Just How Profitable Are Healthcare Insurers?
larrycheng.com
larrycheng.com
Source: The Economist
Link to Article: http://www.economist.com/blogs/democracyinamerica/2010/03/he...
Let's say I'm an insurance CEO. You tell me, that by spending 20 million on increased claim scrutiny, we'll net 1 million in total savings by disbursing 21 million fewer dollars.
What do I do there? It's obvious, I go for the 1 million. So I just spent 20 million in order to hand out 21 million fewer dollars. The policy holders are worse off, the country's worse off, and the insurance company only got a crappy 1 million out of it, compared to the 21 million they're no longer disbursing.
All perfectly rational given the incentives -- which is why the system's broken.
Feel free to compare Medicare's dispute process with that of an insurance company. And remember that some people can switch insurance companies while no one can switch Medicare.
We can make switching insurance companies easier. Switching "single payers" is, by definition, impossible.
The government can pass laws, of course.. but the insurance industry can hire lobbyists. Seems like an awful uphill battle to beat those guys, based on the last 60 years of healthcare reform history. Harry and Louise can be pretty influential.
Medicare's dispute process with that of an insurance company? Well, I'll tell you one thing, Medicare doesn't spend the 20 million to deny 21 million dollars in claims like I outlined above.
We should make switching insurance companies easier, but that doesn't get us anywhere if they're all embracing the same bad practices. I don't have the option of starting an insurance company out of my garage like you could with a tech startup -- if the incumbents consist of a broken oligarchy, that's what we're stuck with, absent government action. There are so many classic incentive problems in play here, tragedy of the commons, free-rider problem.. it's frankly a wonder that things aren't broken even worse.
With government run healthcare you get the benefit of proper incentives at the cost of government-run bureaucracy, which will always be a little less efficient. That's the tradeoff.. as far as which is more effective, we could look at every other industrialized country which gets better outcomes for a fraction of the cost, or we could appeal to ideology, fears of vague things like "socialism", and absurdities like "keep the government out of my medicare".
You're talking about rules for employees. I'm talking about interaction with clients. When the DMV says "no", you're basically hosed.
> Well, I'll tell you one thing, Medicare doesn't spend the 20 million to deny 21 million dollars in claims like I outlined above.
Actually, it does. More to the point, the rules are such that it doesn't have to spend much money to deny and there's almost nothing that you can do about it.
> We should make switching insurance companies easier, but that doesn't get us anywhere if they're all embracing the same bad practices.
Competition results in better customer service in every other industry, why is health insurance different?
> I don't have the option of starting an insurance company out of my garage like you could with a tech startup
Actually, you do. All it takes is some money and a decent risk model, and you can bootstrap by providing services to companies that self-insure, which significantly reduces the money required.
> That's the tradeoff.. as far as which is more effective, we could look at every other industrialized country which gets better outcomes for a fraction of the cost
Not on comparable populations.
True insurance essentially "insures" against catastrophic loss and policies are underwritten on a personalized basis.
"Health insurance" often covers routine care, medications, diagnostic tests, etc -- hides the actual costs behind devices like "co-pays" and distributes cost inflation across the "group" instead the high risk/sick individual.
How expensive would your car insurance be if it covered oil changes, car washes, body repair and then lumped you, the driver with a clean record, with your neighbor with his 5th DUI?
Every rational form of insurance relies on distributing risk over groups of independent risks to obtain the benefits of the central limit theorem. There are some very specialized policies, and the Lloyd's syndicate, but anyone wishing to avoid ruin will diversify their risk.
22-year old single, marathon runners pay the same rate as a 37-year old, single, lazy, 300lb HackerNews commenters.
That and the fact that routine care/services are "paid" for by so called "health insurance" is why it's bogus to compare it to standard insurance.
Health insurance sold on a group basis is underwritten on a group basis. That does not have anything to do with whether it is "real insurance." Health insurance sold on an individual basis is underwritten on that basis, but rate differentials may be severely constrained by statute or regulation.
These do not affect whether financial risk is transferred. The routine care issue does impinge on a valid consideration of whether the transferred risk is "insurable", but since these are short-term contracts it is not fatal.
What would those policies cost if they did?
The better comparison would be with Worker's Compensation insurance, where the loss control mechanisms are ongoing.
As far as what the policies would cost, I don't know. Even if routine medical care is fully covered, a lot of people won't take advantage of it for whatever reason. An insurer's actuarial models will build that expected frequency into the projected cost.
