The Healthcare Breakdown No. 055 - Breaking down the health insurance business model: deny, deny, deny
Brought to you by The Clinical Operations Group
What we’re breaking down: The insurance model strategy at a high level
Why it matters: Oh, just because they decide if you get treatment or not
Read time: The length of that one Grey’s Anatomy episode (no, not an eternity, 6 minutes for real)
Right about now we are on track to spend around $5T on healthcare.
But before we get to all that…
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In 2013, we spent $2.9T on healthcare. At $5T by the end of the year, that’s a mere 72% increase. Meh, 0.72 isn’t even a whole number.
In 2014, the Affordable Care Act took effect. That’s important to note, because while this landmark legislation was well intentioned and had a lot of good, there also came a lot of downside. Mostly because the various lobbying organizations made the bill look more like Anakin Skywalker post lava dip versus the adorable pup we all met on Tatooine.
One of the items in the bill was the Medical Loss Ratio, familiarly referred to as MLR. Insurance carriers are beholden to an MLR of 80-85%. That means they have to spend at least that much of premium dollars on medical costs.
Funny, I know.
Let’s part with reality for a moment and assume that if an insurer coughs up the requisite 85% that it’s all legitimate, fairly priced, and actually goes towards medical care. I know. I hope you didn’t just spit out your mimosa.
Now that we are living in the floating realm of make believe, here are the strategies and reasons for the strategies that your friendly neighborhood insurance provider employs to make themselves as rich as possible, while you wonder if you can afford to pay for that procedure your doctor told you that you needed but United Health Group said wasn’t covered.
1. Deny, deny, deny
We’ve all seen this rodeo before. You need an MRI, but your insurance company, which apparently is allowed to practice medicine and somehow formed a physician patient relationship with you has decided you don’t need an MRI. Or a procedure. Or a medication.
This does two things. Well three if you include how much it pissed you off.
From the insurance company’s perspective, it improves its bottom line and its cash flow.
In terms of profit, a denied claim means premium dollars it doesn’t have to spend. That’s money it gets to keep.
For cash flow, that’s money that stays in the coffers, not money going out. Cash in hand son.
Yay money. It’s a big part of the reason UHG, for example, is looking like a cash king in Q3 2024:
Who doesn’t want a cool $21.8B? I’d for sure be drinking my mimosa out of a 10th century Han dynasty chalice.
It’s also mega profitable.
As an aside, you may have seen UHG stock slipping lately. Them and all the other big dogs. Well that’s what happens when you only make a billion dollars a month instead of two. Get your act together United!
2. Prior authorizations
Prior Authorizations, if you know, are like pre-denials. Well, really they are pre-approvals. But you know what’s happening here.
For many procedures and things like MRIs you will need a prior auth to make sure your insurance will pay for the thing.
Fun fact, only about 10% of Medicare Advantage prior auth denials were appealed in 2022.
Just look at the denial appeal rate. If you were in the business of getting a lump sum from the government and told you can keep what you don’t spend, wouldn’t you love denying and banking on the fact that only 10% of the time anyone would come knock on the door and say, “Where’s my money man? That was a loan.”
Speaking of loans, the prior auth game is really about protecting the coveted float. Turn the page. Figuratively. Not like a literal page. I know you don’t bring books into the bathroom anymore and you are reading this instead of your morning doom scroll.
3. Protect the float
Guess what made Warren Buffet extra super rich? That’s right, Geico’s float.
Float if you haven’t heard is the money that insurers collect in premium dollars and know they will need to pay out but haven’t yet.
It’s a liability on the balance sheet, like-a-so:
Despite that being a liability, it’s also cash. Cash that the insurance company can use for other stuff. Presumably investing in things. Like yachtspitals probably.
Just like your bank doesn’t just take your money and throw it on a musty mattress in the vault, waiting for Al Capone and his tommy gun to come steal it or for you to come withdraw it for that matter, your delightful insurance company isn’t just sitting on your premium dollars waiting for you to twist your ankle.
They have deployed that capital and are making money off of it. Just like the old dude in Mary Poppins singing about your deposit being invested in railroads or some quaint old timey thing.
By delaying payments in the form of denials and prior authorizations, we are all giving Sir Andy Witty the pleasure of making free money off the other free money.
Take another sip, you’ll need one for this next section.
4. Increase the cost of healthcare, I mean revenue
Remember that MLR thing? Hypothetically speaking, if you ran a business and I said you were never allowed to make more than a 15% margin, what would you do to earn more profit?
Not a trick question, you would raise prices. If the profit percentage stays the same, the only way to increase the bottom line is to raise the top line.
But here’s the rub, if you raise the top line without matching spending, your percentage will necessarily increase.
Buuuuut, if you also increase spending so you stay at 15% but on a bigger number, then you just won the game.
Last but… that also means in healthcare land, cost have to go up.
So while insurance companies are always trying to pay less and complain about reimbursement and costs, they really don’t give a hoot, scoot, or boogy.
They need healthcare costs to go up. If costs don’t go up and they just raise premiums, they have to pay back their customers. Blech, who wants to do that.
Looky, here’s an example of how that works:
So there you have it. The upward spiral of healthcare costs in three way too simple pictures.
Here’s your TL;DR:
Insurance carriers are in the business of making money, not paying for your healthcare.
To do that they employ these macro strategies:
Deny claims to improve margin and cash flow.
Require and deny prior authorizations to improve margin, cash flow, and protect the float.
Focus on keeping the float high so our premium dollars can make money by sitting on the balance sheet. See the first two strategies.
Let healthcare costs balloon so they have justification for raising premiums and making greater net profit.
Well, I hope today’s issue made you want to fire your BUCA plan, go rogue, and join the revolution. And remember if it made you want to start something crazy and you want the baddest folks around on your side for the most wildly incredible deal, you know where to clicky.
It’s here. Click here.
See you out there!