The Absurdity of Preserving Profit in the Health Insurance Industry

You know, one component of the health
insurance reform debate that has always puzzled me is this notion that somehow
health insurance companies are entitled to make a profit for using your money
to pay for your health care.  It's truly one of the strangest concepts
I've ever heard of, and I think it's time we put that notion to rest, once and
for all.


Did you know we're the only
industrialized nation on the planet whose health care financing system is
controlled by a for-profit health insurance industry? Yeah, that's right; and
we're also the only industrialized nation in which health care makes up significantly more
than 10% of its GDP (Health care accounts for  nearly 17% of our GDP), even though
we're also the only country that doesn't cover virtually anyone living within its
borders legally. (Fully one-fifth of our population has no coverage, or access
to health care.)  Coincidence? Not even a little. If you think about what
for-profit insurance companies do to maximize their profits, it actually makes
perfect sense that our system is screwed. Health insurance, even when it works,
doesn't actually provide a marketable service. Essentially, they take money
from a bunch of people, who give it to them in good faith to pay for any health
problems that might arise but they alone seem to decide what is necessary and
what is not. And whatever they don't spend, they get to keep.


How is that fair? More importantly,
I'd like for some wingnut to explain to me how that meets any sort of rational
"free market" capitalistic model.


The health insurance model we live
with now is patently absurd. They actually increase their profits by NOT
providing services. In what way does that not stand capitalism on its head?


Think about it this way…


Imagine your brother-in-law came to
you and said, "Send me $18,000 per year, and I'll keep it for you.
Whenever you need money to spend, just come to me, and I'll pay the bill for
you, as long as I approve of the item you plan to buy. Then, at the end of the
year, whatever you haven't spent, I get to keep."


Would you take that deal, or would you
laugh at him and suggest to your wife that he be committed?


What if you deposited money in your
bank, but in return for using the debit card (your money), the bank got to
approve your purchases, then zeroed out your balance every December 31, kept
the money and made you start over? Would that be a fair capitalist model? What
if they approved you for a mortgage this year, then ten years later canceled it
because the home's value had dropped slightly or the neighborhood had changed?
Wouldn't you consider that unfair and take them to court? Oh, wait; you can't
take them to court, because the mortgage contains a mediation clause.


The above examples are almost exactly
how health insurance works now. Our current health care financing system is wrong, and it will cripple our economy if we continue with it. By the way,
this shouldn't come as a surprise to anyone, but the current for-profit
insurance system is actually relatively new, and pretty much a neocon creation.


Yes, that's right. The concept of
for-profit health insurance is actually a relatively new concept; borne out of
the right wing takeover of the government that actually started right after
Goldwater lost the 1964 election by a record margin. Consider the history of
health insurance, and you'll see that health insurance worked quite well for
most people until it became a profit center.


During the 1920s, because of increased
technology and a desire for higher quality care, doctors and hospitals started
charging a little more than most individuals could afford to pay. Baylor
Hospital in Dallas saw the problem and created a system of insurance, wherein
everyone involved could pitch in a few dollars a month, and the system would
pay their bills in the event of illness. This concept caught on all over the
country, and the Blue Cross system was born.


As conceived, Blue Cross was a system
of largely philanthropic organizations. The organizations were led by (then
non-profit) hospitals, which were mainly interested in signing up potential
patients. They charged the same premium to everyone,
regardless of age, sex or the state of a person's health.  In other words,
health insurance came about because hospitals wanted to be paid. It was an
economically rational choice, not unlike General Motors setting up its own
financing arm, so that more people could afford its cars.


But as is the case with most such
ideas, commercial insurers saw a chance to make a buck and bastardized what
started as a rational system. The success of Blue Cross convinced those
insurers that there was money to be made in health care, so they entered the
market by peddling their wares to employers during World War II. Because of
wartime wage controls and labor shortages, businesses were looking for a way to
compete, so they signed up with these private insurers and offered health
insurance as a way to attract new workers. Since they were establishing a
market for themselves, they mimicked Blue Cross in every way, including
charging everyone the same premium. And they would remain non-profit for quite
a while, as they tried to establish themselves.


