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by Penny, Laura

  There’s no love lost on the legal side: most of the anti-insurance sites on the Web are about individual or class action suits against insurers. Insurance companies bought some of these domain names themselves, like “state-farm-sucks.com,” in a bold preemptive strike against bad word-of-Web, but there are still scads of complaint sites with stories of ongoing or impending litigation. Some suits claim that insurers act in bad faith by using stall tactics to delay payments and deny claims, or have focused on other breach of contract issues, like premium rates that double and triple within a year of purchasing a supposedly low-cost policy. This is a bait-and-switch; they sell you a plan that seems comprehensive and affordable, but then the insurer raises the rates, or reduces the coverage, once you have committed to the plan. And it’s not just policyholders who are suing insurance providers, either. Doctors have filed suit against health care giants like Cigna and Aetna, claiming the health care providers are engaged in corrupt practices like “bundling” and “downcoding.” Bundling is lumping several services together, a strategy to pay doctors less in fees; downcoding is paying for cheaper procedures than the ones the doctors actually performed.

  We’ll come back to those lawsuits—there are plenty to choose from—but first let’s look at how private health insurance actually works. The health and life business is an even more arcane, complex, bureaucratic behemoth than property and casualty. It is also a business that has changed completely over the past twenty years. Most health insurance plans used to work according to a system called fee-for-service, which is how the public insurance system in Canada still works. Your doctor would recommend treatments, and your insurer would pick up the bill. Over the past two decades, U.S. insurers have switched to two different types of managed care insurance plans, the health maintenance organization (HMO) and the preferred provider organization (PPO). HMO plans require that you see only approved practitioners, and may refuse to pay for treatments performed by someone else. PPOs, the more costly option, allow you greater freedom of choice when choosing practitioners. Both HMOs and PPOs do more than provide insurance; HMOs and PPOs often include hospitals, doctors, other health care providers, and several tiers of administrative middlemen, all rolled into one big megacorp.

  In both HMOs and PPOs, the doctors receive a flat fee for each patient. This is called capitation, and if it seems benign, bear in mind that what it means is that a capitated doctor makes less money every time he recommends an expensive treatment. The kid with the sniffles is pure profit; the triple-bypass patient gnaws away at the bottom line. And even if you happen to be Mr. or Ms. Hero Doctor, who still holds the Hippocratic Oath in higher esteem than the bottom line, you are but a gatekeeper in the managed care process. You can refer patients to specialists, and you can suggest radical treatment options, but in the end the decision will not be made by you or, for that matter, by your patient. Such decisions rest in the capable hands of a middleman.

  Most Americans rely on their employers for health care coverage. Employers pick up the health insurance tab for 60 percent of the Americans who have coverage, and they have been trying, desperately, to reduce their swelling insurance costs. Employers are making employees responsible for larger portions of their health care costs through higher co-pays and deductibles. Those without an employer-provided health plan can buy private plans, but they are more costly than plans negotiated at a group rate. The government, through the auspices of Medicaid and Medicare, provides some care for the approximately 40 million people covered by each program. These funds are primarily for the old, children, and the very poor. Medicaid and Medicare have also been trying to reduce their costs and improve their services by enrolling people in managed care, but the program hasn’t been as successful as the feds hoped it might be; enrolees have had rising out-of-pocket costs, and HMOs have been dropping out of the program in droves. The government just doesn’t pay ’em enough.

  More than 45 million Americans, many of them full-time workers, have no health insurance coverage whatsoever. The uninsured tend not to do things like go to doctors, or seek preventative care, but they can visit hospital emergency rooms. Hospitals risk fines for “dumping” if they turn away patients in severe distress who fail the wallet biopsy, but emergency care hardly serves as a substitute for actual health coverage. Patients are still billed, and face much higher costs, even for routine procedures, than they would if they were visiting regular clinicians. Whether you are covered or have no coverage at all, ill health is the leading cause of financial ruin, accounting for half of U.S. bankruptcies.

  The U.S. is the globe’s undisputed leader in health care costs. It has the most expensive health care system in the world. Yet, in terms of access to care, the U.S. lags well behind other nations. The 2000 World Health Report, issued by the World Health Organization, focused on the issue of health delivery systems, and compared their costs and benefits. The U.S. placed twenty-fourth in overall health system attainment, nestled between Israel and Cyprus. In terms of fairness of financial contribution to the health system, the U.S. drops further still, to 54—just ahead of Fiji and prewar Iraq. The U.S. health care system is expensive in part because of advances in technology and increased usage of prescription drugs, the better stuff and the shinier things. But health care is also wildly expensive because it is a poorly organized market, full of high-paid middlemen.

