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Insurance companies are in the business of managing risk. Health insurance companies, in particular, manage something incredibly precarious: wellness. The business of health insurance is an incredibly delicate balancing act between the interests of insurer, patient, physician and the greater public. Even the smallest action explicitly favoring the interests of one of the aforementioned groups can throw the integrity of the entire system into whack. As employers became involved in the endeavor of providing health insurance, corporate interests were suddenly tossed into the fray, further complicating an incredibly complex network of vested interests. An array of factors contribute to growing health care costs: expensive treatments (experimental or reliant on costly technologies), high-risk patients who create higher average premiums, medical liability insurance leading to higher markup for health care, to name a few. Efforts to curb these figures, such as cost-sharing are almost always met with resistance.
Health insurance companies are tasked with making some hefty calculations: assessing the financial risk of insuring an individual; writing policies and pricing premiums that allow for a wide profit margin (while still paying the majority of claims); aiding in the containment of health care costs; judging the medical necessity of certain procedures; denying claims for unnecessary medical care or claims that exceed the terms of a contract; defending legal action against erroneously denied claims; and drafting contract agreements that meet ethical, patient, courtroom and industry standards. Health insurance companies tend to invest their profit, too. It is safe to say the accounting departments of such companies are frighteningly complex.
Technological and professional advancement in the field of medicine have allowed for new, groundbreaking treatment options but these advancements have come at a cost. As medicine grows more sophisticated, the price tags of treatments have grown in proportion. Today, health care expenses can easily reach astronomical figures. One health insurance expert called affordable healthcare an oxymoron. Few people have adequate funds readily available to pay these expenses, yet the nature of health care renders it a non-negotiable expense. This is where health insurance enters the equation. There are a handful of corporate juggernauts that dominate the private health insurance oligopoly in the United States. Approximately 67% of Americans carry health insurance from a private company (either employment-based on direct purchase).  For senior citizens and low-income families, public health insurance is the most oft-used avenue, the primary programs of which are Medicare and Medicaid. Private insurance can be purchased on a group or individual basis. Many Americans are covered by employer-sponsored health insurance programs. As health insurance became an increasingly pressing issue in recent decades, the state of the system comes into focus, and it is generally riddled with confusion, complexity and rivaling bureaucratic and corporate interests.
How Health Insurance Companies Make Profit
Despite the noble nature of providing access to health services, health insurance companies are above all, for-profit enterprises and they amass profit in a number of ways. The cost of healthcare in the US is generally much higher than in other areas of the world for a number of reasons; this proximately leads to high insurance costs. Potential payout benefit commonly ranges from $1 million to $5 million, at maximum. Insurance companies attempt to balance the scale between premiums and claims so that the profit generated from premiums outweighs losses from paid claims. While they do rich analyses to try and predict the likelihood of a claim (their financial risk), this is merely a prediction and more is needed to ensure a company will stay out of the red. Additional measures to ensure profit include stock investment, covering those who are Medicare-eligible, Administrative Service Plans and state funding.
How Health Insurance Companies Assess Patient Risk
When an individual seeks to enroll in a health insurance plan, the insurance company will weigh the risks of that prospective customer. Items that factor into this assessment include age, weight, family history and prior to Obamacare, preexisting health conditions. In the pre-Obamacare era, if the insurance company determined that an individual was too risky to insure (meaning there was a high likelihood that they would bring a claim and claims would be high), they could deny that individual coverage. This created a paradoxical health insurance landscape wherein those who needed coverage the most were those who were rejected and forced to go without it. Denying high-risk individuals with preexisting conditions allowed the health insurance company to make a larger margin of profit. The Affordable Care Act, or Obamacare, made it such that insurance companies could no longer deny coverage based on a preexisting condition, thereby altering the landscape of health care.  Despite seeing this lucrative provision for selective denial eliminated, health insurance companies have always made and still make a profit by another means: investing their income.
