Health insurance versus health

Ezra Klein's Washington Post column quotes from the Congressional testimony of Wendell Potter, a 20-year exec at Cigna, explaining how the health insurance industry's business model is incompatible with health itself:
The industry, Potter says, is driven by "two key figures: earnings per share and the medical-loss ratio, or medical-benefit ratio, as the industry now terms it. That is the ratio between what the company actually pays out in claims and what it has left over to cover sales, marketing, underwriting and other administrative expenses and, of course, profits..."

The best way to drive down "medical-loss," explains Potter, is to stop insuring unhealthy people. You won't, after all, have to spend very much of a healthy person's dollar on medical care because he or she won't need much medical care. And the insurance industry accomplishes this through two main policies. "One is policy rescission," says Potter. "They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as justification to cancel the policy, even if the enrollee has never missed a premium payment..."

The issue isn't that insurance companies are evil. It's that they need to be profitable. They have a fiduciary responsibility to maximize profit for shareholders. And as Potter explains, he's watched an insurer's stock price fall by more than 20 percent in a single day because the first-quarter medical-loss ratio had increased from 77.9 percent to 79.4 percent.

The reason we generally like markets is that the profit incentive spurs useful innovations. But in some markets, that's not the case. We don't allow a bustling market in heroin, for instance, because we don't want a lot of innovation in heroin creation, packaging and advertising. Are we really sure we want a bustling market in how to cleverly revoke the insurance of people who prove to be sickly?

The Truth About the Insurance Industry (via Making Light)


  1. Yes, the American health ‘insurance’ industry is the American health denial industry, but the best productivity tool available is the most emphatically denied: effective pain suppression in the form of opioids.

    If American business really wanted to maximise profits, they would condone or even encourage the use of narcotics &/or stimulants to maximise productivity.

    Instead the rich demonise the poor on every front imaginable. Americans prefer to demolish and rebuild, whether people or companies or development.

    They don’t want individual contribution to society — they want maximal quantity regardless the cost. Cost of quality or human rights are not on the American corporate radar.

  2. Um, we get lots of innovation in heroin creation, packaging, and advertising. Legal selection pressure is as good or better than market selection pressure for fueling the evolution of commerce.

    Of course, it tends to make things evolve in ways that fit it to a government-shaped niche rather than a stockholder-shaped niche. While neither one of those is a customer-shaped niche, stockholder selection methods usually approximate customer selection, as is necessary to satisfy customers to some degree in order to have any profits to disburse to stockholders.

    Government-shaped adaptations can run the gamut all the way to negative correlation with customer demands. As anyone in prison on drug possession charges can attest.

  3. You point to problems in private medicine, but government run medicine has the same problem, look at the US’s medicare or the VA health system, or the UK’s NHS or Canada’s system. I don’t see how socialized insurance programs will be any different in this regard. Look to the UK or Canada and you will see they deny healthcare to the very elderly for cost reasons and keep prices down by not allowing drug companies to recoup r&d costs in their sales prices.

    Even look at the debate currently in the US, the proponents of socialized medicine keep saying that they want to deny claims as a way to cut costs.

  4. And this is in general what’s wrong with America and most of the world today. The fact the article implies these are only American companies irritates me somewhat. The actual fact is almost all publicly traded companies, American, foreign, or multi-national work on a price per share structure.

    A huge problem is the complete disconnect from the top brass and the people that actually make their company run. Even middle level managers sometimes act like they are somehow that important. Here’s a real world (I just lived through this) example: About 2 months ago the company I work for fired, laid off, downsized, rightsized, whatever about 2/3 of it’s 2nd shift workforce. This was due to cost issues and projected workload. Now come to the present. We have exceeded our sales projections by about 20-25%. A good week is getting a single day off, all days are 10 hours. Second shift is being rehired and 100% operational. Less than half of the people who got let go want to come back. This means we have a lot of new people and temps. Which means production will be less efficient because everyone has to get up to speed….

    How did that exactly save money? Oh wait it didn’t. When the news got out that we cut the headcount stock prices jumped. F’n brilliant.

    A few companies, like Sas, work normal hours, have great benefits, a good work/life ratio, good stock prices, and are looked at as an excellent company to work for. Perhaps we should have companies like this actually teach others how to run their own…

  5. Ok, here’s how it works in most of the civilized countries in ALL THE WORLD:
    – When i’m healthy, i pay with my taxes the best possible medical care for the people that are sick, ANYONE.
    – When i’m sick, EVERYONE pays with their taxes the best possible medical care for me.