  It’s one thing to make a loopy, litigious system like insurance into a surtax on niceties like owning a house or a car. Oh, sure, it keeps the working poor from movin’ on up to the middle class, but you can rent and take the bus until you have enough money for insurance and a house or a car. It might be inconvenient, but you won’t die. But it’s quite another thing to marry and mate the colossus of insurance with the business of saving lives. People do die, sometimes needlessly and awfully. I’m one of those loons who think health care should be available to everyone and paid for by taxes, like it is in Canada and most other Western nations. There should be no co-pay, no deductible, no bureaucracies devoted to the bean-counting of care. It’s not just that it would be more ethical; it would probably be cheaper, too. Seriously. It’s no wonder that the American health care system is the priciest, what with lawyers and bureaucrats doing nothing but regulating access to care. Not providing care, not curing jack, just filing forms and more forms, haggling about who gets what when—and clogging up the legal system to boot. At least under so-called socialized medicine, there’s just one horde of civil-service bureaucrats squabbling among themselves, and fewer lawsuits. Under privatized medicine with some state care, there are actually three nonmedical groups at work: the insurers, the lawyers, and all the civil servants you still end up hiring. One study, published in The New England Journal of Medicine in 2003, showed that public health systems actually had much lower administrative costs than private ones. The United States spends three times as much money per capita on health care administration than Canadians do under a public, single-payer system. Administrative costs eat up almost a third of U.S. health spending. Canada’s administrative costs are half that, at 16 percent of health spending.

  Remember those public auto insurance systems in Saskatchewan and Manitoba I mentioned way back when? It turns out that the Canadian provinces with public insurance have far more stable premium rates than the ones with private systems. There have been some increases, most notably in Quebec, but these increases have been modest compared to the skyrocketing rates in provinces with private systems. In Manitoba, premium increases for 2002 were 1.8 percent, well below the 26 percent increase in neighboring Alberta, or the over 30 percent increases in the Maritime Provinces. Manitoba Public Insurance is the cheapest in the nation, and it also devotes a greater percentage of premium income to paying out claims—90 percent, as opposed to the industry rate of 73 percent. MPI is also financially solvent and self-sufficient, lest you envision a taxpayer-funded boondoggle.

  Of course, public auto insurance isn’t on the table in the U.S., nor is any form of public health insurance
. Call me a commie, or hopelessly Canadian, but you can’t tell me it isn’t feasible for the state to provide some basic health care for everyone. It’s the least they can do for your tax dollar, and it’s the sort of thing that states do better than corporations. The classic lefty argument is that the health of the nation should not rest in the hands of people who make decisions based on the short-term exigencies of the profit motive. But you can also make this argument in market-friendly terms: health care costs are an onerous burden free enterprise should not have to bear. The Economist has been singing Canada’s praises lately, rating it the best country in the world in which to do business, and Canada’s public infrastructure is part of the reason this is so. There are plenty of American companies up here, happy not to pay health premiums.

  Of course, this is all wildly utopian. I might as well propose a public program providing free pie on Fridays as argue that health care needs be public. I can reel off stats and studies and sad stories, but the grim fact remains: There are plenty of lobbies devoted to keeping medical care a strictly private and profitable matter. No self-respecting multibillion-dollar industry is going to say, “Take our billions and fire us en masse! We will beat our clipboards into plowshares and till the earth—please spend the billions on the cancer patients and the house fire victims and the sufferers of vehicular malaise!” This is not how industries become and remain multibillion-dollar industries. Private health care is a fucked-up fact of American life, and the profiteers are creeping into Canada, too. Why, even Hillary’s doomed, supposedly socialist, health care plan only suggested that the government act as a sort of health care broker, negotiating with a consortium of existing health care providers to obtain care. That modest proposal was received like so much commie talk. I admit that it is an odd proposition, the whole state-trusting thing. But, sadly, the only thing that strikes me as even crazier is to leave it in the hands of a ginormous corporation. Capitated as a covered life by my gatekeeper? Thanks, but no thanks.

  Terms like capitation and gatekeeper are but a smidge of the heady lingua franca that is all insurance’s own. Do you know what a “death spiral” is? It’s what starts to happen once a policy pool is closed and its members start to age. Premiums go up, and healthy members of the pool opt out and head for cheaper coverage, driving premiums up. Even at higher premiums, the pool is less profitable, because it has selected out all the healthy pure-profit types who offset the cost of the invalids. And because rising premium costs do not keep pace with the pool’s needs, the pool has to reduce its expenditures. Ergo, people pay more, and get less care, at a point in their lives when they need care most. The death spiral is actuarial entropy, and the only way to avoid it is to not sign up too many sickies in the first place. Insurers try not to get locked in a death spiral with preventative measures like cherry-picking, also known as “creaming,” which means insuring only those people who don’t have much need for insurance, and letting the risky folks trickle down into state-funded programs like Medicare. You may recognize this strategy from successful industries such as banking and energy, which rack up record-breaking profits even as they leave record-breaking messes behind for taxpayer-funded agencies to clean up. Only this time, the mess is people. Sick people.

