01 October 2009

It's The Stocks, Stupid

A couple of weeks ago the good Dr. Shadowfax treated us to a humorous cartoon explaining the healthcare debate. In the cartoon we see that Medicare only spends around 3% of the money it receives on administrative overhead, whereas private insurers typically spend 3-6 times that amount while paying their executives obscene amounts of cash as a reward for denying patients the care they need.

Catron gave a dismissive comment regarding the severe lack of education on the economic nature of the problem. While he mentions the simplistic cartoon portrayal of the Healthcare Industry, he did not offer any evidence or argument on why this was the case. It made me start to think about economic models of the insurance industry in general, and specifically how this applies to Healthcare.

One of the key insights relates to understanding that many companies are not in the business you think that they are in. With a tip of the hat to Douglas Adams, think of how Xerox is not actually in the copy machine business. They are in the business of selling toner cartridges (Gillete is in a similar business model). If you are an insurance company, you are not in the business of distributing risk; rather, you are in the banking business. Insurance companies have a lag period between when a claim is made and when they pay out each claim. In the meantime, they have collected premiums from a large pool of individuals, and put this money to work on making more money through investment in a variety of instruments: bonds, stocks, etc. If they are smart about their investing (or lucky, as I suspect), then they end up with high profits. This can lead to lower premiums when the stock market is doing well, and higher premiums when the stock market is doing poorly. I first learned of this trend through an analysis of Malpractice Insurance Premiums, (link is to PDF file) which correlate well with stocks' performance, and poorly with $$ spent on claims.

What would happen if the 14 billion Healthcare insurance industry was taken over by an entity like Medicare? That enormous sum of money would no longer be contributing to the growth of the stock market through private insurance investment. I have a suspicion that this is the chief reason that the Republican party holds such a deep opposition to a public plan option, and to Healthcare Reform in general.

So although the portrayal of the economic reality in the cartoon might have been simplistic, it does raise a very valid point. Are we choosing to continue to give our money to a profit-based system that incentivizes maximum returns, or will we instead choose an efficiency-based system that incentivizes delivery of Healthcare?


  1. What would happen if the 14 billion Healthcare insurance industry was taken over by an entity like Medicare?

    Answer: Nothing (beyond the further metastasis of red tape). $14 billion is way less than 1% of the estimated cost of Obamacare.

    Moreover, Medicare claims are processed not by CMS or some other "efficient" govt entity, but by insurance companies or their subsidiaries.

    And they do not do so for free. Like all govt contractors, the MACs (as they are called when they do Medicare work) clean up.

    So, the issue of insurance profits is just a red herring to keep you busy while those thieves in D.C. pick your pockets.

  2. Thanks for responding Catron. I actually pulled the $14 Billion figure out of a hat (or somewhere else, but this is a PG-rated blog), and didn't bother to fact-check the actual number.

    However, you are not addressing the central point of my post. The motivation for insurance companies is to delay reimbursement of care as long as possible so that their investments can continue to make money. Raising the issue of government instead of private insurers handling the money is a red herring to keep you busy while someone else uses your money for profit.

    Seriously, though, does your opposition to healthcare reform hinge on the premise that government is inherently corrupt?

  3. Seriously, though, does your opposition to healthcare reform hinge on the premise that government is inherently corrupt?

    1) I'm not opposed to reform. I'm for genuine reform. Unfortunately, none of the Dem plans circulating inside the Beltway qualify.

    2) I don't think government is always corrupt. In fact, I'm not necessarily against some role for government in health care, within reasonable limits.

    3) However, Obama and his congressional accomplices have no intention of being reasonable. They see this as a vote-buying opportunity. Obamacare is a classic bait and switch.

  4. I don't have much faith in what will come out of Congress...but a government run plan will certainly give us better than what we have now. If nothing else, hopefully the introduction of a public option could lead to a more comprehensive health plan that some day would lead to single payer.

    The amount of money private insurers spend on advertising, lobbying and administrative costs is ridiculous. None of which would be present under a true single payer system. Pretty sure these cuts alone would basically pay for a government run system.

    Disappointing how the Democrats have dealt with the situation, hopefully they grow a backbone


  5. Riddle me this, Catron: Why are various for-profit licensees of the Blue Cross/Blue Shield Assn setting up venture capital funds and banks (ostensibly to better service their HSA clients)? It certainly is not for the benefit of their insureds, nor is it a means to improve any insured's health.

