How Did We End Up with a Broken Health Insurance System?

The murder of UnitedHealthcare CEO Brian Thompson has drawn attention to Americans’ frustration with the for profit healthcare insurance industry. Change is possible but less likely if people don’t understand how we got here, the real issues, and how they might be fixed. 

Health insurance wasn’t always run by big for profit corporations 

According to Elizabeth Rosenthal’s book, An American Sickness (a must read), it all started in the 1920s when the Vice President of Baylor University Medical Center discovered that they were carrying a large number of unpaid bills. The goal wasn’t to make money. It was to keep sick people from going bankrupt while helping keep the lights on at not-for-profit hospitals. 

Baylor launched “Blue Cross” as a not-for-profit and it offered one-size-fits-all coverage, one-size-fits-all pricing, and all were welcome. By 1939, Blue Cross grew to 3 million subscribers and health insurance might have stayed this way if it wasn’t for two important innovations that would change healthcare and insurance as we know it.

Before the late 1930s, there wasn’t a heck of a lot we could do for sick people. That all changed with two innovations: 1) the ventilator and 2) the first intravenous anesthetic. The ability to put people to sleep and keep them breathing opened the door to a whole array of new surgical and intensive care interventions. More interventions meant more lives saved. It also meant longer hospital stays, more expensive equipment and care. Insurance would have to evolve to keep up with medical innovation.

We probably could have solved that problem with direct-to-consumer private insurance (like car or life insurance). But World War 2 introduced a creative workaround to a labor shortage that gave employers an outsized role in determining our health. 

Health insurance tied to employment

During World War 2, the National War Labor Board froze salaries and companies faced labor shortages. Employers figured out they could attract employees by offering health insurance. The government encourages this by giving a tax break to employers on health insurance spending.  

The number of Americans with health insurance skyrockets. Between 1940 and 1955, this number increased from 10% to over 60%, with the not-for-profit Blue Cross dominating. It’s hard to believe nowadays, but at the time, an insurance company was one of the most beloved brands in America.

The extreme growth of the health insurance market attracted existing for-profit life insurance companies like Cigna and Aetna. They were already good at pricing and selling insurance. Importantly, they weren’t strapped with the nonprofit mission of “providing high quality, affordable care for all.” They entered the market by selling plans to employers with younger, healthier workers at lower prices. 

The lower prices were welcomed by employers. Unfortunately, it was now up to the employer, not the person in need of healthcare, to decide what insurance employees will / will not be receiving and the benefits offered. 

The fall of the not-for-profits

By the 1990s the Blues were getting killed by their for-profit competitors. As long as their mission committed them to providing care to all and the premiums of healthy people were going to the for-profits, they couldn’t compete.  

In 1994 the Blues’ board voted to allow Blues franchises to become for profit. At first they said it was to gain access to the stock market to raise some cash to dig out of the hole they were in. But when a public service mission goes head-to-head with a responsibility to raise shareholder value, profit tends to win. 

The newly for-profit Blues started gobbling one another up to consolidate market power. Blue Cross of California was renamed Wellpoint. Many Blues merged or were acquired and rolled up into Anthem. In New York, the former Blue Cross operates under Empire. Today, along with United, Cigna, and Aetna, they’re among the largest and most powerful for-profit companies in the U.S. — and they operate accordingly. 

The profits > people playbook

Not-for-profit organizations exist to provide a benefit to the public. For-profit organizations exist to earn a profit and have a fiduciary responsibility to use that profit to reward their owners and shareholders. These legally binding obligations lead to two very different playbooks. The original Blue Cross was obligated to provide “high quality, affordable care for all.” What does the playbook look like when the obligation is to increase shareholder value? 

Before the Blues went for-profit, 95 cents of every dollar of premiums went to medical care. In 2010 in Texas, the birthplace of nonprofit health insurance, the for-profit Texas Blues spent 65 cents of each dollar on medical care. How do these corporations use their profits to make more profits and reward their shareholders? 

They follow a 4 step plan:

1. Tie executive pay to profits
2. Buy the favor of elected officials
3. Vertical integration
4. Stock buybacks

First, they create executive compensation packages tied directly to how much money the corporation makes. Today, those packages are in the 10s of millions of dollars per year. What’s the most obvious way for executives to generate profits when revenues come from premiums and the expenses are paying for care? Raise premiums and cut benefits. 

In 2010, Wellpoint planned to hike their premiums by 39%–before the CA attorney general stepped in. It turns out, once a health plan dominates a local market, only government regulation can prevent them from setting their own prices or denying medical coverage. 

Which necessitates the next area of investment in the for-profit health insurance playbook – buying the favor of elected officials. Insurance companies spend more than $150M each year lobbying the folks that are supposed to regulate them. Elected officials need this money to be elected and stay in office. The lobbyists of multi-billion dollar corporations make the price of their support (and the cost of opposing them) crystal clear.  

The blessing of elected officials becomes even more important for the next strategic investment of for profit health insurance corporations – “vertical integration.” That’s when insurance companies buy the companies that they used to pay or negotiate prices with. Vertical integration locks out competitors and gives greater price control over not just premiums but doctors, drugs, services, etc. In the last two decades health insurance corporations have bought pharmacy benefits managers, billing and service companies, clinics, consultants, and so on. United Healthcare now employs 90,000 doctors – that’s 10% of all MDs in the US. That’s a lot of leverage over what will and will not be covered and the price of each service.  

If this plan of incentivising executives, raising premiums, cutting coverage, denying claims, buying political protection, and vertical integration works as it should, you’ll have enough money to give the ultimate reward to your shareholders – the stock buyback. 

The stock buyback is a transfer of wealth from the company directly to the company’s shareholders. The way it works is the corporation buys its own shares from the public market, in effect reducing the total number of shares available for sale. This makes the existing shares worth more, rewarding existing investors.  

Since 2010, health insurance corporations have been on a stock buyback tear, spending $120B of their profits – not to lower premiums or improve care – but to increase the wealth of their shareholders. Why? Because that is the obligation of directors and officers of for-profit companies. 

How do we move forward?

Don’t reduce this problem to the greed of a few executives. It may be morally repugnant, but it’s predictable if not inevitable that executives of for-profits will do everything allowable by law to generate profits and use them to reward their shareholders. 

Things are getting worse quickly, making it harder to fix. As for-profit health insurance corporations grow, they gain more power–more pricing power, greater market dominance, greater sway over elected officials. They are getting more extreme in their denial of claims, acquisitions, reduction of customer service, and in their monopolistic behavior, because they have done the math and they have determined that they can.  

Change from our elected officials is the only way forward. We give our elected officials the power to regulate for-profit corporations so that enriching shareholders doesn’t come at the expense of poisoning our drinking water or allowing our cars to burst into flames. In this case, they’ve neglected their duty to oversee a market that deals in human health. 

They too have done the math. They will not prioritize change unless their calculus concludes that the best way to keep their positions is to regulate the for-profit healthcare insurance industry. Thus far, that has not been the case.