Non-Profit Does Not Necessarily Mean Low Cost
I recently posted an article on the Colorado Health Insurance Insider about my views on making Medicare available as an opt-in option for Americans younger than 65. I got a comment on the article that I thought brought up some good points and wanted to expand on some of the ideas. The reader pointed out that a good number of private health insurance plans are non-profit, and included a link to some facts about non-profit health plans in the US. Here in Colorado, the vast majority of our private health insurance plans are for-profit (Kaiser Permanente and Rocky Mountain Health Plans are notable exceptions). But according to the data from the Alliance for Advancing Non Profit Health Care, 48% of Americans with private health insurance are covered by non-profit plans – not an insignificant number at all (this data is based on health plans with enrollment of at least 100,000 members).
My concern is that non-profit does not necessarily mean low cost and efficient. Profit is what is left over after expenses are calculated, and those expenses include everything from CEO salaries to artwork in hospitals. Another bonus for non-profit health insurance plans – as with any non-profit – is that they can apply to the IRS for income tax exempt status, and many do. Here in Colorado, Kaiser is tax exempt, and has had to work deals with our insurance commissioner recently to determine how to best utilize the $700 million that they had in reserves.
As a test, I got quotes for myself for a $5000 deductible HSA qualified plan with 100% coinsurance from six different Colorado health insurance carriers: Aetna, Anthem Blue Cross Blue Shield, Assurant, Humana, Kaiser, and United HealthOne (Golden Rule). The prices ranged from $78 to $130. Kaiser was $93, higher than Assurant, Anthem Blue Cross, United, and Humana. So although Kaiser is a non-profit health care system, in the individual market they are not providing less expensive health insurance than the for-profit health plans in Colorado.
I do agree with the rest of the comment: guaranteed issue individual health insurance will only work if everyone is required to buy into the system, and “Who pays the tab doesn’t change the underlying problem that we have runaway demand for very expensive care supplied by an inefficient system.” One way or another, a lot of reform is needed.
Louise:
Having less expensive products can be one way to assess the effectiveness of a not-for-profit insurer.
When it comes to qualifying for tax-exempt status, a paper from the IRS written in 1992 still has much relevance today.
For the paper, go to:
http://www.irs.gov/pub/irs-tege/eotopicl92.pdf.
A few excerpts:
On page 1 – “Congress determined that although the Blues and plans similar to them had evolved to the point where many of the characteristics that distinguished them from the commercial insurance carriers were no longer apparent. Therefore, there was no longer any justification for the continuing exemption if their primary purpose was providing medical insurance indistinguishable from that provided by commercial carriers.”
On page 5 – “In recognition of the fact that the Blues were operated on a non-profit basis providing health care coverage that was virtually nonexistent in the commercial field,the IRS determined that the plans were exempt from federal taxation.”
Page 12 – “Over the years, however, as a result of competitive pressures, the Blues changed their mode of operation, and in the process have erased the characteristics that at one time distinguished them from commercial insurance carriers.”
Page 18 – “In addition, in G.C.M. 39828, the Service determined that based on the following factors, the HMO’s primary activity was providing commercial-type insurance.
The factors used to make this determination were (1) Whether and to what extent the entity is operating similar to for-profit insurers and (2)whether and to what extent the entity is marketing a product similar to for-profit insurers.”
As you can see, non-profit tax exempt non commercial insurers have as part of their mission to be unique insurers compared to what is commercially available.
Don Levit
Thanks Don! I didn’t know the specific history of all that.
When we take continuing education courses set by the Colorado Department of Insurance, there are some questions about the blues. The information is soooo out of date that they are still talked about as a single, non-profit entity.
Jay:
Thanks for your reply.
The IRS was looking at sections 501(c)(3) and 501(c)(4), but it could have been looking at virtually any non-profit code section that applies to insurers.
This is why I believe 501(c)(9) is relevant, and that VEBAs earn their tax-exempt status, at least partially, by operating distinctly from for-profit insurers and marketing a product different from for-profit insurers.
Thus, the product designs are virtually unlimited, aside from the VEBA being able to pay claims in a timely fashion.
VEBAs can be particularly relevant for small employers, in that according to the VEBA regulations, employers in the same line of business, across 3 contiguous states, can combine to provide insurance benefits.
Don Levit
The important difference between Kaiser and the other for-profits you mention is that with Kaiser, you actually get some coverage. My son acquired a short-term policy through Assurant which was a joke. The only benefit it provided was allowing him to see a Dr. who otherwise would not have accepted him as a patient if he had had no coverage. Other than that, they provided nothing. They would not even count his out-of-pocket toward his deductible. The only thing they deducted was $1500 from our family’s safety net.
Not-for-profit does not mean not-high-salaries, but on the whole, if you move beyond premiums to what the participants are actually receiving, I think you’ll find that the non-profits win hands-down.
Steve C.
