The Healthcare Hostage Crisis: Insurance is no assurance

Editor's Note: This article continues our 8-part series excerpted from the "Healthcare Hostage Crisis" chapter of AC360° contributor David Gewirtz's upcoming book, How To Save Jobs, which will be available in October. To learn more about the book, follow David on Twitter at http://www.twitter.com/DavidGewirtz. Last week, we looked at how those with insurance are being forced to file bankruptcy. This week, we'll look at the steps insurance companies take to avoid paying your medical bills.

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David Gewirtz | BIO
AC360° Contributor
Editor-in-Chief, ZATZ Publishing

There is a concept in the insurance biz called rescission. It's the insurance world's equivalent of a marriage annulment, allowing an insurance company to back out of an already-paid insurance policy and deny the policy holder insurance coverage.

If you have a serious medical problem, you stand a better than even chance of losing your insurance and never getting paid. And if you don't work for a major company or the government with a good group policy, your chances go up to virtually 100 percent.

Most insurers claim the rate of rescission is fairly small. In testimony before the U.S. House of Representatives Committee on Energy and Commerce, Don Hamm, CEO of Assurant Health stated "Rescission is rare. It affects less than one-half of one percent of people we cover."

And yet, according to a story by Karl Vick in the September 8, 2009 issue of the Washington Post:

In the past 18 months, California's five largest insurers paid almost $19 million in fines for marooning policyholders who had fallen ill. That includes a $1 million fine against Health Net, which admitted offering bonuses to employees for finding reasons to cancel policies, according to company documents released in court.

Of course, $19 million in fines across five companies is a drop in the bucket compared to how much insurers are saving by abandoning those paying customers who have the audacity to get expensively sick.

Vick's story continued:

Officials from three insurance companies told a House Energy and Commerce subcommittee this summer they had saved $300 million by canceling about 20,000 policies over five years.

ABC News reported that Wellpoint, another insurance provider, claimed rescission rates of 0.01 percent, and, in a 2007 article in Money Magazine, authors Walter Updegrave and Kate Ashford pegged the rescission rate across insurance companies at 1 percent.

Despite Assurant CEO Hamm's testimony that rescission is rare, the practice turns out to be a very big problem for Americans. Once again, a little math is in order. To fully appreciate the problem, recall that insurance coverage is supposed to spread the risk among all the policy holders, so the vast majority of healthy customers help pay for the relatively small percentage who are actually sick.

Instead, by practicing rescission and by making misleading statements about percentages, what the insurance companies have in many cases managed to do is get all their customers to pay premiums, but deny payment to those who need it most. In effect, rescission allows the insurance companies that practice it to violate a sacred trust and instead of providing insurance coverage to their customers, they are merely grifters running a long con with billions of our dollars.

So let's see how they're running this con. To start, according to the U.S. Department of Health & Human Services (HHS), a full 50 percent of Americans incur almost no health care expenses. A lot of Americans are relatively healthy.

So let's move on to another group of Americans. According to HHS, "A small proportion of the total population accounts for half of all U.S. medical spending."

In fact, just 5 percent of Americans account for 49 percent of all medical spending. According to HHS, "Among this group, annual medical expenses (exclusive of health insurance premiums) equaled or exceeded $11,487 per person."

But even that's not all that expensive to an insurance company with rapidly increasing premiums. The top 5 percent of the population incur insurance expenses that really amount to just about two years of premium payments.

It's the next cohort that becomes impressive. According to HHS, a mere 1 percent of all Americans account for 22 percent of all the health care costs in the United States, with annual health care expenses in excess of $35,000 per person.

Stick with me. I know this is a lot of math, but if you want to see how you're probably getting ripped off, you'll need to keep reading.

If you remember way back to the beginning of this chapter, you'll recall that about 85 percent of Americans have health insurance coverage. So, of the 1 percent  of Americans incurring relatively large medical expenses, that really turns out to be just 0.85 percent of those covered by health insurance. Stick with me. This will become clear in a minute.

Looking at the HHS numbers, it becomes clear that the vast majority of health insurance policy holders don't ever make claims that exceed the cost of the premiums paid. It stands to reason, therefore, that insurance companies wouldn't ever care about rescission for most of the policy holders they cover, since they're making a profit off of these policy holders.

But once those payouts start to get expensive, for that remaining 0.85 percent of policy holders, rescission becomes a more and more attractive option for policy holders. And here's where Hamm's testimony become freaky. Follow along carefully.

The point at which rescission becomes attractive is for that 0.85 percent of policy holders that actually need serious health care. It's for this kind of health care expense (more than about $35,000) that's the reason we all buy insurance. It's therefore almost overwhelmingly likely that virtually all rescission would be applied to the 0.85 percent of policy holders that actually cost insurance companies serious money.

