Philadelphia Reflections

SIXTH: Indemnity, Not Service Benefits

About eighty years ago, Blue Cross organizations started paying service benefits. Before that time, most casualty insurance paid an indemnity, which is to say, a certain amount of money if you had a certain type of "loss". If you had a fire, the indemnity would pay up to a stated amount, not a bit more. Auto insurance would pay what it cost to repair your car, but at their option, they could just impose a top limit, after which they "total" your car. So pure indemnity for healthcare gradually added service benefit features; it made the insurance a lot easier to sell, as in "Paying for everything you need, no questions asked". Health insurance would generally pay for appendicitis, no matter what it cost, or a broken leg, or hospitalization for terminal care. They were able to do this because they were often started by hospitals; and while the hospitals shared the risk of overpayment, they naturally had some control over the cost or at least some way of paying for it from charity funds. In the course of time, almost all health insurance preferred the image of "Don't you worry about cost, just get better."

When you reach a point where average health insurance costs exceed 5 %, you are probably in such a spiral. Unfortunately, the tax reduction for employer-basing often averages more than 5 %, so it pays to continue something which ought to be stopped. And those who ought to denounce the system, quietly defend it.

Service Benefit Cost Spiral

Sometimes it takes a struggle to keep that promise, but it reassures clients, and the industry struggles to maintain it. Meanwhile, it has been a long time since anyone said, "Don't you worry about big bills. Your insurance covers everything medically necessary above $5000, and if not the hospital carries re-insurance paid for by your employer." Naturally, first-dollar service benefits with no upper limit seem preferable, until it becomes unaffordable. Having reached the limit of affordability, the next step should be to reduce coverage for small claims, not for big ones. If even that fails to cover costs, the hospital must submit to individual service limits. Each step in this rationing process increases administrative costs, so a spiral is created. When you reach a point where average insurance costs (including hospital costs to administer it) exceed 5%, you are probably entering such a spiral. For comparison, bank debit cards profitably charge 1-2% to pay your bills, including fraudulent bad bills. Unfortunately, the Henry Kaiser tax reduction for employer-basing often averages revenue gains of more than 5%, so it pays to continue something which ought to stop. Those who ought to denounce the system, quietly defend it.

We didn't promise to pay for a hernia repair, we promised to pay five hundred dollars if you have a hernia repair.

Indemnity

However, complaints in the news media lately, suggest that this approach has reached some sort of limit. Instead of having one doctor in one hospital, people move around, so they change employers and hospitals; they frequently change doctors, by shifting their primary focus on a new specialist in a field that becomes primary to them. That is, women shift their primary focus from obstetrician to a pediatrician to the internist, perhaps to a surgeon or dermatologist, perhaps back to gynecology, perhaps finally to the geriatrician. The insurance companies have struggled to keep up with this, and state licensure of both health insurance and hospitals linked them to local employers. It is almost as though health insurance companies are trying to push the clock back to something they can manage, as a futile resistance to the way the society is changing and is going to continue to change.

Job mobility is increasing, shifting hospitals is just as common, and shifting doctors to respond to the disease of the moment remains feasible. But when insurance flirts with becoming national, or interstate, the fortuitous links are greatly stretched. Teaching hospitals may remain situated in the center of cities, posh hospitals may migrate to the high-rent districts everywhere. But it begins to get hard for an insurance company in Connecticut to maintain informal assessments of hospitals a thousand miles away. Potentially, every insurance would have to have an opinion about every hospital and doctor in the country, in order to shift into investigative mode about a rapidly escalating variety of service prices and underlying price structures which influence their claims. To simplify matters, insurers have begun to limit their availability to specific hospital networks, physician groups, and specialties. Clients promptly howl with indignation, and it can be pretty hard to guess where all this is leading. But in general, when the public conflicts with a vendor, it is the vendor who had better change.

Meanwhile, the role of the state Insurance Commissioner is indeed changing. Starting perhaps with Herb Dannenberg of Pennsylvania forty years ago, the insurance commissioner is seen as a consumer advocate, holding down prices. Before that, the main job of the Insurance Commissioner was to assure that the insurance company didn't go bankrupt, leaving a lot of customers without the insurance they had paid for. They protected the public in a different way, by assuring that premiums were realistic, and its administration was following the rules. In recent years, however, the Commissioner has tended only to hold premium prices down, which in the long run probably makes insurance harder to get. Meanwhile, the insurance company sits in its office tower, trying to find its way among a myriad of demands on it, watching the familiar local social structure fragment to the point where big data analysis supposedly fulfills the role of community gossip. Sometimes data is better than shop talk, sometimes it is hopelessly left behind. Sometimes you can trust it, sometimes you can't. So, in fact, you can never trust it.

It certainly seems useful to reduce the proportion of service benefit and increase the proportion of indemnity, for the protection of the insurance concept, not merely for the protection of the companies. That is, to transfer some of the risks from the insurer to the public. John Wanamaker once made a fortune using the slogan, "The customer is always right." But when the customer is on the other side of a failing bargain, some means of persuading the public it is wrong must be searched for. Otherwise, the service demanded will disappear. In fact, it is probably true that a few insurers will go bankrupt, just to persuade the public to pay attention. In the present stressful introduction of Obamacare, insurers are experimenting with limiting certain policies or price ranges to certain hospitals or lists of physicians. But the public is starting to shake off the flounderings of populist insurance commissioners, and essentially announces this just won't do, because it goes far beyond the mandate extended to insurance companies to pay the bills. Take our premiums, pay our bills, take your fee, and then -- please go away. A quick way to get back to basics is for the insurers to declare they will pay a certain (indemnity) amount for a certain type of claim. Providers can raise prices if they wish, but this is the limit of what we promised to pay. Anything more must be supplemented by the subscriber, not by us. We didn't promise to pay for a hernia repair, we promised to pay five hundred dollars if you have a hernia repair.

Originally published: Thursday, February 06, 2014; most-recently modified: Wednesday, June 05, 2019