At the end of the war, you had a
strong, non-profit, hospital-run, philanthropic Blue Cross system, and a
smattering of fledgling private insurance firms, trying to sell businesses on
carrying health insurance to attract workers, and not interested in profits
quite yet. Therefore, when Harry Truman proposed a national health insurance
system right after World War II, it didn't go over well, as opponents could
rightfully point to the non-profits and say they had the situation well in
hand, and it wasn't needed.  In particular, he was opposed by the American
Medical Association, many of whose members were running Blue Cross organizations,
and who characterized the proposed national health insurance as
"socialized medicine."


Let's just say Harry Truman was a


At the time Truman proposed a
"socialized insurance" scheme, most people had access to health
insurance, it was affordable, and everyone paid roughly the same. But, as more
private insurance companies entered the market throughout the 1950s, the market
began to change, as more of them started evaluating risk and began to avoid the
riskiest customers altogether, and raise premiums for those who were just a
little risky.  At the same time, large companies started to self-insure,
which took a lot of potential customers off the market for the still-emerging
health insurance companies. But this was the beginning of a trend, whereby
those who needed coverage most had the hardest time getting affordable
coverage, if they could get it at all. 


During the 1950s, a greater number of
workers, seniors and the unemployed were not covered, and political
pressure  grew substantially, at both the national and state levels, to
come up with a national health insurance system. Finally, in 1965, Congress
passed Medicare and Medicaid, and 20% of the population received coverage.


But the neocon takeover of the
government was coming. When the Vietnam War became the most important issue of
the late 1960s, it gave Richard Nixon the presidency over Hubert
Humphrey. In 1971, Nixon and Ted Kennedy proposed dueling "universal
coverage" bills. Teddy's was an actual proposal that would have
essentially given everyone access to affordable coverage, while Nixon's was a
mix of public and private programs, with an emphasis on the private. A
cornerstone of the Nixon plan was a major expansion of the concept of the
Health Maintenance Organization, or HMO. Yes, folks, you have Richard Nixon to
blame for your HMO. And make no mistake; HMOs are the root of this problem,
because HMOs were the conduit by which private insurance brought profit into
the system.  Keep in mind, by 1971, virtually all health insurance was
still non-profit. A lot of people had already been priced or locked out of the
health insurance system, but the companies themselves were non-profit.


The HMO idea had been around for
years, and in the hands of good people, they can actually be beneficial. I
mean, who could argue against a plan that includes coverage for regular trips
to the doctor, and creates incentives for doctors to keep you healthy,
right?  Sounds peachy, doesn't it? But think about how HMOs work, and
imagine them in the hands of greedy profiteers.


In an HMO system, you pay premiums to
the health insurance company, and choose a primary care physician from a list
they give you. Then, that insurance company gives that doctor a portion of the
money you've paid in premiums, and that's all the money that doctor will get
from the insurance company, so he essentially gets to keep whatever he doesn't
use. Now, good doctors, in business for all of the right reasons will see that
as an incentive to treat patients efficiently. But others, especially those
working for for-profit medical groups, might see an incentive to NOT treat. And
remember; doctors only get a portion of the money you pay in to the insurance
company; the rest goes to the pool to pay for hospitalization. But look at the
model; by adopting the HMO model, for-profit health insurance companies had the
opening they needed. After all, if medical professionals got to keep any
portion of your money that was not used by you, why shouldn't health insurance
companies, as well?


For the next decade, the move to
for-profit insurance was a trickle, mostly because neocons were just gaining a
foothold in the government. By 1981, only 12% of the health insurance market
was controlled by for-profit insurance companies. But then the neocons hit the
fan, and deregulation fever swept the nation. With neocons in charge, and
progressives left to sit on the sidelines and whine about how terrible Ronald
Reagan was, all of the restraints on for-profit insurance were lifted and the
entire system was transformed into the price-gouging, immoral system you see
today.  And why not? The HMO concept is the only profit model that can
work when it comes to health insurance. You pay them money, and whatever you don't
use, they get to keep. It's simple, yet corrupt. That model used to be
called a "protection racket," but neocons see this as a good
"free market" business model.


