Not Paying Claims Doesn’t Necessarily Mean Not Knowing What They Are

Charlie Baker with Pilgrim Health Care has an interesting blog post responding to a health care op-ed that appeared in the New York Times on the subject of controlling health care costs.

Charlie writes:

Krugman states that, “They (health insurance companies) also deny as many claims as possible, forcing doctors and hospitals to spend large sums fighting to get paid.” For me, this statement of “fact” is right up there with the one about how 40% of health insurance premiums funds health plan administrative expenses and profits. Unfortunately, Krugman isn’t the only one who believes it. Many people would like to believe it, too. Too bad it isn’t supported by the evidence. In fact, I’d say just the opposite. I believe that health insurance plans that don’t pay claims accurately and on a timely basis fare worse financially than the ones that do, and Harvard Pilgrim is Exhibit A to support my argument.[...]

You see, plans build their prices for the next twelve months based on the claims they paid in the last twelve months. Since medical expenses make up 85-90% of total expenses, it’s critical to get this number right. If a plan is doing a bad job of paying claims properly, it underestimates what its prices need to look like going forward to cover its future costs. When it underprices its products, it loses money – not just now, but for the next year as well.

In short, a health plan that does a bad job of paying claims inevitably does a bad job of pricing its products, because the plan doesn’t know what its true costs are. This leads, inevitably, to financial losses. The landscape is littered with plans that hit the skids financially because they did a bad job paying claims – not the other way around.

There is a significant logical flaw in that statement.

Charlie assumes that if a claim is denied, then an insurer assumes that it’s done and no payment will ever be required. See no evil, speak no evil, hear no evil. And, while I can see some poorly-run insurance companies naïvely taking that stance, that isn’t necessarily the case.

I do work in the insurance industry. And, I know, first hand, that just because an insurer may decline to pay a claim, it doesn’t mean that records aren’t being kept, reserves aren’t being set aside for future payment, and that the claim isn’t being monitored for development. As long as the insurer is being realistic in how its claims will eventually develop out, denying claims as a means to try to reduce payouts is going to work.

Also, I can’t tell how much the original NYT op-ed was based on true health insurance, and how much of it was based on the system that I and many other Americans are covered under—employer self-insured programs with claims handled by a third-party administrator. (Aetna, in my case).

With employer-provided, self-funded programs, the TPA’s customer is the employer. The TPA bears little, if any, of the actual underwriting risk. They’re paid a fee for their administrative services, and the relationship will continue as long as the employer they’re serving is kept happy, and costs are contained as much as possible.

Thus, there is frequently no incentive for the TPA to not attempt to deny or limit payment whenever it think it might succeed…especially since federal law protects TPA’s from jury trials and punitive damages should the be sued for such shenanigans.

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