Underwriting Income And Investment
Imagine you are insured by Imaginary Insurance Group. You are a smoking male in your 30’s who is otherwise healthy. Annually you pay a few thousand dollars in health insurance. In theory, you would recover these expenses should you become ill because your insurer would cover the health care expenses to treat your illness. Let’s say you don’t become ill at all, and your only hospital visits are for routine checkups. In this case, the insurance company gets to pocket your premiums. You still pay those few thousand dollars annually to the insurance company because you could potentially fall ill at any time, whether by disease or injury. In these cases, insurance companies must make claim payments for the treatment covered in a given plan. Pocketed premiums are one of the principle ways these companies make money, and this profit does anything but sits idle. The insurance company breathes new life into ‘idle’ premium profits by investing them in the stock market. Insurance companies stand to collect mountains more of profit with this practice of investing idle funds. These idle funds, or the difference between premiums and claims, are known in the industry as ‘underwriting income’ rather than ‘profit.’
One practice employed by some companies is undercharging for health insurance, on the belief that they will recuperate that underwriting income loss by making gains in the stock market. Or, a company may intentionally incur an underwriting loss by charging low rates simply to generate business, then the following year drive up rates on the policies they wrote. Health insurance and the stock market then become intrinsically tied, and health insurance premiums may rise in accordance with the behavior of the stock market. The premiums you pay are not only invested in stocks but real estate and many other investment options as well. This allows for continued profit even when companies are “forced” to pay on insurance claims.
Commercial membership and non-commercial membership
In an exploration of health insurance companies’ attitude toward Obamacare, the Huffington Post described the business of health insurance with serviceable bluntness: “Insurance is a bet you make with a large company that something bad will happen to you. It’s a strange bet because both you and the company hope you’ll lose. Just to make sure you’ll lose, insurance companies hire high-priced financial talent to guarantee their odds of winning; they know exactly how to rig the game.” 
Obamacare met significant resistance from health insurance companies, who did not want to take on a mass of new customers to insure. It is worth noting that insurance companies do not blankly want to take on as many new customers as possible. On the contrary, insurance companies have funneled millions of dollars into the effort to fight the ACA, because they want to remain selective in who they insure. A sort of quality over quantity principle applies when regarding potential customers. The pool of newly insured individuals would include high-risk candidates as well as those not covered by Medicare or Medicaid. Insurance companies regularly solicit those who qualify for Medicare or Medicaid (offering gap insurance?), and display marked disinterested those who don’t. The resistance against Obamacare has been so fervent in part because insurance companies do not want to take on this slew of customers they would have previously denied. Doing so stands to decrease their profit margin.
Since 2005, companies have increased membership of those who have Medicare and Medicaid by almost 200%. This is called non-commercial membership. Contrastingly, commercial membership has increased by just 13% since 2005. The majority of ‘commercial’ policies managed by insurance companies are Administrative Service Contracts, and interestingly they do not provide insurance at all. Many employers opt for ASCs due to their seemingly lower cost, however, almost all actual financial responsibility is shifted to the employer, who would have to foot the bill if an employee requires health care. With an ASC, the insurance company only assumes responsibility for processing claims, issuing denials, negotiating medical costs and providing access to their network of providers. Insurance premiums cost far more than ASCs, and this is why some employers are opting for them but their ultimate cost could be far greater. Like all aspects of this industry, employers with ASCs assume a great deal of risk. ASCs raise a number of problems. During pricing negotiations, an insurance company is not ‘motivated’ to get the best deal possible because they are not responsible for paying the amount they manage to negotiate. Furthermore, even if they manage to strike a deal, hospital markup is generally incredibly high, therefore a ‘deal’ is still a very high figure to most eyes. Ultimately, ASCs provide little to no motive for health insurance companies to strike good deals for the health care the contract helps to provide.
How Health Insurance Companies Write Policies
A policy is a delicate web of interconnected interests. The two most important of these are the best interest of your health and the best interest of the insurance company’s pocketbook. After evaluating and weighing the factors of your health and wellness, the insurance company can begin calculating your premium. According to healthcare.gov, “there are five plan categories – Bronze, Silver, Gold, Platinum, and Catastrophic. The categories are based on how you and the plan share costs. Bronze plans usually have lower monthly premiums and higher out-of-pocket costs when you get care. Platinum plans usually have the highest premiums and lowest out-of-pocket costs” 
The way policies are written has seen a fascinating, almost soap-operatic evolution. Many factors weigh into the creation of these contracts, as mentioned. To grasp a modicum of the complexity involved, we will explore the intersection of health insurance and medical necessity with the ‘experimental procedures’ conundrum that arose in the tail end of the 20th century.