What does this mean for you and your family? Well, if you take Hamm's 0.5 percent rate (which is a good median between the Money Magazine numbers and those from Wellpoint), and you divide that by the 0.85 percent of policy holders who actually need real insurance, you get 58 percent - that's the percentage chance that if you have a serious medical problem, your insurance company will simply drop your policy and refuse to pay.

Of course, it's actually worse. About half of those Americans who are paid by "employer companies" work for companies with 500 employees or more. These companies have really good group policies, and so the odds of an employee of, say, IBM being denied coverage or having his or her contract yanked is very small - because, after all, an insurance company isn't likely to want to upset its best customers.

What that means is that rescission is most likely to be practiced on those who work for smaller companies or who buy insurance on their own - about half of those getting insurance. And so, before we accounted for employees of big companies, we learned that there was more than a 58 percent chance you'd be denied coverage. But the odds are doubled if you factor out those who work for big companies. Bottom line: if you don't belong to a large group policy, you have virtually a 100 percent chance that you'll be denied coverage if you need it.

After all, as insurance CEO Hamm stated in his Congressional testimony:

Rescission ... is one of many protections supporting the affordability and viability of individual health insurance in the United States under our current system.

In other words, if an insurance company has to pay out too much in claims, rescission could be a get-out-of-paying-free card. And this is where it gets disturbing.

Let me make that clear: if you have a serious medical problem and you're not part of a major corporate group policy, you stand a statistically 100 percent chance of losing your insurance and never getting paid. Here's an easy thing to look for: if your medical bills exceed $35,000 a year, your insurance company is probably, right now, trying to find a way to drop you.

The bad news: there's an almost guaranteed chance they'll do it, too.

According to documents obtained by the House Committee on Energy and Commerce and reported on by Lisa Girion in the Los Angeles Times:

The documents show, for instance, that one Blue Cross employee earned a perfect score of "5" for "exceptional performance" on an evaluation that noted the employee's role in dropping thousands of policyholders and avoiding nearly $10 million worth of medical care.

Did you make even the slightest mistake or omission on those overly-complex, designed-to-confuse applications? Bingo. You're gone. Is there any other excuse the company could use? Poof, you're history. And, since you're now stuck with a pre-existing condition and a history of being dropped by an insurer, you may not get the health care you need. Slam. You're screwed.

And - I swear, I'm getting tired of saying this - it gets worse.

Wendell Potter used to be the media relations director for insurance giant Cigna. In June, 2009, he testified under oath before the Senate Commerce Committee, stating that insurance companies:

...dump small businesses whose employees' medical claims exceed what insurance underwriters expected.

All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether - leaving workers uninsured. The practice is known in the industry as purging.

Read that carefully. All it takes "is one illness or accident among employees at a small business" for the insurer to go out of its way to purge the entire company from its system.

BusinessWeek wrote about this. In an August 27, 2009 article, Joshua Kendall reported:

In a February conference call with analysts, Cigna President David Cordani said: "In 2008 we were essentially actively decreasing our posture in several markets, particularly the under-50 book of business [companies with fewer than 50 employees]. You could use the term 'purge' if you'd like."

Kendall continued:

Compounding the problem is the fact that entrepreneurs, if slapped with hefty premium increases, may end up with fewer alternatives. In half of the states in the country, according to a 2008 survey by the Government Accountability Office, the largest small-business insurer has 47 percent or more of the market; in Alabama, one carrier insures 96 percent of all small businesses.

This is America, the country that should have the best medical system in the world. But this is also a country where one employee getting sick or hurt could either cause all the other employees at a small company to lose their insurance coverage or, worst case, cause their employer to go out of business.

Something's wrong.

This is also a country where, once you're actually sick and even if you've paid all your insurance premiums, year after year, you stand an almost 100 percent chance of losing your coverage, and where insurance company employees earn bonuses if they can successfully drop thousands of policyholders in need.

It's abundantly obvious that the insurance system is terribly, terribly broken.

Follow David on Twitter at http://www.Twitter.com/DavidGewirtz.

Editor’s note: David Gewirtz is Editor-in-Chief, ZATZ Magazines, including OutlookPower Magazine. He is a leading Presidential scholar specializing in White House email. He is a member of FBI InfraGard, the Cyberterrorism Advisor for the International Association for Counterterrorism & Security Professionals, a columnist for The Journal of Counterterrorism and Homeland Security, and has been a guest commentator for the Nieman Watchdog of the Nieman Foundation for Journalism at Harvard University. He is a faculty member at the University of California, Berkeley extension, a recipient of the Sigma Xi Research Award in Engineering and was a candidate for the 2008 Pulitzer Prize in Letters.