Steve,
I’m sorry about your son’s experience with his Assurant policy. But it’s important to note that short-term policies are nothing at all like standard health insurance plans. They’re typically designed to only cover large claims; most have no coverage for doctor visits or prescriptions (or anything at all before the deductible). They also are less expensive and have much more lenient underwriting than regular individual health insurance plans. Short term policies are popular with people who are between jobs or who need a policy to cover them until an employer group policy kicks in, for just-in-case coverage. But beyond that, they can’t really be compared with standard health insurance policies, regardless of whether the carrier is for-profit or non-profit.
I think the above commentary and comments missed the real point, which Steve C. stated very well: “on the whole, if you move beyond premiums to what the participants are actually receiving, I think you’ll find that the non-profits win hands-down.”
Most health insurance plans aren’t a problem while just paying premiums, it’s when a claim is actually made and they fail to fulfill contractual obligations to the policyholder in favor of maintaining huge PROFITS for their corporate shareholders. that’s when an efficiently run nonprofit structure should be superior–in actually paying out claims.
Keep in mind that insurance companies (for profit or not) are not the main reason for rising costs… there needs to be control of the costs associated with the care one receives. As an example if you have a bad headache in the USA you will receive a CT scan to check for cerebral bleed (this is best practice)… but for 99% of the people the headache is caused by another reason so a CT is not needed (a wasted expense)… Another example have a backache and you go to a orthopedic specialist when the muscle strain could be resolved by your weight loss, care by a primary MD.. etc… One more point, current federal plans (i.e. Medicare) are also struggling with the rapidly rising costs… their solution is they have Congress print more money, a solution commercial insurance companies do not have..
Mike:
Excellent point about the “options” of Medicare versus private insurers.
Actually, Medicare (as well as Social Security) has completely leveraged not only the trust funds, but also the payroll taxes themselves, to pay for general governmental expenses like battleships.
No private insurer has that kind of flexibility.
Don Levit
Hah! That IRS paper was written specifically in an attempt to get non-profit insurance to start paying taxes, which it completely failed at. It doesn’t matter how similar in other respects to profit status a non-profit is to profit-making entities. If ANY organization is not sending profits to owners (individual or shareholders) on the basis of its intent, organization, or charter then it gets non-profit status. The rest of that paper is just noise. Private for-profit insurance exists for one purpose: to deny coverage (either by rejecting applicants or rejecting care after acceptance of applicants) in order to increase profits. It is the very denial of acceptance to plans and UNREASONABLE denial or alteration of physician-prescribed care that are the cause of the current health-care crisis.
Insurance, whether it is a complicated deductible, denial of coverage, or simple co-op system, is at its most fundamental level a risk-buffer that has specific utility due to the fact that not everyone under its care will get sick at the same time. The larger the single buffer (i.e. the more people are paying into the plan), the better it works. That is why countries with mandated single-payer health care systems give far better care PER DOLLAR than the United States currently does. Systemically, the uninsured are getting care that is too late and therefore expensive, and too mismanaged, causing tax payers, the disparate and already price-gauging & care-stingy insurance industry, and the entire economy to bare the excessive costs.
Regarding the IRS’s intent of publishing that paper, your opinion is mere speculation.
What we can go on is not only the text of that paper, but texts of other papers and rulings published by the IRS.
To maintain non-profit status, an organization needs to do more than simply not providing profits to various participants.
It has to maintain its mission, which, as I pointed out, would be to differentiate itself from the insurance shenanigans you pointed out.
Don Levit
Mike’s comment on the 28th deserves deep consideration. While it appears that the insurance company’s profit motive is under attack as a primary culprit in our current heathcare debate, I think a less visible and more costly issue is that of efficient delivery. PriceWaterHouseCoopers recently estimated that $210 billion could be saved by eliminating duplicative testing (aka defensive medicine). Another $200+ billion was attributed to billing administration. A medicare reform bill that directly addressed these issues without spending trillions more money would be much more broadly welcome.
Great discussion. Although there is waste in the medical delivery end of the system, the administrative costs of the American health system are a major issue. A 1999 study found “fter exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada.” Link.
The sweeping declaration that medical care is better in countries like the UK and Canada is not accurate. It uses the same false measure of health care quality used in the premium comparison shopping exercise. Cheap does not mean better just like expensive doesn’t mean bad.
The higher costs for health insurance go hand in hand with higher expectations for high quality services. The myth thrown around these days in health care discussions is the term “quality health care” … Every one gets quality health care even in rural Somalia. The problem is would you be happy with the quality health care provided in the UK and Canada. I know that Canadians have long waits (years) to be assigned a primary care provider. That means the doctor is not one chosen by the patient. Likewise the news media in the UK has reports routinely about quality care failures.
http://www.telegraph.co.uk/comment/5010722/Heads-should-roll-over-the-Staffordshire-hospital-scandal.html
http://www.telegraph.co.uk/health/healthnews/6156076/Daughter-claims-father-wrongly-placed-on-controversial-NHS-end-of-life-scheme.html
Don’s comment on Jul 28 2009 seems to say that Social Security funds have been used for general governmental expenses. If that’s his contention, it’s simply not true…..even though that contention has been perpetuated through spamish emails. Got to this link to find out more: http://www.snopes.com/politics/socialsecurity/changes.asp
I have medical insurance through Kaiser Permanente and am more happy with it than the Blue Cross/Blue Shield I used to have and pay nearly $300/month less. Frankly, I think Kaiser would be a good model to use in health care reform.
