The Truth About The Insurance Industry

Harry · June 26, 2009

http://voices.washingtonpost.com/ezra-klein/2009/06/the_truth_about_the_insurance.html

Insurers often complain that their critics don't understand their business practices. It would be hard to say that about Wendell Potter. Potter, whose name sounds like that of a character in a Frank Capra movie, worked in the health insurance industry for more than 20 years. He rose to be a senior executive at Cigna. He was on their calls, at their board meetings, in their books. And today, at a hearing before Sen. Jay Rockefeller's Commerce Committee, he testified against them.

What drove Potter from the health insurance business was, well, the health insurance business. 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."

Think about that term for a moment: The industry literally has a term for how much money it "loses" paying for health care.

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?

If you'd like to read Potter's testimony in full, I've uploaded it Potter Commerce Committee written testimony - 20090624- FINAL.pdf.

FirefightnRick · June 26, 2009

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."

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.

CRISIS!!!!!!

Question for you Harry. Everything I've read and heard which supports a government run one payer health rationing system is obviously a deliberate act to set out to paint the private insurance industry in a negative light, ultimately with hopes that they are destroyed(testimony above). My question to you is, what will happen to your own business if the private industry is eventually destroyed?

Rick

Edited June 26, 2009 by FirefightnRick

UNTflyer · June 29, 2009

Comparing the medical insurance industry to the heroin market. Hmm.

Well, the easiest and surest way to fight rescission is to tell the truth on your insurance application in the first place. When you lie, you are committing a fraud against the insurance company. This is really no different than lying about your driving record when getting car insurance.

Second, the medical insurance industry is no different from life or auto insurance. Their goal is to maximize profit, and they do that by collecting premiums in excess of costs. Why are we so bothered that a company wants to make a profit? Do the doctors and nurses not demand a profit?

If we demonize profit, then we eliminate incentives. If we are going to say that profit should be eliminated, then all we will have left are government programs and government-owned conglomerates. We would become slaves to the state.

NT03 · June 29, 2009

Fake Candian ID cards!!

keith · June 29, 2009

I still think people are focused in the wrong direction and are trying to address the symptom instead of the problem. These arguments also have a hint of look what the big bad capitalist economic system has done to us. Don't get me wrong, I'm not a fan of the insurance industry, but it seems to me that it is filling a need. At least in modern times. It's not like medical insurance has been around since the dawn of time or anything. Insurance is largely a piece-of-mind thing and attempts to protect us from the catastrophic event we all hope we never experience. That probably doesn't go away. But what if medical care (not insurance) was priced reasonably. What if it was something people could afford so that we did not *need* insurance to cover common and routine medical treatment? IMHO, we need to be driving the cost out of providing medial service, not trying to cover everyone with an insurance policy.

Keith

Harry · June 29, 2009

CRISIS!!!!!!
Question for you Harry. Everything I've read and heard which supports a government run one payer health rationing system is obviously a deliberate act to set out to paint the private insurance industry in a negative light, ultimately with hopes that they are destroyed(testimony above). My question to you is, what will happen to your own business if the private industry is eventually destroyed?
Rick

Well Rick, I know that reform will have an impact on all of the players in health care and that includes my business. I think any substantial policy change is going to require sacrifice on all sides. This fear of change has been what has put us in this position for all these years and as I've stated here I don't think we can continue to go down the same road. I put my business future in our ability to providing outstanding service, health care expertise and of course quality products. I will continue to provide all of my clients the very best service I can provide every day. I am also staying on top of reform so I can help my clients understand how to best maneuver through it. Change can be a good thing, as it can provide new opportunities if you are open to it.

The Fake Lonnie Finch · June 29, 2009

Hello? Insurance companies are in business to make money. Stick with any insurer long enough and they will raise your rates, even if you've had no claims. This goes for health and P&C.

The only difference is that the driving factors in the health industry are causing rates there to go higher, faster. And, the main reason is plain - medical professionals cannot turn down patients. If someone shows up at the hospital for treatment, they've got to be treated, insurance or not. It all costs something, so the cost is shifted, ultimately, to policy holder.