‘Experimental procedures’ were legally scrutinized for their relative benefit to the patient, and the relative financial detriment to the insurer. Before their sudden relevance, insurance companies were obviously contractually mum about these procedures. With their rise to prominence, insurers and certain policyholders were bound to end up in contractual disputes about what constituted an ‘experimental’ procedure and the boundaries of ‘medical necessity.’ The M.O. of the health insurance company is simple: they want to spend as little money as possible. They do so by covering only what is absolutely necessary, more importantly, what is explicitly covered in someone’s policy. If a given treatment or procedure lands in that disputable grey area, it is almost certain that the insurance company will fight coverage of it to protect their financial interests. To understand how insurers evaluate medical necessity and experimental procedures, we will review the case of Tishna Rollo and the disputed treatment of autologous bone marrow transplant (ABMT).
According to the judge in Rollo v. Blue Cross/Blue Shield, ABMT was the “only realistic hope” of saving 8-year-old Tishna Rollo’s life as she battled a tumor of the kidney. The procedure would cost an estimated $150,000 and the hospital could not admit her without coverage. Rollo’s policy with Blue Cross/Blue Shield explicitly excluded “experimental procedures” and she was denied covered for ABMT. With only a short “window of opportunity” to begin treatment, the matter had to be litigated and quickly. The judge noted that he was essentially deciding whether Tishna was to live or die. BC/BS denied the treatment not only because it was not covered in her policy, but also because its medical efficacy remained to be seen.  There is a deep-seeded history as to why insurance companies did not want to cover experimental procedures. The University of Pennsylvania Law Review reasoned that this exclusion resulted from a growing concern that many new medical procedures had been hastily adopted, inadequately tested and researched, and had little real value to the patient. Before insurance companies began excluding them in coverage, they were forced to pay for many unproven medical procedures because they that had the benefit of the doubt. To combat the ballooning costs of covering these types of procedures, insurance companies adopted a provision that clinicians must prove the efficacy of a procedure before the company would cover it. This requirement would, in theory, allow insurance companies to better allocate existing financial resources, thereby bettering the health of the general population. Simply put, they wanted to spend their money wisely, or they refused to spend it at all. Sixteen other courts evaluated the question of ABMT in the two years prior to Rollo’s case, ruling in favor of the patient and ordering insurance companies to cover the treatment. Twelve other courts contending with the same question in similar cases ruled in favor of the insurance companies, deeming the procedure experimental, unproven, explicitly contractually excluded and thus deniable for coverage.
At their core, these are simple contract disputes, haggling over the meanings of ‘medical necessity’ and the descriptor ‘experimental.’ The University of Pennsylvania Law Review also noted that this was not “peripheral” medicine; the treatment and cost in question had the potential for widespread implementation, as do many other ‘experimental’ procedures that are at odds with insurance companies’ definitions of medical efficacy/necessity. Should all or many of these new, pricy procedures become commonplace, premiums would hike for existing policyholders and many could be left uninsured. On the other side of this moral quandary was the fact that a treatment might be an individual’s only chance of survival. The ABMT question was emblematic of the greater issue perplexing the health care industry and the country as a whole.