If it bothers you sufficiently, you may consider most health plans to be the sum of a "real insurance" policy and a routine health discount plan. There are health plans that truly avoid assuming substantial risk, although they do so by getting providers to assume the risk. Those plans do retain the risk of providers in their network going bankrupt where prepaid capitation would be lost.
Employers pay those costs themselves in return for rate reductions. Not sure how that differs from any of my other comparisons (auto, life, homeowner's).
I think you have to admit that one's health care premiums have nothing to do with that individual's "actuarial" risk to the insurance company. There is not a single form of insurance that follows that pattern. NONE.
As for the other, I admit health care insurance has its own peculiarities that make it a distinct field of insurance. And, no, your last assertion is incorrect. I have the advantage of having actually worked in the group pricing department of a major health insurer, so I'm not just speculating here. In lieu of further banging my head against the wall, I'll point out that the syllabi for the SOA's actuarial exams are available to the general public - just look in the "education" section of their site.
You obviously don't understand insurance outside of healthcare, if the insurance companies' underwriters and actuaries do their job right - the profit/revenue of all policy types is the same regardless of risk.
High risk=High rates, Low risk=low rates. Revenue/risk is balanced.
We all suffer spiraling healthcare costs because there is little correlation to what you pay for healthcare insurance and your overall risk to the insurer.
"Group underwriting" only exists in the healthcare industry - no where else.
For a single payer system, the idea of reserves is non-sensical (similar to the farce of the 'social security trust fund' which makes zero sense from a macro economic perspective). I would make the point that reserves are a waste product of an insurance based system.
You're forgetting that insurance companies invest that money.
There are times when claims payout exceeds the premiums, yet insurance companies still manage to make money because of the investments.
As always, if you think that you can do insurance better, go for it. If you're right, you get rich and drive them out of biz.
The company makes an operational loss, but it makes a killing in the financial market, and is thus (very) profitable.
Claims don't exceed the premiums, but it's narrow.
2. We need to look at profits in the health care industry as similar to a VAT. If you have a profit margin at the end of the line, even if it's 18%, it's not that big of a deal. However, if each segment along the line adds a VAT, even a 5% tax of every segment can add up to a third of the cost, depending on how deep the pipeline goes. Each segment of the line is taking a profit. 3% of the health care industry, x% of the hospital (less than you would think because they subsidize so much of the uninsured) y% from the pharmaceutical industry, z% from the individually owned clinic... The end result is a disproportionately expensive system in this country.
One expense for U.S. insurers is medical underwriting - the army of people they employ to find reasons to deny you coverage. The reason they have to do this is that their competitors are doing it. Anyone who provides better coverage at a good price will be swarmed by sick people and go out of business, so they are in an arms race to provide the worst coverage they can get away with.
Level the playing field by, eg., requiring coverage of pre-existing conditions (as the countries I mentioned do) and this arms race goes away.
I almost think the government should start with tuition incentives / loan relief for doctors and nurses, and create a government cataclysmic insurance fund that covers stuff over a $100K (think flood insurance).
Which of those factors are due to insurance companies?
If you don't fix them, how likely is it that any "new" system will be any better?
Not to be rude, but where have you looked?
Besides, if that sort of legislation is what is required, how does its absence justify doing something else?
Politics are political. Each party is funded by people who want parts of the current system to stay the same or change for their benefit. Trial Lawyers (D) and Drug Companies (R) for example have huge stakes. I ignore what a politician says and look at the actual documents. I admit, lately, it has been really hard to get ahold of bills. I worry about the urgency that doesn't let a bill be posted and reviewed before voting.
That's better than nothing, but if you looked at a Repub senator's website, you're unlikely to see all Repub proposals, let alone Dem proposals. The reverse is also true.
> I ignore what a politician says and look at the actual documents. I admit, lately, it has been really hard to get ahold of bills. I worry about the urgency that doesn't let a bill be posted and reviewed before voting.
I agree with all that.
I'm just worried everyone is going to have the same "end of fiscal year no money for you" that has plagued the reservations under IHS. The sad part is the coverage of the news media is so poor on these, that the few stories that have gone out are thought of as aberrations instead of the day to day reality. I just wished the gov (both parties) would prove they could get it done with the limited population already served before moving on.
I agree. In fact, that's exactly my proposal - try out nationalized healthcare on federal employees and so on.
If you want to look for greed in healthcare, look at medical schools, hospitals, doctors, and pharmaceutical and medical device manufacturers. Insurance costs are a simple reflection of the incomes of those parties. State regulators (for small group and individuals) and shopping around by sophisticated consumers (large groups) assures that.
