The Problem With The Insurance Industry

Ezra Klein points out a major reason why the market, while best at providing most services, is unable to handle health care. He describes testimony before the Senate Commerce Committee by Wendell Potter, a former senior executive at Cigna. The insurance industry, when motivated by maximizing profits, has found that the best way to do this is to find ways to deny care, including dropping people from the plan once they actually need to use the insurance coverage:

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.”

And don’t be fooled: rescission is important to the business model. Last week, at a hearing before the House Subcommittee on Oversight and Investigation, Rep. Bart Stupak, the committee chairman, asked three insurance industry executives if they would commit to ending rescission except in cases of intentional fraud. “No,” they each said.

Potter also emphasized the practice known as “purging.” This is where insurers rid themselves of unprofitable accounts by slapping them with “intentionally unrealistic rate increases.” One famous example came when Cigna decided to drive the Entertainment Industry Group Insurance Trust in California and New Jersey off of its books. It hit them with a rate increase that would have left some family plans costing more than $44,000 a year, and it gave them three months to come up with the cash.

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?

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3 Comments

  1. 1
    Leslie Parsley says:

    Ah, my favorite subject.

  2. 2
    Leslie Parsley says:

    Here are some of the tidbits that surfaced when I researched HMOs way back in the mid-90s. Ouch. “Administrative expenses, capitation, gag rules, denial of treatmentand unethical marketing practices are creating an environment of high priced lawsuits and fast paced legislation.”
    Deja vu. There is so, so much more. One of the shabbiest things the HMOs do when they have a seminar to market themselves: hold the meeting at the top of the stairs so the sentinels can watch for anyone who has trouble climbing –  they are denied insurance.

  3. 3
    Leslie Parsley says:

    I guess I’m the only one who cares about health care ; )
    Anyway, if you have any doubts as to why it’s needed, go to barackobama.com  Click on stories.

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