Monday, January 26, 2009

United Health Group and the Cost of Healthcare Part I

Gabriel Caine: Do you know the difference between a hustler and a good con-man?
Fitz: No.
Gabriel Caine: A hustler has to get out of town as quick as he can, but a good con-man - he doesn’t have to leave until he wants to.

There’s probably not a better quote to begin a post about insurance companies and con-artist, class-action lawyers – who will be called CA lawyers the rest of the article so you can choose which words the C and A stand for.

There’s also not a better opportunity for me here in New York to post on the Minnesota blog Truth v Machine about one of the biggest companies in their state, United Healthcare, and cross-post on my home state’s blog Red Albany regarding the industry I work in – employee benefits.

UnitedHealth Group is comprised of many different insurance and healthcare-related companies that were acquired over the last two decades. Last week, United made two major moves regarding out-of-network coverage that affects nearly all medical carriers nationwide. Both items have flown under the radar due to Obama’s inauguration and the fact that they were announced within a day of one another making it seem like one event. This news will likely come up again as healthcare becomes a topic for national discussion during this economic downturn.

United reached a retrospective settlement in a class action lawsuit for out-of-network claims payouts that were shortchanged. They also made a prospective agreement with New York State Attorney General Andrew Cuomo regarding out-of-network claims going forward. I’ll focus on the CA lawyers’ settlement today and follow up with the future arrangement later this week.
Now for the background: United, like all medical carriers, makes deals with doctors to be “in the network” so those doctors will charge less for medical services performed. This idea first came about in certain parts of the country and then exploded when Richard Nixon signed the HMO Act in 1973. By that time, many doctors (especially newer ones) were eager to have an instant customer base that was willing to see them based on less payment administration, cost, and vicinity.

The problem this created is at the heart of the healthcare mess in America. Doctors gave up two things a smart businessperson would never dream of giving up control over: 1) the pool of potential clients 2) their revenue and pricing scheme. This is made all the worse because they gave up those two vital components to insurance companies. Insurance hasn’t had the most stellar business reputation since the first time a Cro-Magnon man offered to replace a poor Neanderthal’s stolen PC with a Mac – clearly not the same thing as only one button on the mouse was just too confusing for Neanderthals and homo sapiens alike. Before I go on, let me quickly apologize to Cro-Magnons for using them in an insulting manner by calling them Mac users.

Fast forward a few thousand years later to 1994-2008 when a number of patients and doctors complained that United was being stingy with out-of-network reimbursements for services. When the complaint seemed legitimate, the American Medical Association petitioned on behalf of the plaintiffs. Oh yeah, they’re plaintiffs at this point because the CA lawyers work fast to get that rabbit out of the hat; they have to. CA lawyers eat what they kill and can sniff a large case against an unsympathetic defendant a mile away so I imagine this one wasn’t hard to organize. Of course as the years go on, a number of organizations that sometimes need to prove their reason for existing (like numerous “state medical societies” that found a way to become part of the plaintiff class) saw an easy target in an insurance company to crusade against.

For those not familiar, a person with private health insurance who goes to an in-network doctor pays less out of pocket and the doctor charges a significant amount less to the insurance company for the remainder of the service per the agreement he has as an in-network doctor.

When an insured person goes out-of-network they either have no coverage (in the case of HMO’s and EPO’s) or out-of-network charges are partially covered by the medical carrier. In the latter instance, the patient pays a deductible directly to the out-of-network doctor and then shares the remaining costs for medical care with the insurance company – this is called coinsurance. Out-of-network coinsurance is typically 60% - 80%, which is the percentage of charges paid by the insurance company with the remaining 20% - 40% paid for by the patient. Given the cost of medical care, it’s easy to see why most people choose to stay in-network when receiving care even when they have coverage to go out-of-network.

Now the insurance company doesn’t just take the medical bill created by the out-of-network doctor, subtract the deductible from the amount billed, and then pay the 60% - 80% of what’s left over as mandated in the contract. Instead, the contract says that the insurance company pays 60% - 80% of the Usual, Reasonable, and Customary (UCR) charges for the geographic area the doctor is in. The reason for this is the out-of-network doctor is not discounting the care like an in-network doctor does. The out-of-network doctor can charge a lot more and the insurance company is protecting themselves from a large bill by using the UCR as a payment guideline.

Here’s what was being fought over. The UCR is determined by geographic region through collecting all aggregate payment and billing data submitted by 100 major contributors including other insurance companies and claim administrators. The company most well-known and most often used by medical insurance carriers to collect this data to determine out-of-network reimbursement is a Minnesota-based firm called Ingenix. The higher the UCR determined by Ingenix, the higher the amount an insurance carrier has to pay for out-of-network claims.

The company that owns Ingenix is UnitedHealth Group. This is a clear conflict of interest that should have been caught way earlier by the Federal Trade Commission. Now that the hand is red, United is claiming “no admission of wrongdoing” and will be paying a settlement to the tune of $350 million to the CA lawyers, the AMA, doctors, state medical societies, and patients. That list is in roughly the order of who probably made out the best.

A few things to note here: the first is that United paid $60 billion in total medical claims since that year and $350 million dollars is only 0.6% additional to what was paid out already. Second, doctors who are not in United’s network and United patients who chose to go outside of that network know that United is only going to pay the coinsurance percentage (60% - 80%) of the UCR so there is going to be a very high out-of-pocket cost for the patient regardless of United paying slightly more due to a higher UCR. Yes, it is sad to see the anecdote of the woman with cancer who was on some news programs and is in tens of thousands of dollars of debt because of her illness. However, that woman decided to go out of network and to a premiere Cancer Center like Sloan-Kettering. Even if United paid more, she would still be thousands of dollars in debt. She chose to get the best care regardless of affordability. A choice nearly everyone would make as most would prefer to be alive paying off a debt than dead with a net worth.

Last, and I will elaborate on this point in the next article, if United and other carriers paid out more for all of their out-of-network claims because Ingenix increased the UCR for all procedures, that cost would be passed along to the policyholders and would possibly increase the extremely high cost of medical coverage even more.

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