Do for-profit health insurers need to die?

[bascule]

This was a pretty interesting Krugman article:

 

http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/

 

It's short and to the point: for-profit health insurance systems don't work. To turn a profit they need to minimize the number of claims they accept. To do that they need to deny care. However, they're in the business of providing care.

 

Worse, there's administrative costs associated in deciding which claims to accept and looking for loopholes which would allow them to deny care. This means that for-profit insurers actually spend more money to provide less care (because in the end this saves them money). As Krugman puts it:

 

And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.

 

I've noticed an inordinate amount of attention is paid to how people would abuse the health care system if there weren't associated costs, e.g. people visiting a GP when it's unnecessary. But as Krugman notes:

 

The big bucks are in triple coronary bypass surgery, not routine visits to the doctor’s office; and very, very few people can afford to pay major medical costs out of pocket.

 

Ironically, the type of care which a for-profit insurer is most interested in denying your claim are exactly the types of care when you need your insurance company the most. Does that seem... fundamentally broken to anyone else?

 

So what's the solution? Here's what Krugman had to say:

 

All of this doesn’t necessarily mean that socialized medicine, or even single-payer, is the only way to go. There are a number of successful health-care systems, at least as measured by pretty good care much cheaper than here, and they are quite different from each other. There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.

[Pangloss]

Well what I think is that it makes me mad. (grin) Sorry but I gotta rant on this one. Nothing against you, of course -- I appreciate you passing it along.

 

There are, however, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence.

 

If I had a virtual bird cage I would line it with this virtual column. (Ooo -- Facebook app!)

 

See what I mean about Krugman selling out his academic laurels for his progressive ideology? He's an economist, but he's talking about how profit motive is the root of all evil in the health care system! He even has the audacity to point to himself as an example of economist who believes this to be the case. "Why, it's too expensive! It's too complicated for people to compare! You can't sell something that expensive or complicated as if it were 'like bread'! Pay attention, children -- expensive things have to be paid for by insurance!" What a load of malarkey.

 

I realize he's not suggesting socialism, but what he is suggesting is something almost as bad. I like to call it "regulation uber alles", and it's a general socio-economic position that regulation is always a good thing, and more regulation is a better thing. Krugman conveniently overlooks the fact that there ARE no free markets in this country. None! ALL commerce is regulated to some degree. How would he know that free markets can't fix this? He doesn't, of course. So he's suggesting that everything that's bad just needs the application of the appropriate rule to fix.

 

Only hey, guess what? Regulation makes a business MORE complicated. Regulation makes a business MORE expensive. The two things he says are most symptomatic of a broken system are the same two things he wants to make worse!

 

I believe he's wrong, and that the right answer is a balance of regulatory force and market force. Of course, I don't have a blackened Pulitzer sitting on my mantle. But then I haven't sold out, either. I call it a wash.

[JohnB]

He's an economist, but he's talking about how profit motive is the root of all evil in the health care system!

I think you've got him wrong. His point, as I got it from the column is that pure market forces are incompatable with health care.

 

This is manifestly true. The bottom line for a company is to make a profit and give a return to it's shareholders. The best way to do this is to maximise income and minimise expenditure. Actually paying out classifies as "expenditure".

 

Likewise, insuring "bad risks" would be viewed as bad business practice.

 

This is basic economics. A purely for profit health insurer does not have the health or well being of it's customers as a primary concern. Making money is.

[iNow]

This is basic economics. A purely for profit health insurer does not have the health or well being of it's customers as a primary concern. Making money is.

+1. I also wonder why we always assume by default that everything in the US must make a profit... It's silly, and there clearly are some enterprises where profit driven motives are directly counter to the needs being discussed. Healthcare is a clear example.

 

If the right-wingers get to call it "socialized medicine," then I get to call private insurers "repugnant vultures who live off of the corpses of america and get rich by preventing us from receiving care and ultimately making us sicker."

[bascule]

"Why, it's too expensive! It's too complicated for people to compare! You can't sell something that expensive or complicated as if it were 'like bread'! Pay attention, children -- expensive things have to be paid for by insurance!" What a load of malarkey.

 

The number of people who can afford catastrophic care out of pocket is extremely limited. We are all at risk of needing catastrophic care at some point in our life, so some sort of system for pooling the risk is definitely in order. Catastrophic care isn't something you can just write a check for in most circumstances.

