The free market is a wonderful idea, but one that rarely exists in the real world. There are plenty of places where free market incentives are in conflict and lead to negative (though “Pareto optimal”) results for pretty much everyone involved. One such instance is with health insurance in the
US. The following will review issues with the fact that insurers are:
A. Publicly traded companies
B. For profit
Problem A: Playing The Market
It is perfectly logical that health insurers (and many other businesses) would want to go public in order to raise funds and expand their business.
In theory this would make sense in the long run, investors would buy stock that represents a partial ownership of the company and voila you have a insurer flush with cash and ready to expand, capitalism at its finest.
However, health insurers really have two types of investors: those that buy stock, and those that pay premiums (ie their customers). Few, if any, companies provide a serious dividend anymore, and most people that buy a stock are hoping to "buy low and sell high". This is extremely different from all those customers who reliably pay their premiums, copays, etc. each month as an investment in their own future, health and well being) every
Here in lies the disconnect. We have people going into stock for what is essentially the short term. When we're talking about health, 10 years is still short term compared to my the average lifetime expectancy of ~74 years (or 54 years of adulthood).
This begs the question, whose goals are driving corporate and CEO decisions over at your insurance company? The people paying premiums for the long haul, or investors looking for a quick profit?
The recent financial cluster f&$k should be reasonable proof that decisions are all too often made to please the stock prices and the board of directors. And hey, why not? CEOs are in it for the short term too, they want the stock to go up, get a big salary and a bigger bonus and get out a few years later. CEOs are not judged in the long term success of a company or the effects on their actual customers, they are judged on stock price.
This was not originally the case, way back when, a long long time ago, buying stock in a company really was about buying a piece of it. A buyer not only got stock, but also a solid dividend that came from company profits. There has never been something wrong with a company that makes 10 billion every year even though it didn’t grow in a year. A solid dividend rewarded long term goals and not only the quick buck that could be had from "buying low and selling high".
I suppose what I'm getting at, is that buying a stock without a legitimate dividend seems much more like a gamble on the emotional sentiment of the market (at worst) and the short term growth of the firm (at best). However, none of this is supporting long term success and actual legitimate business decisions for all of us paying our premiums and hoping for affordable care.
Problem B: Saving Lives In the Pursuit of Profit (we’ll discuss big pharma another day)
What do private companies do? They try to minimize costs and maximize revenue, profit and growth.
How might that translate into health insurance company decisions? Minimize how much health care you provide (costs) and maximize how much you get from customers (revenue). This is not exactly a great goal from the perspective of the average American.
What would they do with the profit? Pay a huge bonus to senior management, save some money for a rainy day, maybe buy another smaller insurer to boost that good old stock price?
What would they not do? Lower premiums, provide quality care, invest in long term health, etc. etc.
Could a private health insurance company aiming for profit ever be a good vehicle for quality and affordable health care? I would venture to say no, and the reality today shows that it clearly has not in the past. How else could we spend more than 2x the money per person and be in worse health than other modern countries that spend half as much?
But wait, you say, what about the magical powers of the good old Invisible Hand? Good point (if this were a textbook). In reality, many of the requirements needed for the market to do its thing, bring down costs and improve efficiency are seriously lacking and unlikely to change in the near future:
- Competition: There are few insurance companies that control the large large majority of the market (more like an oligarchy than a free market)
- Low Barriers to Entry: Serious costs and governmental red tape required
- Transparency: I work in the industry and I am very often confused as to what health care benefits I have, so what chance does the average American have?
- Free choice: We usually go with what our company provides if we’re lucky enough to get it.
This is not to say that we don't switch insurers throughout our lives, we do and usually not by our choice (usually via our company, new job, job loss, etc.). That is unfortunately one of an insurer's excuses, because why should they think in the long term and focus preventative care if you're going to leave and they'll never get the "benefit" of supporting healthy customers. Sure, they’ll pretend for appearances sake, but in capitalism choices are made to make money not because it’s the right thing to do. Even if a CEO tried to go against his/her better money making instincts, he/she would likely be fired and replaced by someone more ethically flexible and profit focused to keep that stock price up.
In summary, the fact that the insurers in charge of our health are all driven by absurd incentives from investors rather than their customers is a serious problem. Could the requirement of dividend payments help, yes?
How about a private non-for profit insurance company? –This is not without precedent, German Health Care is provided via regional, private and non-for-profit insurers could be a very interesting option to look into. I would also argue that no industry or company is less efficient and wastes more of the country’s money on pushing paper than insurers (the US spends many times more on paperwork for health care than all other western nations), so I would not really worry about a non-profit’s ability to keep efficient.
As we look to the new administration, I am very curious and skeptical about the increasingly likely potential of a government run, common health care fund. Will this new competition provide some movement in the direction of true competition to keep payments low and benefits high? I’m not so sure, especially if it is run through existing publically traded and for profit commercial health insurers (like Medicare already is).
Note: There are many major problems and issues to be dealt with across every aspect of health care in the US. The above is one example, and not even the whole story for insurance companies. We’ll talk about coinsurance, medical vs. pharmacy benefits, etc. in due time.
Please comment and let me know what you think. I’m sure there are other counterarguments and ideas that I have missed.
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