There is no such scheme on the P&C side. If someone's house is damaged and they aren't carrying insurance, or aren't carrying enough, no one else is forced to bear the burden of the claim. If a home or business is damaged in a storm, robbed, catches fire, etc. there is a finite number the insurer will be on the hook for. But, on the property side, they are only on the hook for the one insured.

My health insurance is about to expire, so I'm currently in the marketplace. Assurant proposed to raise my rate to $494 per month over last year's $356 per month premium. I've declined and told them to cancel. Why? Because I have quotes sitting on my desk for identical (actually, better) coverage from Blue Cross ($284) and Humana ($334).

[We take $5,000 to $10,000 deductibles everytime we go out. So, we pay out of pocket for most visits, which are very few, if any per year. We have health insurance as a security blanket in case we are hospitalized - and that's the way it should be. Another big reason health care costs are out of control is that people go to the doctor every time they so much as get a sniffle.]

It's not rocket science, folks. The market does work. The problem with nationalized health care is that in the future, I'd have to pay my premium plus a tax to account for the uninsured - the majority of which simply will not budget conservatively enough to buy some plan. My sympathy is very low for people who pay over $120 a month for their cable/dish television/internet/phone set ups, eat out more than three times a month, and throw away money on alcohol every weekend but say they can't afford health insurance.

I'm convinced that 25% of the uninsured are simply illegal aliens and another 50% is jugheads who refuse to live and budget responsibly. The thought of picking up those two groups really bothers me. If you think its more important to regularly go out for lunch and dinner, swill beer with your friends every weekend, and have every channel known to man at your disposal, I should not be directly responsible for helping you get health insurance. You've made your choice about what is important to you in life. If you are hospitalized and your costs are later passed on to me, that's fine. The market bears that. But, until that happens, you shouldn't get a free or cheaper ride off the rest of us who plan ahead and act responsibly for ourselves and our families.

You can PM me if you want to talk insurance. Our firm is 80% commercial P&C, but we've got two agents who can do life and health. It's the same companies with just about every agent anyway. My suggestion to everyone is to shop everything, if not every year, every two years. The market has been very soft (premiums decreasing) for a good four years now. Even if you've got no beef with your current agent, make him or her shop your stuff. If they won't, get another agent to do it. There's no need to just sit back and take increases year in and year out. There are way too many insurers in Texas. It's very competitive for the insurance consumer here.

Edited June 29, 2009 by The Fake Lonnie Finch

UNT90 · June 29, 2009

http://voices.washingtonpost.com/ezra-klein/2009/06/the_truth_about_the_insurance.html

Think about that term for a moment: The industry literally has a term for how much money it "loses" paying for health care.

Yes, and I'm sure the property industry calls it a "loss" when they have to replace homes damaged by tornadoes. Don't emotionalize the issue. There is nothing wrong with the insurance company making a profit, otherwise why be in business? Sure, the Fed. government will offer it cheaper, because they have taxpayers to cover the loss (or the will just put it on the credit card known as the national debt).

BeanCounterGrad'03 · June 29, 2009

Yes, and I'm sure the property industry calls it a "loss" when they have to replace homes damaged by tornadoes. Don't emotionalize the issue. There is nothing wrong with the insurance company making a profit, otherwise why be in business? Sure, the Fed. government will offer it cheaper, because they have taxpayers to cover the loss (or the will just put it on the credit card known as the national debt).

From an accounting perspective, they should be referring to them as expenses because they are costs incurred in the normal operation of business.

This is my attempt to be the first GMG member to ever hijack a thread with accounting talk.

UNT90 · June 29, 2009

From an accounting perspective, they should be referring to them as expenses because they are costs incurred in the normal operation of business.
This is my attempt to be the first GMG member to ever hijack a thread with accounting talk.

Actually, expense and loss would reflected the same on the balance shee ... who am I kidding. I was an accountant major until my soph year before opting for something much easier.