 

Krugman conveniently overlooks the fact that there ARE no free markets in this country. None! ALL commerce is regulated to some degree. How would he know that free markets can't fix this? He doesn't, of course. So he's suggesting that everything that's bad just needs the application of the appropriate rule to fix.

 

He's suggesting that the profit motive, which is at the heart of free markets, runs counter to the notion of providing effective care, because providing care is a liability to an insurer. This idea becomes painfully clear when you look at Kuchinich's statistic that 60% of bankruptcies in the US are because of hospital bills, and 80% of those people are insured. Making the insurance market in some way "more free" isn't going to fix this fundamental problem.

[Pangloss]

I think you all might've missed my point. My problem with Krugman isn't that he's wrong, but that he's distorting things to suit his ideological goals.

 

 

I think you've got him wrong. His point' date=' as I got it from the column is that pure market forces are incompatable with health care.

 

This is manifestly true. The bottom line for a company is to make a profit and give a return to it's shareholders. The best way to do this is to maximise income and minimise expenditure. Actually paying out classifies as "expenditure".

 

Likewise, insuring "bad risks" would be viewed as bad business practice.

 

This is basic economics. A purely for profit health insurer does not have the health or well being of it's customers as a primary concern. Making money is.[/quote']

 

Boeing and GM are about making profit and returning income to their investors, and yet they make safe vehicles. Saying that profit motive is the cause of this is like complaining about water flowing down hill.

 

We have to create a situation where downhill is a GOOD thing, instead of the opposite. That means the right environment and the right kind of regulation. (This is essentially what Krugman is saying, I just get annoyed with him because he manipulates people's fear of corporations.)

 

 

I also wonder why we always assume by default that everything in the US must make a profit...

 

Krugman isn't arguing that they shouldn't make a profit -- he goes out of his way to say he's not advocating socialized medicine. What he's advocating is a higher degree of regulation.

 

 

He's suggesting that the profit motive, which is at the heart of free markets, runs counter to the notion of providing effective care, because providing care is a liability to an insurer. This idea becomes painfully clear when you look at Kuchinich's statistic that 60% of bankruptcies in the US are because of hospital bills, and 80% of those people are insured. Making the insurance market in some way "more free" isn't going to fix this fundamental problem.

 

That's right, that's what he's saying, but his "evidence" for this is that complete freedom won't solve the problem. That's like saying if NASCAR removed all regulations the cars will go flying off the edge of the track, therefore a quarter-inch change in the restrictor plate is a bad idea. They don't do that -- they make slight changes in BOTH directions and then observe the results. That's what a good scientist or engineer does. But that's not Paul Krugman.

 

Krugman believes that any lightening of regulation is always a bad idea. And the argument he uses to support this belief is that no regulation would be chaos. It's an illogical and sophomoric argument. And it's about ideologies, not realities.

[John Cuthber]

"They don't do that -- they make slight changes in BOTH directions and then observe the results. That's what a good scientist or engineer does. "

Sometimes it's not practical to make those changes- you just have to look at other systems. (This is perfectly valid science- nobody ever tells an astronomer to watch a star for 5 billion years to see what happens; they just tell them to compare it with an older star).

What happens if we look at some other healthcare systems.

My understanding is that if you make the comparison you find that Americans have healthcare that is among the most expensive in the world and the least "socialised" in the world.

If they had the longest lifespan in the world or the best general health during that life there might be a reason for the expense. I don't think they do.

Could that be telling us something?

[Mokele]

Krugman believes that any lightening of regulation is always a bad idea. And the argument he uses to support this belief is that no regulation would be chaos. It's an illogical and sophomoric argument. And it's about ideologies, not realities.

 

Two things:

 

1) Has he ever explicitly stated this? That he usually champions regulation, including in this case, does not mean he holds the opinion you suggest.

 

2) Second, we *have* tried truly free markets, back in the Industrial Revolution. It failed, miserably, and we put regulations in place as a *direct* result of failures of the free market system.

[CDarwin]

Boeing and GM are about making profit and returning income to their investors, and yet they make safe vehicles. Saying that profit motive is the cause of this is like complaining about water flowing down hill. [/Quote]

 

Boeing and GM have a profit motive that lies in producing safe vehicles, though, or at least sufficiently obscuring the fact that they don't. And they are both made to produce safe vehicles by significant government regulation, anyway. The profit motive of health insurance companies lies in decreasing the ratio of the amount they have to pay out to policy holders to their income in premiums.

