Products and Losses

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The second largest health insurance company in the country is United Health Care.  The health insurance industry supposedly supports Pres. Obama’s goals for health care reform.  Yet UHC is encouraging its employees to show up to anti-reform rallies and town halls; even providing them with talking points.

UHC happens also to be my insurance provider.

Normally, when a business I patronize does something I find deeply offensive, I take my business elsewhere.  It might be Kroger or Domino’s or GM or Disney or whomever.  If they do something I don’t like, I can penalize them by taking my money elsewhere; I might or might not do it, but I have the option.  So does everyone else.  That gives those businesses an incentive not to piss people off.

But health insurance markets aren’t structured that way.

I don’t have any control over who gets my health insurance business.  My employer makes that decision.  So there’s nothing I can do to hold UHC accountable for jumping into the political process to oppose something I favor, all the while pretending to favor it.  They’ve got my business, and there’s nothing I can do about it.

This isn’t limited to me, of course.

Consumers have extremely limited control over insurers, and therefore the insurers in this country have very little incentive to behave themselves.  Overwhelmingly, their customers are the businesses that buy group insurance and provide it to their employees at a subsidized cost.  The transaction is between an insurer and an employer, not between an insurer and an insuree.

What’s the problem?

Obviously, it’s that neither of those parties’ interests are aligned with employees/insurees.  The overwhelming interest of both insurers and employers is the same: maximize profit by minimizing costs.  The interests of the rest of us — the employees who need to rely on insurance to obtain health care — are not represented.  We aren’t party to the transaction.  We don’t make the decision.

As long as costs are low, both the insurers and the employers are happy.  The coverage can suck.  That keeps costs down.  The coverage can be rescinded when the insuree gets sick.  That keeps costs down.  The coverage can be limited to a maximum lifetime benefit.  That keeps costs down.

All of it sucks for the people being insured, but they aren’t parties to the transaction so it really doesn’t matter if they’re happy with the product.

In fact, do you know what insurers call their product?  “Medical-loss.”  That’s the money they spend buying health care for their policyholders.  Medical-loss ratio is the Holy Grail insurance executives chase; the lower it goes, the higher profits, stocks, and salaries go.  In their minds, the thing we think of as their product — access to health care — is a loss.

Most businesses take some pride in the product or service they provide.  They want to believe it’s good; that they’re providing value to the customer.  They look for ways to maximize that value, because that means customers will want more of it.  And if demand for your product is going up, your losses are going down.

That’s the way we normally think of things.  Not insurers.  To them, their product is a loss, and they look for ways to minimize its value.

We insurees, we think of buying insurance as a transaction wherein we buy a product that will pay our medical expenses, but that’s not at all how insurers think of the transaction.  Payment for medical services isn’t the product they provide to customers.  It isn’t a product at all; it’s a loss.  Every single medical expense they have to pay is a loss.

Look at how that shifts a business’s mindset.  Products are something to be designed, manufactured, marketed, and sold.  You always want to move more product, not less.  More product is good.  But losses are something to be cut, avoided, minimized, eliminated.  More losses is bad.  Losses should be zero.

In the health insurance industry, that means medical payments aren’t value delivered to the customer, and they aren’t good; they’re bad.  You cut, avoid, minimize, and eliminate them.  You push them toward zero.  They’re not your product.  They’re your losses.

But when you take that attitude, what is it, exactly, that you’re providing of value in exchange for people’s money (premiums)?  What are you delivering?  What’s that Thing you want customers to want more of?

Well, if you think your customer is the insuree, who needs their medical bills paid, there isn’t one.  The one thing you’ve got that they want is the very thing you’re trying to eliminate.

But if you think your customer is that insuree’s employer, who wants their payroll costs reduced, you’ve got just the thing: by cutting, avoiding, minimizing, and eliminating your “medical-losses,” you can charge them a little less and still make a little more.*  It’s a win-win.  And since you’re the two parties to the insurance purchasing transaction, it’s a perfect arrangement.  It sucks for the insuree, sure, but s/he has effectively no say in the matter, so who cares?

If anybody can think of another market or industry that functions this way, where the incentives are this perverse and misallocated, I’d be interested to hear it.

When this is the way our health insurance system works, is it any wonder our health care system is busted?

[* This, of course, never actually happens, due to forces elsewhere in the health care industry, but it is how the arrangement would work under ideal circumstances, according, as best I can tell, to the insurers’ notion of what the arrangement is.]

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