This is part 3 of Jeff Goldsmith’s history of managed care. If you missed it read Part 1 & Part 2
By JEFF GOLDSMITH
Two major changes in health insurance ensued as the US health system entered the 21st century- a strategic shift of health cost risk from providers to patients and the emergence of machine driven managed care.
Insurers Shift Strategy from Sharing Risk with Hospitals and Doctors to Markedly Implicating their “Patients’.
After the 2008 recession, employers and their health plans shifted strategy from putting physicians and hospitals at risk through delegated risk capitation to putting patients at risk through higher patient cost sharing. In the wake of the recession, the number of patients with high deductible health plans nearly quintupled–to over sixty million lives. By 2024, 32% of the lives in employer-based plans (50% among small employers’) were in high deductible plans regardless of patient economic circumstances.
The stated intention of the High Deductible Health Plan movement was to encourage patients to “shop” for care. In real care situations, however, patients found it difficult or impossible to determine exactly what their share of the cost would be or which providers did the best job of taking care of them. For an extensive review of the literature on how healthcare “consumers” struggle to manage their financial risk, read Peter Ubel’s 2019 Sick to Debt: How Smarter Markets Lead to Better Care.
Employers and insurers, working together to “empower consumers”, rapidly shifted “self-pay” bad debts onto their provider networks. Some 60% of hospital bad debts are now from patients with insurance. Instead of “shopping for care”, consumers found themselves saddled with almost $200 billion in medical bills they could not pay, and hospitals and physicians ended up eating most of it.
This escalating “insured bad debt” problem forced providers to hire revenue cycle management (RCM) consultants to revise and strengthen their policies regarding patient financial responsibility, “revenue integrity” (meaning crossing all the “t’s” and dotting all the “I’s” in each medical claim and making sure care is coded properly) and rigorously monitoring the flow of claims to and from their major insurance carriers. As a result many providers found themselves spending 10-15% of their total operating expenses on RCM!
Medicare Advantage Enables Insurer Market Dominance
The movement from Ellwood’s vision of regionally-based provider sponsored health plans to market dominance by huge national carriers was cemented by the emergence of Medicare Advantage as the most significant and profitable health insurance market segment. In 2013, Medicare Advantage accounted for 29% of total Medicare spending. A decade later, in 2024, it was 54% (of roughly a trillion dollar program). And until a federal crackdown on MA coding and payment policies by the carriers, it was a 5% margin business, significantly more profitable than commercial insurance, ObamaCare Exchange or managed Medicaid businesses.
As Medicare Advantage emerged as the largest health insurance market, it was dominated by a cartel of large publicly traded carriers.
Six publicly traded carriers (United, Humana, CVS/Aetna, Elevance/Anthem, CIGNA and Centene) accounted for 69% of MA’s 34.6 million enrollment as of November 2024. Kaiser, the “founder” of the movement, added another 5.5%. The top two MA plans, United and Humana, account for almost 46% of MA’s enrollment! Sixty percent of United and CVS/Aetna’s health insurance premium flow and 90% of Humana’s now come from this single program, according to a recent Bank of America analysis.
However, owing to the aggressive promotional activism of consultants and private equity financed “management services organizations”, the median MA plan enrollment is less than 2000 lives (!). During the 2010’s, Medicare Advantage became an industry in and of itself. An amazing number of small hospital and physician sponsored plans are fighting over less than a quarter of MA enrollment, and, predictably, losing money on every subscriber (negative 5% margins are typical). Some communities have as many as forty MA plans competing for their share of this lucrative market.
The Rise of Machine Driven Managed Care
The huge national carriers rely, in turn, on a complex network of contractors to manage their Medicare Advantage care management and payment. A shadowy industry populated with billion dollar high tech firms no one in the care system had ever heard of–with names like Emdeon (now Change Healthcare,), Equian, MultiPlan (taken private by Carlyle in 2024), naviHealth, Signify and Cotiviti–emerged to service health plans with automated systems to review hospital and physician claims prior to payment.
These firms used AI driven machine learning to analyze and process the flow of hundreds of billions of dollars in medical claims. A significant fraction of those claims are denied, either because of data errors in the claims themselves, or because AI rules engines kicked them out for not conforming to constantly evolving medical necessity criteria.
Prior authorization, a forty-year-old HMO expense control tool for managing “elective care”, has been augmented by “prospective pre-payment review” applied after hospitals have admitted and cared for patients and submitted insurance claims. According to the American Medical Association, each practicing physician in the US is required to submit 45 prior authorization requests for their patients each week.
Hospitals saw, in some cases, a doubling of claims denials or repricing in just a twelve to eighteen-month period after 2016 based on these automated “prospective” reviews. This surge of machine-driven denials played a major role in the mysterious 39% plummet in hospital operating earnings seen in 2016 and 2017.
A key factor in the wave of denials was the increased centrality of hospital emergency admissions as the main gateway to complex and expensive inpatient care. Upwards of 70% of patients in many health systems are admitted through the emergency room and care is rendered to those patients on an urgent basis.
With primary care physicians withdrawing from hospital practice, decisions to admit patients to hospitals were increasingly made by employed physicians or physician contractors to the hospital, many of whom are “out of network” with the insurance carriers, and under limited control by the hospitals themselves.
After-the-fact denials by insurers often result in unexpected higher bills to patients with high deductible plans as well as significant new administrative expenses for hospitals to track and contest the surge of denials.