    How it works? Because:
    1- Im healthy a lot more of the time than sick, and tough there are people very sick all of the time, they are very few.

    Got it?

  6. From the article:

    The issue isn’t that insurance companies are evil. It’s that they need to be profitable. They have a fiduciary responsibility to maximize profit for shareholders.

    I take issue with that statement. Acting immorally and without compassion purely for the sake of “maximizing profit” IS evil.

    I find it depressing that the “good of the corporation” seems to increasingly outweigh any sense of decency or human empathy.

  7. Right on, IRU. The “debate” is never framed: “How can we give more people health care,” but rather: “How can we give more people COVERAGE.”

    The fact that we have to prop up a bloated, for-profit middleman is (almost) never questioned.

  8. What the government could do now, while they figure out a better solution, is to require that insurance companies charge anyone a fixed price for a given amount of coverage. Don’t let them charge young healthy people a small amount and old sick people a fortune.

    That would help a lot of people get insurance, and the companies shouldn’t mind, either–they just have to figure out what that fixed amount is to get the same profit they get with their current model.

    Yes, young healthy people would have to pay more–but they’ll benefit from it when they’re older.

  9. The heroin analogy is very dubious and pretty irrelevant to the discussion, but beyond that a pretty good treatment of these issues.

    Go NHS?

  10. I really fear that universal healthcare will pass, and it won’t have a public option (Medicare for all). Costs won’t come down if there isn’t a public option to force big insurance companies to be more price-competitive. Also, without the public option we simply have a huge giveaway to insurance companies (sort of like we had with the banks, but at least now we’re getting something for it).

  11. Personally I tend to believe in a “Shut up and pay” model, assuming that private insurers are to remain in the business (I’d prefer they got out). I see no reason why insurance companies should be involved in medical decisions.

    Unfortunately it seems the “Shut up and pay” model applies to customers rather than companies in this case, at least.

  12. “The issue isn’t that insurance companies are evil. … They have a fiduciary responsibility to maximize profit for shareholders [in the short term].”

    They also have an over-riding fiduciary duty to treat in good faith — a fiduciary duty that is supposed to be more compelling than maximising their shareholder’s profits in the short term.


    “Thus the insured must reveal the exact nature and potential of the risks that he transfers to the insurer, while at the same time the insurer must make sure that the potential contract fits the needs of, and benefits, the assured.

    Failing to undertake /reasonable/ steps to learn of all material facts on the part of the /professional/, in a contract which is more-than-likely to be substantially a contract of adhesion (and is IMNSHO absolutely a contract of adhesion if no physical is required for insurance coverage to occur) while enacting a practice of policy rescission after-the-fact when the assured attempts to seek fulfillment of the terms of the contract is inherently acting in bad faith – and is inherently a conflict of interest, a violation of /uberrima fides/, and is inherently seeking to put money/profits over the lives of others. It’s a scam, wherein the conmen decry “but the law has tied our hands all the way to these profits!”

    As long as public corporations are legally required to seek to maximise the profits of shareholders in the short term, that /legal requirement/ is incompatible with and should legally prevent operation of the ethical and legal /necessary requirements of conduct/ of a healthcare entity.

    And this doesn’t even /cover/ the egregious abuse of bureaucracy, red tape, arbitration, litigation, and outright lack of understanding by untrained staff.

    Public Option with transparency and accountability and regulatory oversight; fuck the greedy bastards spending our premiums fighting to ensure they can prevent us from getting better coverage, better service, and better care.

  13. Maximizing profit at the expense of human life is evil. Change will only come when workers go on general strike or when radicals start bombing insurance offices. Congress won’t even talk about single payer healthcare. The insurance industry must be eliminated.

  14. I completely agree that competition in the insurance industry is not in the best interest of the American public. I wrote about this issue (as it relates to homeowner’s insurance) in

    First of all what is being discussed is not insurance at all. Despite the name insurance practically any thing medical related is far from it. We have health care companies acting under the delusion that they are insurance companies.

    If health ‘insurance’ was treated as actual insurance was treated in the same way auto was, with some differences, it would be a lot cheaper. Sure you can claim any auto repair on your insurance, but your rates will go up. Insurance needs to be looked at as something for emergencies, not common usage.

    Also the suggest fix being pushed by Obama and various Democrats does not do any thing to address the underlying issues with the prices. These would be best addressed by working on encouraging a vibrant market place by fixing patent laws and etc.