Are courts even equipped to play God in these circumstances? Can the enigma of “medical appropriateness” be fairly subjected to legal fact-finding? Rationing medical care on the basis of cost also raises many ethical questions. Insurers do exercise some form of independent judgement in determining medical necessity, unless a policyholder appeals their decision by litigation. Beginning in the 1960s, Inserting clauses of medical necessity gave insurance companies the right and flexibility to deny frivolous or unnecessary care. Still, circumstances arose in which they were forced to shell out payment for treatments that were dubious at best, in some cases even formally outlawed in the United States. Despite such contractual revisions, the courts were not persuaded to blindly accept an insurance company’s determination of medical need and a treatment’s worthiness. Countless courts have found the term “medical necessity” to be hopelessly ambiguous and thus unenforceable. The question commonly went up for reexamination as many courts would note that their plaintiff-favoring rulings were reserved to the specifics of that case. With courts coming up with a garden variety of different legal decisions on this issue, contradictions naturally arose. While courts initially chastised insurance companies for failing to include potentially life-saving experimental treatments in their coverage, later court decisions found that they could deny ABMT treatment on the grounds that it was in fact “experimental.” The UPenn Law Review wrote, “The courts’ rulings create the appearance of a judiciary driven by a single-minded concern for extending coverage to patients in desperate situations at all costs.” These far-flung “desperate situations” had the unintended side effect of raising rates for everyone else.
Courts also took issue with retroactive denial of coverage, in which a patient consented to care by the physician’s recommendation, only to find the procedure wasn’t covered when they receive the bill. This led to the conclusion that what is ‘medically necessary’ can be determined only by one’s doctor.  This invalidates any agreement allowing the insurer to police medical decision-making, but its enforcement has been riddled with confusion and contradicting contractual obligations. If a physician enters into a contractual agreement with the insurance company, how then can they petition to refute the provisions of that contract by providing and charging for care not permitted in the contract? A contract does not allow cherrypicking of the provisions its entrants will abide by.
In the 1980’s, studies began probing the factors affecting hospital admission rates. They concluded that the vast difference between regions had no proximate cause, no objective culprit such as the demography, income, or health of a prospective patient. The difference was attributable only to the variant discretion of physicians and medical personnel. These blatant discrepancies, an affront to the concept of a universal standard of care, prompted insurance companies to begin meticulously reviewing the medical decisions determining the claims they were paying. This was called “prospective utilization review” and it began to gather steam as a mainstream practice of insurance companies. In 1983, Congress formally established Peer Review Organizations, an express purpose of which was to review medical decisions and their relative necessity. This amounted to a far greater degree of scrutiny for physicians.
If it had not yet been proven, the efficacy of a treatment or procedure was at best, a “coin toss.” Insurance companies chafed at the idea of paying for the outcome of a coin toss and doing so on an incredibly large scale. There was reason to believe the treatment would be beneficial, but in most cases, a logical argument could be made that it would not.
Bound to morality more than a legal contract, courts were routinely tasked with ignoring blatant contractual agreements, despite the illegality of such concessions on paper. After plaintiff-favored rulings, insurance companies would adopt the court suggested contractual revisions that further tightened the definitions of their obligations. But these airtight definitions only made it more difficult to cover necessary healthcare (if it came up short of contractual definitions). This only gave rise to more litigation, and then a heart-wrenched court was forced to refute these even tighter, revised contractual agreements. The solution was to include experimental procedures in coverage, meaning one thing: raised rates. This all bespeaks the complexity of health insurance companies and their financial interests.
An unintended side effect of a humanitarian judiciary is considerably heightened costs for policyholders. With court rulings essentially urging insurers to expand coverage to include previously disputed treatments, policyholders are left having to pay higher premiums for broader coverage that they didn’t want or foreseeably need. This court mandated coverage has become known as “judge-made insurance,” which is entirely different from legislatively mandated insurance, seeing as it resulted from the gamut of legal disputes listed above, and carries its own discrete cost.
Despite acting in their own financial interests, the actions of health insurance companies work to contain health care costs for everyone. Rulings that effectively emasculate insurance companies in areas they ought to have a say in, by virtue of the service they offer, deter their efforts to contain health care costs. In actuality insurers deny only 1-2% of claims, indicating a cautious and prudent attitude toward the issuing of denials. They are not handed down frequently at all. But the implications of denials are grand. If the court finds that a denial was erroneous, this is determined to be a bad faith breach of contract and punitive damages apply. For ‘erroneous’ denials, insurance companies would not only incur punitive damage but would be subject malpractice liability if that denial proximately leads to the patient’s deterioration of health. In this nuanced system of checks and balances, insurers are reined in from overzealously issuing denials for financial gain. Yet the consumer and the insurer have the common goal of containing health care costs, so stifling the insurer on this count leads to financial hardship for the consumer. These court rulings are morally and ethically sound, and naturally benefit from popular support – but they do incur a cost that is largely ignored.