 

We have to create a situation where downhill is a GOOD thing, instead of the opposite. That means the right environment and the right kind of regulation. (This is essentially what Krugman is saying, I just get annoyed with him because he manipulates people's fear of corporations.)

 

It think you just have thing with Paul Krugman, then.

 

That's right, that's what he's saying, but his "evidence" for this is that complete freedom won't solve the problem. That's like saying if NASCAR removed all regulations the cars will go flying off the edge of the track, therefore a quarter-inch change in the restrictor plate is a bad idea. They don't do that -- they make slight changes in BOTH directions and then observe the results. That's what a good scientist or engineer does. But that's not Paul Krugman.

 

Well, he's an economist, not a scientist. That's kind of a joke, but economists really do operate a little differently. They will accept more things into their theories that can't be empirically verified on the basis of their accordance with first-principles. I think all Krugman is saying is that A) Insurance should represent the collectivization of risk (essentially a first-principle), B) Theory says that the profit motive isn't good at ensuring that, C) Looking around the world, free-market-heavy systems (the US, Eastern Europe, China) don't seem to work, while regulation/government-heavy systems do. Ergo, extensive government regulation to beat the profit motive into a shape is needed for an effective health insurance system.

 

That would seem to be a valid chain of argument for an economist.

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2) Second, we *have* tried truly free markets, back in the Industrial Revolution. It failed, miserably, and we put regulations in place as a *direct* result of failures of the free market system.

 

I think this is a misconception, actually. In the Industrial Revolution the United States and Europe had strongly pro-corporate government policies, but that doesn't necessarily coincide with liberal and free markets. Most countries engaged in extensive protectionism and modified laws to allow large companies to more easily muscle smaller ones and labor. The extensive grants of land to railroads along their rights of way in the American West is a good example.

Edited July 26, 2009 by CDarwin
Consecutive posts merged.

[Mokele]

I think this is a misconception, actually. In the Industrial Revolution the United States and Europe had strongly pro-corporate government policies, but that doesn't necessarily coincide with liberal and free markets. Most countries engaged in extensive protectionism and modified laws to allow large companies to more easily muscle smaller ones and labor. The extensive grants of land to railroads along their rights of way in the American West is a good example.

 

I disagree - it's the epitome of the free market, in which companies can buy whatever they want, including Senators. The only alternative is restrictions on corporate behavior such as bribery (aka "campaign contributions"), which creates the much-despised regulations. Indeed, the only way to have a truly free market is anarchy, which is also a miserable failure. If the Industrial Revolution is not 'pure free market', it's as close as we've ever come and as close as possible in a civilized society.

 

The point, however, is that those who disparage government regulation seem to willfully ignore that a) in times of less regulation, life has been worse by every relevant metric, and, more importantly, b) regulations have never been created for their own sake, but in direct response to the failures or shortcomings of the free market.

 

 

 

Somewhat OT, but I've participated in one of the most unregulated, purely capitalistic market in our economy - the exotic pet trade. It's almost completely free from regulation (and the few that exist are rarely enforced, not to mention a thriving black market), and arguably even more free because most breeders have day jobs, thus can set prices below what they need to feed themselves. The result? Market bubbles, speculation, collusion for price fixing, outright theft, consumer deception, smuggling, blacklisting, and, of course, the most recklessly, criminally irresponsible behavior with regards to dangerous animals that you can imagine.

 

Anyone who wants to sell me on the amazing powers of the free market is going to have to sell me on allowing a 16 year old kid to buy a 7-foot rattlesnake for $150, no questions asked.

[iNow]

I also wonder why we always assume by default that everything in the US must make a profit... It's silly, and there clearly are some enterprises where profit driven motives are directly counter to the needs being discussed. Healthcare is a clear example.

Krugman isn't arguing that they shouldn't make a profit -- he goes out of his way to say he's not advocating socialized medicine. What he's advocating is a higher degree of regulation.

Pangloss - Please note that I was not referring to the tangent of Paul Krugman with my comments, but was instead referencing the topic of the thread and the OP in general.

[bascule]

That's right, that's what he's saying, but his "evidence" for this is that complete freedom won't solve the problem.

 

How would complete freedom solve the problem?

[CDarwin]

I disagree - it's the epitome of the free market, in which companies can buy whatever they want, including Senators. The only alternative is restrictions on corporate behavior such as bribery (aka "campaign contributions"), which creates the much-despised regulations. Indeed, the only way to have a truly free market is anarchy, which is also a miserable failure. If the Industrial Revolution is not 'pure free market', it's as close as we've ever come and as close as possible in a civilized society.

