Healthcare Benefit Determinations and the Profit Motive
The public and journalism seems to be very confused on the linkage between claim denials and insurer profits. They also seem to ignore the role of the actuary as the middle-man in that linkage.
There is the common misperception that if a company denies a transplant, say, then the reduced claim costs flows to the company’s bottom line as profit. This linkage is tenuous, at best.
1) Many people aren’t actually insured by insurance companies; they are instead insured by their employer and a reinsurer. The “insurance” company in such situations has been hired to perform claims administration and to make their medical staff available as an arbiter for benefit disputes. This is the situation Cigna was in back in 2007 in the now infamous Sarkisyan transplant denial, made famous by John Edwards (recently resurfacing in this CNN article).
2) To price fully insured groups, large insurers develop “manual” rates, calibrated to the company’s claims experience. As such, the actuaries involved either implicitly or explicitly consider the company’s past business practices, as dictated in Actuarial Standard of Practice #5 (Section 3.2). What this means is that companies that are stingy with benefit determinations tend to have lower claims experience and therefore have lower manual claims and lower premium rates. This means that the “benefit” of the denied claims flows not to the insurer’s bottom line, but to the subsequently insured members.
3) More directly, denied claims don’t fall to the employer’s renewal in those situations where there is an experience rating. This means that the future premiums for the employer are lower because of the denial. This stream of lower future premiums may help retain the group business and therefore be a profitable venture for the insurer. However, it is predicated upon the group’s continued satisfaction with the benefit plan itself and is not the direct linkage frequently suggested.
Now, it is true that actuaries can be tricked. Companies can also change their business practices suddenly, resulting in a one-time windfall. More often, however, healthcare works the opposite way, with new procedures and processes being put into place all the time, resulting in higher future claim costs and higher future premiums. Actuaries account for this in an opposite way of claims denials: by “trending” their observations of the past.
I am fully aware of the fact that the bullet points mentioned above are generalities and there are exceptions. I also am aware that I am greatly simplifying the work of actuaries. However, I believe that the general truth is as stated: claim denials tend to be reflected in premium levels more than profit levels.
This has an important policy implication that I personally like. Specifically, people who eschew heroic medicine can tend to find insurers that don’t allow heroic medicine. People who want heroic medicine, in contrast, can commit a priori to plans that approve heroic medicine.
The reality of today’s marketplace is that legal liability and the involvement of employer choice in the insurance decision water down the ability of people to select in the type of claims approval regimes that they would ideally prefer. But as we consider reform options, I think it is important to evaluate whether the reforms will push us closer to allowing voluntary selection into relatively generous plans or not.