With employers entering the fray with employer-provided health insurance, the hard objective of cost containment came into focus. The induction of cost-sharing served the public with a sharper awareness of the cost of health care. Corporations/employers note that providing health care coverage is financially burdensome and could potentially hurt business performance. Yet unions will protest efforts to increase cost-sharing. This comes in the face of findings which show that a great deal of medical care is unnecessary and delivered in “widely varying patterns” between health care providers. As the health insurance marketplace has undergone changes, a new role has emerged wherein insurance companies’ interests parallel that of the consumer: seeing to the absolute most cost effective, beneficial and irrefutably necessary medical services. For different reasons but with the same end result, health insurance companies and patients alike want to see that the physician explicitly and meticulously keeps to the standard of care with absolutely no deviation. 
Medical Malpractice Insurance and Health Insurance: The Interplay
Physicians are required to keep medical malpractice insurance for cases of litigated medical negligence. Over the years, as suits of this kind increased (and the payouts that they generated), malpractice insurance premiums consequently increased. Physicians and other health care providers passed these increased costs along to their patients in the form of increased health care costs. Increased health care costs meant health insurance companies had to increase premiums. But this is not the only way medical malpractice and health insurance intersect. There is an interesting conflict of interests here.
Speaking to the argument that physicians should not have the sole say in treatment, the UPenn Law Review makes a fascinating analogy. “Imagine what our food bills would be if we wheeled an empty shopping cart up to the grocer each week and asked him what he thought it would be “dietarily appropriate” to eat. Although ethical and clinical standards deter physicians from ordering completely unnecessary tests, and [co-payment] and inconvenience decrease patients’ willingness to undergo excessive testing and medical procedures, ample data suggests that physician financial incentives are nevertheless a significant determinant of treatment behavior.” It is in the insurance companies’ best interest that physicians do not run excessive or unnecessary tests. But the medical malpractice conundrum is completely at odds with this principle. Often, physicians have found themselves wrapped up in lawsuits after failing to run a wider gamut of tests, which would have enabled them to ‘catch’ the patient’s illness or abnormality. The effects of not catching something, a tumor, an infection or what have you, because a provider did not run adequate tests, are deleterious – for the patient and the greater healthcare system. Health care providers then run the risk of overcompensating for this potential mishap, by running far more tests than need be done, driving up the final health care bill and therefore, insurance rates. For the physician and the patient, better to be safe than sorry when it comes to excessive testing/treatment. For the insurer and consequently the patient-policyholder, it’s better to be extremely prudent about what tests, procedure, and treatments are doled out so that money is spent wisely. With these competing interests, a physician may evaluate a patient’s condition and only sparingly run tests because they assume they have identified the ailment. They also know their medical decisionmaking will later be scrutinized by the patient’s insurance company for having incurred extravagent financial costs. The physician has actually failed to find the actual cause of the illness. The patient’s condition worsens because of the physician’s failure to diagnose and treat, when in actuality their hands were tied, in part, by the insurance company. Where does fault lie? The real loser in this war of competing interests is the patient.
Health insurance companies and health care providers butt heads at another point. In legal disputes about the standard of care or reach of coverage, medical expert witnesses contend with more than just the case. “Incentives affect doctors called to testify in coverage disputes. Even if they do not benefit directly from the particular patient in question, doctors may have a strong professional interest in seeing the particular technology more widely disseminated.”
Health care is a tangle of conflicted interests and sadly sometimes greed or general monetary incentive outweigh morality or proper execution of the standard of care. Exploring the differing interests of the various players of the health care industry lends insight into its complexities, present issues and future.
 No. 90-597, 1990 U.S. Dist. LEXIS 5376 (D.NJ. Mar. 22)
 Mount Sinai Hosp. v. Zorek, 271 N.Y.S.2d 1012 (N.Y. Civ. Ct)
 University of Pennsylvania Law Review, Vol. 140, No. 5 (May, 1992), pp. 1637-1712