12 June 2023
Interesting lawsuit story of the week, courtesy of this StatNews article. On one side are the Connecticut branches of two unions: the International Union of Bricklayers and Allied Craftworkers, and the Sheet Metal Workers International Association. On the other side is Elevance Health, a for-profit insurance company that’s a subsidiary of Blue Cross.
What are the unions alleging? The lawsuit claims that Elevance paid inflated amounts to hospitals and others who provided medical care to the unions. In one example cited by the article, Elevance paid Yale New Haven Hospital approx $8,700 for a claim even though Elevance had a negotiated rate with that hospital for approx $5,600 for that same service.
On the surface, this sounds crazy. Just imagine if you’ve gone to a car dealership to buy a car, and you negotiate a $3000 discount off of the asking price. Would you then turn around and just pay the full asking price? I wouldn’t, and I’m guessing you wouldn’t. So why would a health insurance company?
Here’s why: It’s not their money. In cases like this, the health insurer isn’t actually playing the role of a health insurer. What they’re providing to the union members may sound like insurance, but it’s not. Insurance is fundamentally about using capital to pool risk. The first recorded example was insuring monuments in ancient Babylon against natural disasters. You’ve probably heard the name Lloyds of London, which arose out of the international shipping industry in the 1600s. Before investors were willing to hire ships to move goods around the world, they had to make sure that a single shipwreck wouldn’t bankrupt them.
So who is actually insuring the bricklayers and sheet metal workers and their families? It’s the unions themselves who take in the insurance premiums and then pay out the medical claims. The unions are actually functioning as health insurance companies! And if that surprises you, what would you think about almost every medium to large employer in the US also being a health insurance company for their employees? It’s true. They self-insure for their employees’ (and employees’ dependents’) health care. It’s the same thing that medieval guilds did for their members hundreds of years ago.
If Elevance isn’t providing health insurance to the unions, then what are they doing? They’re acting as a 3rd party administrator. They handle all the medical claims, basically doing all the operational functions of an insurance company, but then send all the bills back to the employer, and take a percentage cut of the whole thing as their fee. And because they take a percentage cut, it’s in their best interest for the unions’ healthcare costs to be as high as possible. (Data on what this percentage tends to be is hard to come by, partly because the industry benefits by obscuring and complicating their fees. But 20% might be a reasonable benchmark, based on the ACA’s rules for “medical loss ratios,” even though the ACA rule doesn’t technically apply to self-insured plans.)
So why does this matter if you’re not a member of the International Union of Bricklayers? My point is that the business model of the health plan industry, just like those of the hospital industry and the pharmaceutical industry, is directly opposed to bringing down healthcare costs. To the contrary, health insurers’ primary goal is healthcare cost inflation. They just don’t call it that. They call it revenue.