  15. #10 posted by sherlockhomeboy, June 25, 2009 8:10 AM

    Competition is good.

    If the government really wanted screw with the market in a useful way to foster it, they would drop the initial funding for a NFP health care company that has strict limit of overhead and the like built into the buy laws. This is because to encourage the market, what is encouraging it also has to play be the same rules.

  16. The connection between the “medical loss” and the stock price begs the question: What is the connection between an insurance company’s value and the health of its employees?

    One must assume that a company like Blue Cross, Cigna, or Aetna uses itself as the health insurance vendor for its company’s benefits. What would happen if there was an epidemic outbreak in their headquarters’ hometowns or some physical disaster at one of its offices?

    Would the bulk payout of medical costs intensify the loss to the company beyond its medical loss? What if there was a fire that left a large number of employees permanently injured but not killed? What if there was a problem with a local water supply that left a large number of employees with hepatitis or cancer? Disaster scenario, true. Unlikely, sure. But, you have to wonder how that would impact an insurance firm.

    Now, playing devil’s advocate for these highly unlikely scenarios, what would an insurance company do to correct the problem? Would healthy employees work to limit medical payouts for sick ones? Would the company engage an internal recission for their employees? Would the employees’ contribution to the policies increase? Would sick employees just be fired?

  17. And this is why health insurance/care should not be a business, but a right for all citizens. This is just one of the magical things that happens when you have a country based on democracy but dedicated to advancing capitalism. Das not kompute.

  18. #3:
    “Look to the UK or Canada and you will see they deny healthcare to the very elderly for cost reasons and keep prices down by not allowing drug companies to recoup r&d costs in their sales prices.”

    Where on earth did this information come from? I can’t speak for the UK, but I spent a fair amount of time yesterday providing health care to a 90 year old woman. I don’t recall the paramedics who brought her in, the nurses who triaged her, fed her and got her her medication, the lab tech who tested her blood, or the tech who x-rayed her chest complaining she shouldn’t get care. Nor did I hear any complaints from hospital administrators, insurance companies or government officials about treating her.

  19. I’m in favor of a public option (compared to the status quo, not to a single payer system). One thing that confuses me, though: how do you do an apples-to-apples comparison between the public option and the private insurers. Will the public option, as an entity, be required to break even? Will the private insurers be able to move their costliest patients over to the public plan, essentially padding their bottom line with taxpayer dollars?

    I guess what I’m asking is, if in five years Congress has to pass a bill that re-funds the public option, perhaps to the tune of $1000/recipient, how will we be able to tell if this is a sign of mismanagement?

    Will the public plan be allowed to go bankrupt?

    Also, I’m wondering if they shouldn’t set up two or three public options that are allowed to negotiate with health care providers as a block, but otherwise compete with each other as well as with private plans.

  20. Whenever people talk about private vs socialized health care, I always wonder to myself “What would the fire department look like if it was for profit? How would the police department get the best return for its stockholders? How could free public education turn a profit?” All of these things are essential to the continuation of our society as we know it. I think health care is important in the same way. But maybe that’s just crazy leftist pinko thinking…

  21. @#3 POSTED BY ANONYMOUS, JUNE 25, 2009 12:52 AM
    > look at the US’s medicare or the VA health system,

    Yes, actually LOOK at them. Medicare outperforms the private sector and the VA health system does great until you let a shitty, private corporation like Halliburton fuck with it.

    Please, for the sake of the people of this country… quit spreading this bullshit that medicare, etc. is no better… IT IS and has been PROVEN to be.

    I bet you think the single payer system sucks too, huh?


  22. RadioGuy @ 6:
    “I take issue with that statement. Acting immorally and without compassion purely for the sake of “maximizing profit” IS evil.”

    Corporations are amoral. At least as far as the law goes.

    Check out ‘The Corporation’.

  23. Just some facts:
    – the US spends almost twice as much on health (about 16% of the GDP) than France
    – yet, France has “free” care and a much higer life expectancy (one of the highest in the World, certainly the highest in France or top 3, depending on the stats.
    – there is a good basic service, supplemented by US style private insurance
    – you can also go to a commercial hospital, go see a GP privately, etc…

    In the end, you have to rationally accept that some services (street lighting) will never be profitable and should stay public. Not only this, but you should also accept that the nation overall has to pay for a minority (education is another example).

    For others, it is debatable whether competition is a great benefit for the consumer to enrich shareholders if prices aren’t going to go down. The failure of UK Comments are closed.