I'd like to see the data for other years. Recessions are bad for health insurers, because when people get fired, young and healthy people tend to drop their insurance while those who are older stay on the plan (with COBRA). So adverse selection sets in and insurance companies lose.
Citation, please? I'm very skeptical that pay for top execs amounts to a really significant part of corporate expenses, or that corporate profits could be increased substantially by cutting these expenses.
Edit: slightly more apples-to-apples: their 2007 profit was $3.6B. Their 2006 profit was $21.5B.
But more important, how much does it cost to find someone who can run a company like that competently? I work for a lot cheaper, but I'm also not capable of managing all of Citigroup. And conversely, if I were someone who had proven that I could do that, I'd likely have enough money to retire; you'd have to pay me quite a lot to convince me to subject myself to that kind of stress rather than sipping pina coladas on the beach.
Obviously it's more complicated than that, but the "we have to pay for the best and brightest!" meme starts to sound a lot more like self-dealing when it turns out the best and brightest do approximately the same quality job as one of those dipper things that replaced Homer Simpson at the nuclear plant for a week once.
Well said. My post above explains why CEO pay actually results in a worse product.
The "best and the brightest are not the ones who end up as CEOs of big companies." Pick one at random out of the Fortune 500. Give me a year to study the company and then replace him with me; I'm now the top dog. There is a 60% chance I will do a better job. I'm 26 and have no advanced degree. Do the same with a small business or a farm. There is almost a 0% chance I will do a better job. What does this say about large companies and their management?
On what grounds do you believe that you can do better than the average Fortune 500 CEO? I assert that you're engaging in empty boasting, with absolutely nothing to back this up. How could there be? Have you any experience near the top management of a company this large and complex?
1. The extreme disparity between CEO pay and other vital executives encourages people to backstab in order to ascend the hierarchy. So "work" for those who are in line to be CEOs is more about jockeying for position and trading favors than about building a company.
2. In addition to (1), such disparities are bad for morale, especially when the CEO is a "hired gun" instead of someone who has been part of the company for a long time.
Except in athletics, where talent is objectively measurable, the "star system" tends to piss off everyone but the stars, and let's be realistic: non-stars are 99% of people, and probably 3/4 of those who would be considered objectively the most competent.
3. When the CEO makes $500,000/year, he's drawing a good salary but still has the incentive to build a legitimately strong company for the long-term. When he has a "performance bonus" that will give him fuck-you money in 12 months if he plays his cards right, his incentives are in the short term.
4. When there are massive discrepancies in pay between the bosses and the people they are managing, the social class and lifestyle disconnects become problematic and can damage morale. This is why the best CEOs try to appear middle-class in terms of dress and work habits.
CEO pay is at such a level that it actually brings lower quality of management. This is what's truly alarming. Decades ago, when CEO pay was much lower, American companies were well-managed and produced great products like (imagine this for a second) cars that people actually wanted to buy. Now, big-company CEOs command stratospheric salaries and generally such ass. This is because executive pay is so high that it has pushed these people completely out of touch with reality.
CEO pay has simply increased in line with the market capitalization of the largest public companies.
Let me offer you another possible explanation. When people are making this much money, it's not really about the money at all; they've already got FU money, and they're taking what they can get only because that's the arbiter of where their skills are most needed. Instead, they're doing what they do because they really like the business, or the challenge, or they really want to contribute something to society. I know the CEO of my company (not Fortune 500-sized, but nothing to sneeze at), and I'm absolutely certain that this is the reason that she does it.
It is also the case that insurance companies invest a large portion of their premiums in short and medium term investments; few are allowed to get so fragile that they are in danger of having cash flow problems due to some small fraction of the policyholders shifting the cost basis. When the market tanks they have less income from investments and must cut costs (e.g. deny coverage) and increase income (e.g. raise premiums.)
Try graphing DJIA, unemployment rates, and insurance premiums and see when changes in the first two lines best match increases in average premiums...
These companies need to be operating as not-for-profits, or coops. Their motivations between decisions should be driven by what's best for their members, NOT what's best for their pocketbooks. No matter whether it's a profit margin of 1% or 10% or 1000%.
* This may be a bit inflammatory, but it's only a mild exaggeration. In reality, their profit-making model is to externalize costs, and they don't really care whether the patient dies or (more often) the costs are dumped onto the government, or hospitals in the form of unpaid medical bills.