But there's nothing "free
market," or even "capitalistic" about the current health care
financing model. Do you realize health insurance companies don't even have to
increase revenues to keep profits increasing and keep their stockholders happy
under the current structure? They only have to figure out ways to keep more of
what they collect. The problem is, their business model actually works against
the needs of the system itself. The actual players in the health care system —
the doctors and patients only — can only function if everyone is covered and
all of the bills are paid. In the health care system we've created, we've been
stuck with a "middleman" of sorts, who must necessarily work AGAINST
the needs of the system in order to increase profits every year.


For-profit insurance works against any
sort of logical model because it incentivizes the actual non-payment of bills.
Opponents of health insurance reform like to bring up "free market" a
lot, but it's as if the mere fact that insurance companies make a profit is
proof of a "free market" model. That's absurd. That's not saying insurance
companies can't make a profit at all. If they'd like to take 3-5% of premiums
off the top in a competitive environment, I suppose that might be acceptable.
But the current system is simply not a "free market" system any way
you look at it. 


The next time someone comes to you and
tells you that we need to preserve the for-profit aspect of the health
insurance system, ask them if they'd take that offer from their brother-in-law
or the bank. Then, remind them that health insurance in this country didn’t
spin completely out of control until the for-profit model took over.  Ask
them to explain such coincidence.


The Absurdity of Preserving Profit in the Health Insurance Industry — 2 Comments

  1. And the argument that we need to preserve the health insurance industry or it will create job losses and hurt our economy is a dumb argument too. Getting rid of them would create jobs elsewhere, possibly better jobs. If you’re paying $20,000/year for premiums for your family and we gave back that 30% the insurance companies skim off then your family would have $6,000 more a year so spend elsewhere … like maybe putting a down payment on a new car, which might get an auto worker his/her job back! So whenever a Righty whines that the public option will destroy the health insurance industry we should say, “Good!”

  2. In health insurance reform, what congress and the president are trying to achieve, i.e., (nearly) universal coverage while lowering costs and equaling or improving outcomes, has never been accomplished before, anywhere in the world, using primarily for-profit private insurance. What is sought isn’t a slam-dunk with this approach; nobody can point to an example that shows this approach even works. We are trying to regulate a private for-profit insurance system into having the attributes previously known only among public (or highly regulated non-profit) healthcare financing systems.
    Thus there is a significant risk that regulating a for-profit system into the attributes of a non-profit or public system will fail. If the president and congress are serious about really wanting to fix the problems this time, they are taking by far the most risky approach.
    Having a “public option” available mitigates this risk. We know that public healthcare financing can lower costs, provide universal coverage, and improve outcomes. It has been demonstrated not only around the world but in our Medicare and VA systems (themselves quite different from each other). If we want to avoid the suggested “disruption” of conversion to a completely public system, then an eminently reasonable alternative is to include a robust, available to all Americans, “public option”.
    By having a robust “public option” – I would suggest simply extending Medicare to buy-in by all Americans (in a cost-neutral way, perhaps on a sliding scale to make it accessible to lowest incomes) – we have a fallback in case the attempt to change the very nature of for-profit insurance through regulation proves to be difficult or impossible.
    Unfortunately, the president’s proposal isn’t to “build on what works”. His proposal is to rebuild what doesn’t work. This is a risky proposition. Medicare – our well-established “public option” – works! If congress and the president insist upon rebuilding what doesn’t work, at the minimum they must also have the “public option” as a model and a fallback.
    The “public option” is far more than competition for the private insurers to keep them honest. It is an alternative model, one that is known to work, which would immediately fill in any cracks and which eventually could be called upon to serve all if the “rebuild the private system through regulation” approach fails. It is the safety net’s safety net.
    We talk about the “abuses” of the current insurance system, but practices such as excluding pre-existing conditions and coverage and rates based upon risk estimates are simply standard business practices similar to practices in all kinds of insurance. The for-profit insurance companies are simply behaving the way even the most ethical for-profit insurance companies would behave. One has to admire the optimism of those who think that this behavior can be changed through regulation or that if these practices are changed, there won’t be compensating unintended consequences.
    We need the “public option” – a robust, available-to-all public program available soon if not now (Medicare took one year to implement) – to ensure that we really do get health insurance reform that works. If all we get is an attempt to rebuild the current system through regulation, there is a high probability that some future president will need to come back to congress for “health care reform” again. President Obama says that he doesn’t want that.