 

Perhaps we're differing on the terms 'free' and 'liberal.' I would agree that in the United States in the Industrial Revolution (although probably not in Europe where there were always significant state-owned industrial concerns and even rudiments of the welfare state), the system was pretty well 'free' to be exploited by anyone with money. What I mean by 'free market,' though, is a system that is liberal, i.e., perfectly competitive and free of any distortions by government action. I think we're closer to that ideal now than ever before, since the declines of first protectionism and then socialism. However:

 

The point, however, is that those who disparage government regulation seem to willfully ignore that a) in times of less regulation, life has been worse by every relevant metric, and, more importantly, b) regulations have never been created for their own sake, but in direct response to the failures or shortcomings of the free market.

 

That's really the take home point.

[Pangloss]

"They don't do that -- they make slight changes in BOTH directions and then observe the results. That's what a good scientist or engineer does. "

 

Sometimes it's not practical to make those changes- you just have to look at other systems. (This is perfectly valid science- nobody ever tells an astronomer to watch a star for 5 billion years to see what happens; they just tell them to compare it with an older star).

 

Sure, but they don't rule out stuff they can't check either.

 

 

What happens if we look at some other healthcare systems.

My understanding is that if you make the comparison you find that Americans have healthcare that is among the most expensive in the world and the least "socialised" in the world.

 

If they had the longest lifespan in the world or the best general health during that life there might be a reason for the expense. I don't think they do.

Could that be telling us something?

 

I agree, and I think it certainly does.

 

 

1) Has he ever explicitly stated this? That he usually champions regulation, including in this case, does not mean he holds the opinion you suggest.

 

Actually it probably does. Regulation is central to the ongoing dispute between post-Keynesian market controllers and post-Friedman free marketers. Sure, there are some Keynesian economists out there who are okay with some free market practices, and some free market economists who favor some regulation. But Paul Krugman is not one of these, in my opinion.

 

 

2) Second, we *have* tried truly free markets, back in the Industrial Revolution. It failed, miserably, and we put regulations in place as a *direct* result of failures of the free market system.

 

If they were failures, as opposed to minor inconveniences that lead companies to reject all moral/ethical considerations in their decision-making and begin to use "what the law allows" as their only determiner. Alan Greenspan himself wrote a fascinating and enduring essay along these lines, analyzing the history of Alcoa in the context of the then-current debate over breaking up the trusts. He suggests that the process was gradual, but that early minor regulations forced companies into a posture of doing everything allowed by the law, and remove all other considerations from their practices. In other words, regulation may not technically have come first, but it caused the need for more regulation.

 

I believe the question to be moot, because a free society is ultimately intolerant of non-regulation -- the mob will ultimately rule, one way or another, and it will not tolerate pain and suffering. So there was never a possibility of a free market in this country. Not ever. It has nothing to do with economics.

 

 

Boeing and GM have a profit motive that lies in producing safe vehicles, though, or at least sufficiently obscuring the fact that they don't. And they are both made to produce safe vehicles by significant government regulation, anyway. The profit motive of health insurance companies lies in decreasing the ratio of the amount they have to pay out to policy holders to their income in premiums.

 

Sure, my point is just that it's not the profit motive that's causing that problem, and as even Krugman admits with regard to HMOs, it is possible that we could have for-profit health insurance. He's not even advocating its demise -- he's suggesting that it be regulated.

 

I think the biggest danger in this lies in doing what he says and then thinking we've solved the problem. It's almost as bad as Congress ignoring the problem entirely and simply having the government PAY the high cost of health care (the coniferous plant "fernus monetaris" grows right behind capital hill; everybody knows that!).

 

 

It think you just have thing with Paul Krugman, then.

 

Sure! I'm not trying to hide that. It's my opinion. Though at least I back it up and explain why I feel that way -- give me credit for that!

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How would complete freedom solve the problem?

 

Nobody's saying that it would.

[bascule]

Nobody's saying that it would.

 

You seem to be arguing that there's the possibility that it would.

[CharonY]

So the point is normal market rules do not apply to health care. Krugman is basing his article on a paper from the 60s, in which much more detail is given. The paper essentially describes that the normal market rules (based on a competitive model) fails to apply to health care and such any assumptions to what a free market should achieve (e.g. cost reduction) would in theory therefore not apply. Maybe this is a point that is easier to discuss.