    I have never been in the fortunate position of having health insurance premiums lowered in a profitable economy, even while covered by an employer's group plan. If my cell phone carrier were a health insurance company, I'm sure I'd get better service at lower costs.

    Health insurance should not be a for-profit business, as most of the developed nations with better health care outcomes for lower overall spending have shown.

  6. Ok, guys. You're not paying attention.

    The question isn't whether insurance companies are good or bad. The question is as follows: Will crushing the industry help pay for Obamacare?

    Answer? The math just doesn't work. There simply isn't enough money there to pay for much of anything. Compared to the cost of "reform," it's chump change.

    No amount of moral posturing about evil insurance profiteers is going to change the basic economics.

  7. I'd love to see some hard numbers to back up your claims that there just isn't enough money to "pay for much of anything." Where does the money go now that the insurance companies charge? Is there an assumption that they somehow create wealth within the system?

  8. I'd love to see some hard numbers ...

    Nice try. The burden of proof is on those of you who claim "reform" can be paid for by gutting the insurance industry.

    By the way, I'm no fan of the insurance industry (on the bio page of my blog, I include them among "the forces of darkness").

    It's just that, as bad as they are, they can never aspire to the breathtaking inefficiency and skulduggery of the federal government.

  9. Love this post. Seems to me that all the arguing between doctors and patients is totally missing the point. Insurance companies are the only ones making money out of health care at this point.

  10. Matalwhatever:

    Aside from noting that there's no shortage of non-profits operating in the insurance market, none of which have demonstrated that going "non-profit" is a useful mechanism for reducing costs, it's worth revisiting the function of profits.

    In short, profits are the price society pays for the efficient coordination of supply and demand, and the allocation of resources. Perfectly efficient - no? More efficient than any alternatives yet devised? Yes.

    Don't believe me? Ponder what happened in the states that imagined that they'd prosper simply by eliminating profits as part of a larger scheme to supplant a market economy with a command economy that substituted centralized caluclation/allocation for market prices. Were they more prosperous as a result? No? How can that be? What happened to all of that wealth that was being squandered in profits?

    One of the major unstated premises of your commentary on insurance companies, profits aren't static, concrete entities with a magnitude that remains fixed in a given system. They aren't. Reality changes, costs change accordingly (worth noting that you can control prices by fiat, but not costs), and all of a sudden the price of your output has fallen below the cost required to produce it. Or, in the case of of a government, the reimbursement no longer covers the cost of what they're buying. If you need me to spell out what happens when that condition persists, let me know. If you're confused, ponder the number of self-sustaining "Medicaid Only" practices for a moment.

    There's also no evidence to suggest that eliminating profits is a reliable mechanism for either reducing costs or improving quality. The Big Three not only had lower profits than Toyota, Honda, etc - they also had higher production costs and lower quality? How is that possible, per your understanding of the function of profits? Moreover, why were consumers convinced that they were getting a better deal when they bought a Toyota, despite the fact that on average more of the price they paid went into profits, instead of the cost of the vehicle?

    I have no doubt that a government run insurer will have any difficulty whatsoever eliminating profits. Quite the contrary. Unlike private insurers, the costs of providing care under this scheme will clearly exceed the revenues available to support them, to the tune of well over a trillion dollars. The salient question is, having done away with profits and then some, will the costs that an accountant can tabulate go down, and will the quality go up? Where is the evidence to support either claim? If you're tempted to say "What is the Dartmouth Atlas, for $100 Alex!," don't do so before reviewing the literature available here: www.buzzcooper.com. (Don't worry, he's an MD).

    This completely ignores the costs that don't show up on an accountants balance sheet such as what innovations get funded and commercialized, and doesn't even begin to touch the whole universe of considerations ranging from the implications of public-choice theory, civil liberties concerns, etc that inspire your opponents, that neither you nor Shadowfax seem willing to acknowledge.

    Even if you feel as though accusing opponents of granting the government more control over health care of bad faith is necessary to account for their opinions, do you really believe it's sufficient? Hopefully (for your team) it'll prove to be a more politically effective than it is analytically sound.

    Back to tormenting souls.


  11. Bah. Above should read:

    "One of the major unstated premises of your commentary on insurance companies seems to be that profits are static, concrete entities with a magnitude that remains fixed in a given system."

    Back to sending my dark minions to play with the levers in Max Baucus' head.

    Also, additional scrolling reveals that your online handle is really your name. My apologies for mangling it.

