There are two major flavors of private, commercial health insurance contracts. The first is “fully insured” or “FI” where the health insurance company takes on the full risk of claims coming in above expectations. If that happens, the insurer loses money. If claims come in low, the insurer makes money. The ACA individual market, the ACA regulated small group market, Medicare Advantage, and Medicaid Managed Care are all fully insured products. The other contract structure is “self-insured” “SI” which is also known as as an “Administrative Services Only” (ASO) contract. An SI plan has a plan sponsor contract with an insurer to run a plan and administer the claims but the sponsor takes on the full risk of unexpected expenses. The most common plan sponsor is an employer like Duke University or Ford or Intel. Unions are also common plan sponsors.
Insurance companies routinely offer both FI and SI plans. From a consumer’s point of view, the only difference might be a few letters on their ID card. But these contract structures might create different incentives for the insurance company when they build out networks and contracts.
Does this matter on how much a given service costs?
There had been evidence from Massachusetts that there was modest within hospital-insurer differences in prices paid for SI and FI patients.
We measure negotiated prices for hospital-payer pairs in Massachusetts and characterize price variation. Between-payer price variation is similar in magnitude to between-hospital price variation. Administrative-services-only contracts, in which insurers do not bear risk, have higher prices.
And now there is some new evidence from a much broader data set. Sen et al in Health Affairs looks at national hospital-payer prices to see if there is a difference between FI and SI contracts:
Using the Health Care Cost Institute’s data set of claims for one-third of the US population with employer-sponsored insurance, we found that unadjusted prices were higher in self-insured plans for most of the services we studied, with the largest differences found for endoscopies (approximately 8 percent higher in self-insured plans), colonoscopies (approximately 7 percent), laboratory tests (approximately 5 percent), and moderate-severity emergency department visits (4 percent). When patient characteristics, plan type, and geography were adjusted for, differences were generally smaller but were consistent with these findings.
What does this mean?
The short take-away is that insurance companies negotiate harder against hospitals when their profitability is on the line. SI/ASO contracts are situations where insurers merely act as pass-through entitites for the plan sponsors. An extra 2% on the charge does not change the profitability of the insurer. That 2% on a FI contract could be the difference between breaking even on a contract or making enough to pay for good hookers and lots of blow.
Backing this out a bit more, this offers another reason to think that there is a space for Individual Contribution Health Reimbursement Accounts (ICHRA). An ICHRA is basically a 401-K for health insurance. Employers allocate a lump sum distribution that can vary on the basis of age, family size, geography and work group to employees for the express purpose of buying a health insurance plan from the ACA. ACA plans are fully insured designs so insurers make money if they can keep costs low. Some of that costs low component is per-unit cost control. We know that there are a lot of ACA plans which offer narrow networks priced at a bit above Medicare while standard commercial SI/ASO rates are 150% or 200% or 250% Medicare in a given area.
I think that most of the past 15 years of health policy has been moving towards putting more dollars at risk of gains and losses to entities that plausibly can assert some control on spending and have enough expertise to actually do something. Most employers fail on one or both of those counts. I think movement to more fully insured products is likely on the margin.
Ohio Mom
Off topic: Dr. Glaucomflecken, who is an ophthalmologist TikTok/YouTuber is posting on the American health insurance industry this month. Every day there will be a new video on another aspect on our wacky system.
The videos are very short and funny (in a laugh-to-keep-from-crying way), and though they are filled with injokes referring to Glaucomflecken’s established characters (he’s been making videos on medicine for a while), they are easy to follow.
From today’s video I learned that the insurance industry got Congress to outlaw physician-owned hospitals from expanding, and new ones from forming, through a provision in the ACA.
All together, the videos are a good primer for laypeople: https://m.youtube.com/channel/UCYDVFfp_AN1WBiNwaf9522w
Anonymous At Work
Have you been watching Dr. Glaucomflecken’s series on Healthcare in US? Funny interpretation of what you’re talking about.
And I think the extra 2% from negotiations is a big deal when you put it into context of the insurance companies’ gross. 2% of a monthly premium ain’t gonna attract much attention, by contrast.
Finally, what’s the policy response? Require that SI and FI rates are the same? Require that insurers disclose the FI rates to SI/ASO entities?
David Anderson
@Anonymous At Work: I appreciate Dr. G’s work and when he is talking about Texaco Mike battling the neurologist, my sides are splitting. I think he has a view on insurance and payment systems that makes a lot of sense as a specialist without considering the implications of how much things would cost and how little access would occur with his implied suggestions in this space.
David Anderson
@Anonymous At Work: The SI/FI rates are disclosable already. I think the policy response is to figure out ways to move people out of SI to FI plans — right now most SI plans are regulatory arbitrage where a few extra points on a per-unit basis is made up for by having to cover far fewer things.
Ohio Mom
And here I was thinking I’d have to explain who Dr G was. I see I am not the only fan among the Juicers.
Interesting to read David’s critique of Dr. G’s blind spot.
David Anderson
@Ohio Mom: It is a fairly common perspective among specialists that insurance companies serve no socially valuable function at all and exist merely to be a money parasite.
Betsy
My health insurer is getting ready to take my damages for injuries, pain & suffering that I may get from the wreck. Wait a minute. I thought they were in the health insurance business? Where they use the premiums paid by their customers to cover the costs?
Oh, no, instead they are going to seize my award that is supposed to compensate me for something entirely different — injuries and pain and suffering — they are going to seize that and pay themselves for the costs of doing business, including their executives’ bonuses, and the salaries of people whose job it is to deny coverage to their customers.
Anonymous At Work
@David Anderson: In defense of Dr. G, he’s not 100% wrong, either. And, frankly, Dr. G’s creation of “Jonathan” is about how much mind-numbing paperwork doctors do that interferes with their primary job.
Ohio Mom
@David Anderson: I am not a specialist in anything but that is my basic belief.
I understand, after reading your posts, that figuring out how to most efficiently and effectively provide health care for the most people, and predict and strategize for the future, is vitally important. Even if we had some version of socialized medicine, we’d still need people like you to design and tweak policy.
But on the ground, to most of us it looks like health insurance companies serve nobody and nothing but themselves. Any good they provide is incidental.
Sounds like that is Betsy’s conclusion as well.
Central Planning
David, why do the SI plans have to be negotiated with hospitals at all? My company uses Aetna and UHC for SI healthcare.
Why wouldn’t Aetna and UHC just add the the employees + dependents to their master plan? If there is more discount for more members, having one large group of healthcare customers makes more sense than negotiation of tens/hundreds/thousands of SI plans.
Of course, idk how all that actually happens so maybe my assumptions are wrong. When I’m benevolent dictator, that’s how I’ll run it.