Just my attempt to continue the accounting talk highjack.

FirefightnRick · July 1, 2009

Hello? Insurance companies are in business to make money. Stick with any insurer long enough and they will raise your rates, even if you've had no claims. This goes for health and P&C.
The only difference is that the driving factors in the health industry are causing rates there to go higher, faster. And, the main reason is plain - medical professionals cannot turn down patients. If someone shows up at the hospital for treatment, they've got to be treated, insurance or not. It all costs something, so the cost is shifted, ultimately, to policy holder.
There is no such scheme on the P&C side. If someone's house is damaged and they aren't carrying insurance, or aren't carrying enough, no one else is forced to bear the burden of the claim. If a home or business is damaged in a storm, robbed, catches fire, etc. there is a finite number the insurer will be on the hook for. But, on the property side, they are only on the hook for the one insured.
My health insurance is about to expire, so I'm currently in the marketplace. Assurant proposed to raise my rate to $494 per month over last year's $356 per month premium. I've declined and told them to cancel. Why? Because I have quotes sitting on my desk for identical (actually, better) coverage from Blue Cross ($284) and Humana ($334).
[We take $5,000 to $10,000 deductibles everytime we go out. So, we pay out of pocket for most visits, which are very few, if any per year. We have health insurance as a security blanket in case we are hospitalized - and that's the way it should be. Another big reason health care costs are out of control is that people go to the doctor every time they so much as get a sniffle.]
It's not rocket science, folks. The market does work. The problem with nationalized health care is that in the future, I'd have to pay my premium plus a tax to account for the uninsured - the majority of which simply will not budget conservatively enough to buy some plan. My sympathy is very low for people who pay over $120 a month for their cable/dish television/internet/phone set ups, eat out more than three times a month, and throw away money on alcohol every weekend but say they can't afford health insurance.
I'm convinced that 25% of the uninsured are simply illegal aliens and another 50% is jugheads who refuse to live and budget responsibly. The thought of picking up those two groups really bothers me. If you think its more important to regularly go out for lunch and dinner, swill beer with your friends every weekend, and have every channel known to man at your disposal, I should not be directly responsible for helping you get health insurance. You've made your choice about what is important to you in life. If you are hospitalized and your costs are later passed on to me, that's fine. The market bears that. But, until that happens, you shouldn't get a free or cheaper ride off the rest of us who plan ahead and act responsibly for ourselves and our families.
You can PM me if you want to talk insurance. Our firm is 80% commercial P&C, but we've got two agents who can do life and health. It's the same companies with just about every agent anyway. My suggestion to everyone is to shop everything, if not every year, every two years. The market has been very soft (premiums decreasing) for a good four years now. Even if you've got no beef with your current agent, make him or her shop your stuff. If they won't, get another agent to do it. There's no need to just sit back and take increases year in and year out. There are way too many insurers in Texas. It's very competitive for the insurance consumer here.

Good post.

Rick

HoustonEagle · July 1, 2009

Will somone please post a link to the Heritage Foundation or Limbaugh.com so I will know what to think about this issue?

UNTFan23 · July 1, 2009

Here's an interesting opinion article relating cost to the level of care we currently get.

FirefightnRick · July 3, 2009

Here's an interesting opinion article relating cost to the level of care we currently get.

If so, then it is political cynicism to point to other countries that spend less on medical care, including some countries where there is "universal health care" provided "free" by their governments.
Just as medical care, houses and cars were all cheaper when they lacked things that they have today, so medical care in other countries is cheaper when they lack many things that are more readily available in the United States.
There are more than four times as many Magnetic Resonance Imaging units (MRIs) per capita in the United States as in Britain or Canada, where there are government-run medical systems. There are more than twice as many CT scanners per capita in the United States as in Canada and more than four times as many per capita as in Britain......In Canada, 27 percent of the people who have surgery wait four months or more. In Britain, 38 percent wait that long. But only 5 percent of Americans wait that long for surgery.

Examples of disasters caused by government intervention in the British health care system

Examples of Canadian Health Care

Rick