Do free market rules apply to health care? If not, what changes to the model have to be made to allow it still to be an efficient system? Of course, if one disagrees that health care different than any other market one might want to discuss some of the points Krugman or in more detail Arrow made.

[Pangloss]

You seem to be arguing that there's the possibility that it would.

 

Conceptually it's fine, it's just untenable. But it wouldn't fail because of "unbalanced market forces" or whatever PC phrase Krugman and his ilk are using while they peddle another dangerously untenable concept at you. It would fail because of society's intolerance for the evening news sob story.

[JohnB]

Pangloss, I think the difference between health insurers and Boeing or GM is product.

 

Boeing and GM produce a tangible product that if it is safe, then people buy it and the company makes a profit.

 

Insurance is an intangible product and valid comparisons cannot be made between the two. (Ask any salesman you want, they'll tell you the two are vastly different.)

 

The simple economic fact is that the best business outcome for an insurer is to maximise premiums (income) while minimising payouts (expenditure). Carried to it's logical conclusion, the perfect outcome for the insurer is to collect premiums and never payout a cent. This is obviously impossible to achieve, so minimising payouts is the next best thing.

 

Just a thought. One way to improve things might be to have a government backed insurer. This insurer would be required to make a profit in a reasonable manner and amount, something comparable to what industry in general makes. This would force the private insurers to compete or lose customers. Note that they would still be making profits comarable to general industries, but much of the obcenity would be taken out.

[Mokele]

It's also worth noting that it's pretty difficult to get an idea of which insurers are better than others. AFAIK, there's no "amazon.com reviews for Health insurers", or compiled ranking of companies. As such, I pretty much just have to look over the benefits and pray they don't **** me over if I ever need to claim.

[Pangloss]

The simple economic fact is that the best business outcome for an insurer is to maximise premiums (income) while minimising payouts (expenditure). Carried to it's logical conclusion, the perfect outcome for the insurer is to collect premiums and never payout a cent. This is obviously impossible to achieve, so minimising payouts is the next best thing.

 

I just don't think it's that black and white. If it were, life insurance wouldn't work either. As I said above, even Krugman admits that health insurance can work on a profit motive (HMOs). IMO the principle is fine -- it's the combination specific bad practices and poor application of regulation/oversight that are the culprits here.

 

But I don't disagree that a change in that approach might be a good idea.

 

(Hey, guess what the two bills before Congress don't do?)

[JohnB]

Life insurance is a very different thing, and the stats have been collected for a lot longer. They can't tell you which 45 year old non smoker, whos uncles wifes sister had polio as a child will die next week, but they can tell how many of them will.

 

Life insurance is also a single payout situation whereas health insurance can have to keep paying for decades.

 

Health insurers can make a profit, the Australian ones do.

 

TBH, I wonder if the biggest obstacle to decent HC reform in the US isn't your state governments and their insistence on "States Rights". You're one nation, they should accept this fact and begin acting like it.

[ecoli]

I don't bother with Krugman because I have Tyler Cowen (who's infinitely more interesting to read, more balanced in his views and arguably a better economist)

http://www.marginalrevolution.com/marginalrevolution/2009/07/examples-of-free-market-health-care.html

[Realitycheck]

 

 

TBH, I wonder if the biggest obstacle to decent HC reform in the US isn't your state governments and their insistence on "States Rights". You're one nation, they should accept this fact and begin acting like it.

 

That's a good one. It seems like I've heard rumors about secessions lately, possibly as a protest to healthcare reform. oh well, we'll just have to show them the error of their ways. Nothing happens overnight.

[CDarwin]

 

TBH, I wonder if the biggest obstacle to decent HC reform in the US isn't your state governments and their insistence on "States Rights". You're one nation, they should accept this fact and begin acting like it.

 

Well, the states really do have rights. In fact, they have every right not explicitly given to the federal government or the people. That whole Constitution thing.

[JohnB]

Our States have rights too. However they have forgone some of those rights in the cause of the common good. Not just health, control of air traffic and other things as well.

 

And let's face it, it's not like you have to have a referendum to change your Constitution.

 

Let the Feds put up some sort of deal, with the caveat that the only States it applies to are those that cede certain rights in the area.

 

If the State govs demand total authority over health care, give it to them. But with authority comes responsibility, so Federal funding should dry up.