UnitedHealth Group Makes its Move
Following the more than decade-long private equity rollup of these care managing tech firms after the year 2000 dot-com/tech stock crash, an amazing percentage of this shadowy sector ended up being owned by a single company. In a stunning rapid fire $20 billion acquisition spree from 2019 to 2021, UnitedHealth Group bought Equian, Change Healthcare and naviHealth. The US Department of Justice unsuccessfully challenged the largest of these transactions–the Change Healthcare acquisition– on anti-trust grounds.
By the time this blitz was over, United’s $19 billion OptumInsight business intelligence subsidiary was processing one-third of all medical claims in the US with automated claims management software–a remarkable $1.5 trillion in health provider payments a year. OptumInsight’s largest single customer was United’s health plans–63% of its total revenues.
But OptumInsight’s other customers were competitors of United’s health insurance business (so much for “vertical integration”). The RCM Industry, on behalf of physician and hospital providers, and Optum Insight have locked horns in what could be called The War of the Robots–as dueling AI systems fought over the documentation, approval and payment of trillions of dollars in medical payments. In the war between Skynet Medical and the RCM industry, patients and physicians have been reduced to mere datapoints.
COVID produced what proved to be a temporary cease fire in the War of the Robots. This is because the shutdown of routine care in hospitals during 2020 produced a multi-hundred billion $$ windfall in cash flow for health plans including United’s. Denying care during a health emergency would have also produced a lot of ugly headlines, so health plans simply turned the denial machine off, according to colleagues in the revenue cycle industry. Health plans did not want to be socked with a “windfall profits” tax (for exceeding ObamaCare’s statutory medical loss ratio (MLR) limits. However, when health plans medical expenses (so-called Medical Loss Ratios, or MLRs) began rising again, the denial machinery cranked up again, and the war resumed.
Physicians have been collateral damage in this war, because a huge fraction of their available practice time, as much as half of their total hours, is now spent minutely documenting every single clinical decision they make in their electronic health record system, feeding the AI denial machine data.
Electronic health records were touted as a revolutionary tool for improving clinical productivity. Instead, they have become an all-seeing surveillance mechanism- a 24/panopticon surveilling physician activity of behalf of vast insurance carriers, and depriving patients of direct care time spent with their physicians and other caregivers.
Skynet Crashes!
It didn’t take more than eighteen months for the historic Optum roll-up of medical claims management software and services to blow up in United’s face. On Feb 21, 2024, a shadowy Russian hacker collective AlphV invaded and crippled Change Healthcare’s data systems, shutting down $120 billion a month in healthcare payments. Only eighteen months into owning all this apparatus, Optum’s data systems were a hot mess, a highly vulnerable mashup of dozens of applications and databases rolled up from the dozens of smaller companies that were part of Change.
AlphV operatives impersonated a senior Change executive, stealing his login credentials. The hackers used those phony credentials to find and exfiltrate (e.g. download and steal) about 8 terabytes of health claims information, including personally identifiable health information on 100 million Americans. Then they deleted Change’s back-up files so they could no longer process medical claims. United paid a $22 million ransom payment to restore their files, but it was stolen by one of AlphV’s members and their systems remained offline for months!
The effect was markedly uneven depending on where providers were located and who they contracted with. Some hospital systems whose health insurance payers used other vendors than Change saw no economic harm. Other saw 100% of their cash flow crash to zero dollars and began incurring, in some cases, seven or eight figure weekly operating losses. Physician practices all across the US were crippled, and owners were putting their payrolls for nurses and physicians on their personal credit cards or obtaining personal loans from their banks.
The Change outage was slowly restored over a four month period. United/Optum has admitted so far to $3 billion in direct expenses for restoring their data systems. Lawsuits seeking to recover damages from United for the extra cost of months of submitting and tracking paper medical claims remain unresolved.
While one hundred million patients and their families experienced violations of their medical privacy, the Change hack revealed a major national security challenge. Fully one-third of all medical payments and one fifth of US GDP were flowing through a single private company’s leaky pipes. Foreign hackers have today the capability of reaching into United’s data systems and basically crippling the US healthcare system. After a scorching May Senate Finance Committee hearing, the US Congress took no action to close this gaping hole in data security for a key piece of US infrastructure. Skynet Medical is now back in operation.
Managed Care in the 21st Century
A managed care movement which began more than seventy years ago by empowering clinicians to manage care for populations in their communities within a fixed budget has devolved, by degrees, into an increasingly data-driven cash management system run by AI on behalf of vast, publicly traded health care conglomerates. Physicians pay a huge tax in time diverted from patient care, and patients bear an unpredictable and unmanageable level of economic risk for health care over which they have limited or no control. And a managed care industry dedicated to reducing healthcare costs added tens of billions in administrative expenses to hospitals and other care providers.
The early stages of this devolution spawned successful, high quality integrated health systems and health plans in some parts of the country. However, the last decade has seen a massive consolidation of health insurance in the hands of a small number of immense firms, through the explosive growth of the Medicare Advantage program.
In its recent 10Q SEC filing, after complaining about providers’ aggressive coding practices and increasing Medicare utilization, United said, “We endeavor to mitigate these increases by engaging hospitals, physicians and consumers with information and helping them make clinically sound choices . . .” This helpful “advice” from United’s AI driven claims management system promises to restore United’s lagging earnings growth.
Clinicians and hospitals are increasing managed by machines, not colleagues and their decisions dictated by algorithms they never see, rather than thoughtful clinical culture and human values. Dr. Ellwood is likely rolling over in his grave.
Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack
2024-12-19 07:01:00