  Managed care organizations have also been accused of shorting doctors to cut costs. Doctors have had some success pursuing HMOs for racketeering. Richard Scruggs, the lawyer largely responsible for Big Tobacco class action suits, got the ball rolling in Miami in 1999. Since then, a few major HMO class action suits have been winding their way through the courts. In one class action, Shane et al vs. Humana, Aetna agreed to a $120 million settlement in October 2004 to prevent a suit alleging they used automatic payment systems, among other forms of chicanery, to underpay doctors. Cigna, another big health insurer named in the suit, agreed to a settlement of $85 million. Another class action suit alleging similar violations, United Health Group vs. Klay, was approved by the Supreme Court in January 2005. The Supremes rejected the insurer’s pleas that the class of thousands of health care professionals from several states was too loose to sue. However, the class shouldn’t stock up on champagne just yet. Right after that, the Bush admin achieved one of its tort-reforming goals: class action suits now proceed to federal courts, rather than state courts, as state courts have been more lavish with punitive damages, and they tend to be more sympathetic than federal courts have been to those screwed by insurance.

  Some states have lobbied for a patient’s right to sue. Texas, for example, has a law that permits patients to sue their insurers. This right to sue became law in 1997, back when Dubya was governor, before he converted to the gospel of tort reform. A 2004 Supreme Court decision, in the case of Aetna vs. Davila, decreed that the Texas state law was overruled by a federal law called the Employee Retirement Income Security Act (ERISA), passed in 1974. ERISA was intended to regulate the managers of funds, and to protect the assets of the employees contributing to pension or health insurance funds. But ERISA was written before HMOs became so prevalent, and the act preempts employee rights to sue their health care provider for denial of necessary care. Aetna vs. Davila is just the latest in a series of attempts by lawyers to prove that care managers have run afoul of ERISA by denying medical benefits to policyholders. In the Davila decision, the Supremes mentioned the precedent set by a 2000 case called Pegram vs. Herdrich. A patient named Cynthia Herdrich sued her doctor and her HMO for making her wait for care for a stomach pain that turned into a ruptured appendix. Herdrich argued that this denial of care was a breach of fiduciary duty under ERISA. The Supreme Court ultimately ruled that the cost-containment measures used by HMOs did not constitute a breach of ERISA statutes, and that, furthermore, to rule that they did would pretty much put HMOs out of business, since they all use the same cost-containment measures.

  The managed care battle isn’t taking place just in the courts. Patients’ rights legislation has also been on the federal agenda since Clinton. In August of 2001, after many adjustments and a muchness of negotiation, the Senate and House finally passed patients’ rights legislation, amending ERISA to respond to issues specific to HMOs. The sticking point amid all the bipartisan compromising was the right to sue, and how much people could sue for. The Democrats, who do very well by trial lawyers donation-wise, were generous in that regard. The Republicans, who receive more from insurance companies and the financial services lobby, took the line that the right to sue would drive up premium costs. The bill allows patients a limited right to sue, but not until all other avenues are exhausted. The lawsuit must be approved by an outside adjudicator, so as to discourage flights of legal frivolity. The law also caps punitive damages at $1.5 million. Bush wanted to limit that to $500,000, but had to concede to the higher cap to keep rogue Republicans on side. Needless to say, the industry claimed the new law would only serve to increase premiums and the number of uninsured, which just goes to show what you get when you let the dead hand of regulation tickle the market.

  Patients’ rights legislation may well be a bee in the industry’s bonnet, but I think that there is another piece of legislation out there that is having a far more profound effect on the industry. In 1999, the Gramm-Leach-Bliley Financial Services Modernization Act repealed barriers that had held bankers, securities dealers, and insurance companies at arm’s length from one another since the Glass-Steagall Act of 1933. I’m going to refer to the GLB act, aka the FMA, as the Glob, since it essentially gathers all forms of financial services, including insurance, together into one great blobby Glob. Part of the impetus for the Glob was the Federal Reserve’s decision the year before to approve a merger between Citibank and Travelers insurance. The merger, which produced behemoth Citigroup, has been touted as the future of financial services, a sort of supermarket where you can shop for your stocks, checks, and insurance policies. Of course, there were good reasons why, in 1933, people reckoned that particular convenience wasn’t worth the risk, but sixty-odd years later, all that total economic collapse jive
was so much ancient history. It was time for the legislation to catch up with the industry, and the industry doesn’t seem to mind federal regulation when it favors them, or when it frees them from the burden of state laws. The Glob preempts state laws about banks merging with insurers, or cross-selling insurance; states have the option of enforcing stricter laws, but at the implicit cost of insurers hightailing it to slacker states.

  Cross-selling is big business, and another side effect of the legislation is a glorious information-sharing. Insurers are starting to use credit checks as part and parcel of the underwriting process, and privacy advocates are howling about how the consolidation of the financial services industry makes this much easier for insurers. The Glob also ferries your premium dollar ever further into the casino economy of speculation. The kind of convergence that the Glob encourages has been creeping up on us for a while. In 1991, one of California’s largest insurance companies, Executive Life, was sold to a front company for a group of French investors that included bank Credit Lyonnais. The sale violated state law, as it was illegal for a bank, particularly a foreign bank, to buy a California insurer. The French investors’ group had no interest in running an insurance company, but they had to take the company to get their hands on its bond portfolio. They paid only $3.5 billion for the insurance operation and its bond portfolio, even though the bonds alone were ostensibly worth about $6 billion. The California attorney general estimates that 300,000 policyholders lost $4 billion in coverage after the sale and subsequent collapse of Executive Life.