Ron:
Thanks for your reply.
Myth #4 posted on the Social Security’s web site says that the money participants paid would be put into the Independent Trust Fund, rather than into the General Operating Fund, and therefore, would be only used to fund Social Secirity, and no other Government program.”
There has never been any change in the way the Social Security program is financed or the way that Social Security payroll taxes are used by the federal government.”
Well, there seems to be some conflict here on this very same Social Security web site.
“Taxes are collected as are other general revenues and are not allocated as was proposed to an Old-Age Fund, but are merged with the general funds of the Government in the Treasury.”
http://www.ssa.gov/history/reports/ces/cesbookc10.html.
“The money will go into the Treasury – the General Fund. The tax money does not go into the Social Security account, but goes into the Treasury.
http://www.ssa.gov/history/pdf/h417.pdf.
Well, what does go into the Social Security Trust Fund – credits, bookkeeping entries, not cash.
“Cash income from earmarked sources goes into the Treasury’s general fund. The income is then CREDITED TO THE TRUST FUND.
The actual cash receipts are expended from the General Fund for whatever purpose arises.”
http://www.cms.hhs.gov from the Health Care Financing Review, 10-2005.
Don Levit
For me, after the debacle of health care reform hinging on huge campaign contributions and manipulation of public opinion by the insurance industry, my goal is to deny these reprehensible creeps the dollars they feed on. Nonprofits, or rather tax-exempts, are forbidden to lobby or support politicians. If that’s true, that is who I want to support with my dollars. Similarly, I’m cutting off the banks and credit card companies and moving everything to a local credit union.
As for the debate about single payer, the best data we have shows the US ranks poorly in outcomes v.s. nations that spend a fraction of what we do. I thought our goal was to provide the best care to all Americans at the lowest cost. Apparently not. It’s to protect the for-profit health care model from unfair competition from the government.
The goal of corporations is not to provide care, but profit. Their goal is at odds with our national goal, because your health will never matter to them as much as their profit. Hence they lower “medical loss” by not paying, delaying, rescission and discriminating. Nothing about those tactics, nor the lobbying expense, sales and marketing, underwriting, “new product” development, big executive salaries, corporate jets and cars, palatial offices or other goodies contribute to health care delivery at all. Health care is not the goal of the corporation.
GreenDreams:
New product development is typically used by insurers to develop new blocks of business.
Older blocks typically are closed to new entrants, who can enter only the newly opened blocks of business.’
This is like a Ponzi scheme without the Ponzi, new applicants, to take up the slack.
According to the Amereican Academy of Actuaries, “It is common practice of the current individual health insurance market that an insurer will periodically close a block of business. That closed block will typically have claim costs rising more rapidly than an open block.
Because there are no new entrants to a closed block, experience often worsens over time, leading to large rate increases. This occurs when rate increases are based on the experience of that closed block alone, rather than on multiple blocks, including currently sold business.
Unfortunately, this exercise is used by both for-profits and non-profits to strengthen their bottom lines.
Would this practice change with health reform?
Pages 3 and 4.
Go to:
http://www.actuary.org/pdf/health/rate_may04.pdf.
Don Levit
Thanks for the response, Don. I know all too well about the “closed block” problem, as my insurer has decided my policy is too expensive for them, so is eliminating it by way of a 25% rate increase, trying to move me to a different “block”. I’d rather move to a different company.
Well put, Don. And GreenDreams, as long as you’re healthy enough to move to another insurer or another plan, I would do so. Closing a block, or “sunsetting” a plan, is designed to “trap” those who have developed health conditions since underwriting. Their rate increases rapidly until it’s higher than the government state sponsored risk pool, which is when the insured qualifies for coverage on the risk pool. In Colorado, the risk pool is http://www.covercolorado.org.
What you’re overlooking is that the non-profits have less of a motive to, well, deny you coverage. The coverage contracts might be similar, or maybe they aren’t. Does Blue Cross cover the same conditions as Kaiser? And if they do, are you sure they’ll come through if you’re sick? Keep in mind that if an insurance company doesn’t pay for your treatment, your only alternative is to spend years in litigation — not a very promising option for people who have six months to live without surgery.
I think if we want to salvage the totally broke and byzantine system we currently have, the new rule should simply be that all insurance companies be non-profit. It’s just a common sense rule. After all, are fire or police departments for-profit? Then why should healthcare be.
Ken,
Thanks for your comment, and you do raise some good points. However, in the individual market in Colorado, Kaiser and Rocky Mountain Health Plans (the two most popular non-profit individual/family carriers) have more strict underwriting than most for-profit carries. This may not be the case in other states, but in Colorado the underwriting on Kaiser and RMHP policies requires a person to be in pretty good health to be accepted at all, while other carriers might accept the person with a 25% or 50% rate increase to account for pre-existing conditions.