Code Red: Two Economists Examine the U.S. Healthcare System

September 22, 2010

Profit-seeking Health Insurers Seek Profits

Filed under: Health insurance,Health Reform,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:02 pm

No one who sees this headline should read any further. There is no news here. So why is everyone getting lathered up about it? Let me explain.

Healthcare reform becomes official this week, as many of the provisions of the legislation kick in. One provision requires insurers to accept children with preexisting conditions while capping what they can charge, undoing a standard industry practice. Several insurers have indicated that they will stop selling child-only policies. Industry officials are having a field day criticizing insurance industry greed.

Maybe these officials haven’t noticed, but insurers are greedy and there is nothing anyone in the Obama administration can do about it. Maybe it needs repeating. Insurers are greedy, have always been greedy, and always will be greedy. So are all investor-owned companies. People don’t invest in health insurance companies (or any other investor-owned companies) for charity. They invest in them to make money. (Investors tend to be greedy too, and that includes the pension funds that most working Americans rely upon for their comfortable retirements.)

Greed lends a certain degree of predictability to policy making. If the government requires a company to alter a product in such a way that it cannot make money selling it, then the company will refuse to sell that product. Usually our legislators have enough wisdom to understand that they cannot banish greed, but not this time. Didn’t anyone tell President Obama that insurers have relied on preexisting condition exclusions to make child-only policies profitable? (A disproportionate percentage of individuals who seek child-only policies do so because of preexisting conditions and this appears to be a far worse problem in the child-only insurance market than in the adult market.) If the government bans these exclusions, insurers will naturally stop selling the policies. Why is anyone shocked when managers do the bidding of their owners?

By choosing to heavily regulate the insurance market, President Obama has shown the same policy ambivalence that seems to mark his entire administration. Here he wants to sustain privately financed healthcare and simultaneously achieve the end results of government financed healthcare. He can’t have it both ways. If he really wanted a privately financed system, he should have done so with the least amount of intervention and let the profit motive work for the greater good, as it does in most markets. Economists have shown how to do this: End the tax subsidy, provide financial incentives for insurers to cover the very ill (risk adjustments? separate high risk pools?) and accept that some individuals will still fall through the cracks and have to rely on safety net providers. If he really wanted the end results of government financed healthcare, then he should have jettisoned the market-based insurance system altogether. We know how to do this to, by following Canada’s lead. Socialized medicine is not without its benefits, and perhaps markets don’t have all that much to offer in healthcare anyway. (That is a debate for another blog, or one hundred blogs.) Pick a side! Healthcare reform is devilish, but the devil you know is better than the one you don’t.

There is, of course, a far more cynical explanation for what is going on. Perhaps President Obama really does prefer socialized medicine, but realizes that he has neither legislative support nor the support of voters. (I doubt I am the first to offer this conjecture.) So he gives us a plan that is sure to fail and lays the blame at the feet of private insurers. Heck, most Americans rank private insurers right down there with tobacco executives, so this populist approach could have traction. After Obama gets done thrashing insurers over these child-only policies, Americans might further lower their opinion of insurers, ranking them right alongside Congress.

2 Comments

  1. While I agree that Obama may have preferred a government-run health system, I don’t believe that he is trying to destroy the ‘reputation’, such as it is, of the insurance industry. In fact, I believe he understood the need for the insurance industry to stay alive because of the numbers that they employee. Most likely, he looked at the Dutch health care system, where the government requires health coverage provided through private insurance companies. The big difference between us and the Dutch, is that in the Netherlands, the insurance companies are not-for-profit as are the hospitals. In an industry where the health of the patient should be the priority, removing the profit motive is actually the sensible thing to do. Hospitals can only profit if people get sick or injured, so there is no ‘profit motive’ to keep people healthy. Insurance companies only profit if they take in more premium than they pay out in health care costs, so there is no ‘profit motive’ to provide potentially expensive life-saving treatments. The profit motive works against the health and well-being of people. So what I see occurring is the administration not pushing for these industries to fail, but pushing the industries into a not-for-profit arena.

    Comment by Brian H — September 23, 2010 @ 9:33 am

    • Good points. At one time most Americans were insured by nonprofit Blue Cross and Blue Shield plans. These plans received some modest tax breaks and in exchange they did a reasonably good job of covering individuals with extraordinary medical needs. And most HMO enrollees were in nonprofit plans like Kaiser and the Group Health Cooperative. I don’t know whether competition from for-profit plans forced the Blues to change their ways, or whether senior management saw their opportunity to leverage market clout into huge profits, but those days are long behind us. I doubt they will return.

      Comment by dranove — September 23, 2010 @ 9:37 am


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