if you’re an Insurance Company
It’s a pretty sweet deal for insurance companies, and getting sweeter. Many insurance companies while still putting on a “local face” are owned by extremely large mega corporations. In fact, the five largest own an estimated __% of the market and they are still gobbling.
Stacking the House
Insurance companies legally (and immorally) stack the odds in favor of higher profits and reduced claims. They intentionally embrace techniques and practices that allow them to deny coverage to those that are the sickest.
Authors Bio:August Adams is a CPA and holds a Masters Degree in Psychology. He is an activist striving to create a fair and just world for all.