  12. Liam, for the record I am agnostic on this issue

    But the basic debate you are illuminating is whether we as a society want to spend slightly more for "more choice".

    AND as I am sure you are aware, we can cut money from our health care system anywhere- there are just obviously always consequences if we do.

    Cutting a few % points off health care spending by moving to a centralized payor monopoly may be an acceptable trade off to you, but others might say that is not how they want to save 2% and choice to save a different way.

    I know a lot of people who fell the best way to save the 2% is to cut physician salaries by that amount and see what happens. ;-)

    AND to be fair, Medicare is the very worst offender of all insurance plans when it comes to claim denials. (source AMA)

    Increasing the power of a single payor monopoly is not exactly saying that this type of things is wrong now is it?

  13. Thai,

    1. Note that this post was by guest blogger Matlzanaizinca, not me.

    2. Just for the record, if you would keep the real name off the blog, I'd be grateful.

    3. Interesting claim that Medicare denies more claims than private insurers. That's certainly inconsistent with my real-world experience. You just gave me a graph, no source link, but the graph noted that it excluded edits, which are the most common method private insurers use to inappropriately withhold payment.

  14. Sorry Shadowfax

    It was cut from a .pdf from the AMA National Health Insurer Report Card website.

    ... I find it interesting that your experience differs from mine.

    It is true that my own experience is that the ED pro fees is rarely denied by Medicare, but the hospital's get racked over the coals on Medicare social trainwreck admissions frequently for which we currently have no good solutions (e.g. the 300 lb homeless gentleman with a moderate gout flare in his ankles and now is unable to ambulate, etc...).

    It sounds like you may practice in a more affluent community than are some of my group's ED so you may see this less than we do.

    You can obviously pull the report cards ups yourself and verify.

    That pasting was 2008 and 2009 is better (from 6.85% to 4%) but even in 2009 Medicare is the worst offender.


  15. "whereas private insurers typically spend 3-6 times that amount while paying their executives obscene amounts of cash as a reward for denying patients the care they need."

    THANK you. This is one of many reasons why healthcare costs so much.

  16. "Catron gave a dismissive comment regarding the severe lack of education on the economic nature of the problem."

    'You can lead a horse to water but you can't make him drink' is similar to 'You can give a person all the education in the world, but that doesn't make him smart. He has to WANT to be smarter.'

    We've had increased health education in schools for decades (I'm now 40) and yet, over that time, we have SLIGHTLY less smokers, GREATLY increased obesity and people overweight. Eduation, IMO, is not the answer.

    I believe enforcing personal responsibility is the answer.

    Remember back before germ theory in the 1800s? We had a few stupid morons, but not that many, because by about age 30-40, they died from their bad habits and high risk behavior and removed themselves from the gene pool. This was due to a nature-imposed personal responsibility. If you didn't act healthy, your actions soon killed you.

    Now we have free meds funded by the taxpayers (Medicare, -caid, -cali(fornia), Medi-Mass) and these people do not remove themselves from the gene pool.

  17. "does your opposition to healthcare reform hinge on the premise that government is inherently corrupt?"

    I don't believe gov't is inherently corrupt. It is not corrupt by default. However, incompetent people tend to gravitate towards gov't employment because it is easier to hide in the crowd there.

    I do believe that any large organization, whether gov't or a private corporation, decreases efficiency as its size increases.

  18. The Great Depression added 6.2 years life expectancy of the average American between 1929 and 1932 (e.g before ANY New Deal programs had a chance to work).

    One could take the position that Herbert Hoover was one of the greatest public health heroes of all time and correctly have at least some data to support their viewpoint ;-)

    My point is that I think the forest sometimes gets lost for the trees in this discussion.

  19. the key figure to understand is that insurnace ocmpanies (car, auto, health) pay out a % of what they take in. In a perfect world, they would pay out 100% of what they take in. In practice, a behemoth such as Aetna pays out about 82% of what they take in. About the same for life and car insurance. Other companies can get closer to 90%.

    But if you think the equation changes dramatically if we eliminate insurance companies, you are wrong. Cost might reduce 10 or 15%, and then the steaming freight train called unchecked growth continues anew. And with Medicare costs growing ~7%/year, eliminating the biggest boogeyman only allows us to slide back to 2007 pricing.

    Think about that....all this noise spent on the evils of insurance, and at the end of the day if they did their job for free prices would only drop ~15%.

  20. Chuckr:

    Please divide the total compensation of insurance executives by total private spending on healthcare and post the figure here.




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