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The health care debate-15: The ruthless science of health industry profits

(For previous posts on the issue of health care, see here.)

Some of the supporters of the current health system have a somewhat naïve view of capitalism. They seem to have bought into the myth that the ‘invisible hand’ of the market will always result in good quality goods and services being provided at lower costs. That model works in some situations when there is competition among many suppliers and when the consumer has the option of not buying a product at all if they are not satisfied with the price or quality of the offerings, say as with the purchase of specific foods or a new car or a washing machine.

But it ceases to be true when people are in dire need and their options are limited. This is why one finds price gouging in essential supplies like water, food, blankets, and power generators in the immediate aftermath of a disaster like a hurricane or earthquake, when callous merchants take advantage of the misery of people to rake in huge profits. It would be insane for the government not to intervene and provide people with necessary supplies and services at those times. Look at how George Bush got hammered for the government’s slow response to Hurricane Katrina.

Since health care is one of those situations in which people do not have the option of not obtaining services, and usually have to seek it in emergency situations, it is closer to the hurricane situation than that of buying a new car, which is why a strong government role is essential.

But the private, profit-seeking health insurance industry wants to go in the opposite direction. As Wendell Potter, who used to be the head of corporate communications of CIGNA, the highest public relations position of one of the largest health insurance companies, says in an interview with Bill Moyers, “The industry doesn’t want to have any competitor. In fact, over the course of the last few years, has been shrinking the number of competitors through a lot of acquisitions and mergers. So first of all, they don’t want any more competition period. They certainly don’t want it from a government plan that might be operating more efficiently than they are, that they operate. The Medicare program that we have here is a government-run program that has administrative expenses that are like three percent or so”, compared to the health insurance industry’s 20%.

Potter explains to Moyers the brutal calculations that go into increasing profits by denying treatment.

WENDELL POTTER: …[T]here’s a measure of profitability that investors look to, and it’s called a medical loss ratio. And it’s unique to the health insurance industry. And by medical loss ratio, I mean that it’s a measure that tells investors or anyone else how much of a premium dollar is used by the insurance company to actually pay medical claims. And that has been shrinking, over the years, since the industry’s been dominated by, or become dominated by for-profit insurance companies. Back in the early ’90s, or back during the time that the Clinton plan was being debated, 95 cents out of every dollar was sent, you know, on average was used by the insurance companies to pay claims. Last year, it was down to just slightly above 80 percent.

So, investors want that to keep shrinking. And if they see that an insurance company has not done what they think meets their expectations with the medical loss ratio, they’ll punish them. Investors will start leaving in droves.

I’ve seen a company stock price fall 20 percent in a single day, when it did not meet Wall Street’s expectations with this medical loss ratio.

For example, if one company’s medical loss ratio was 77.9 percent, for example, in one quarter, and the next quarter, it was 78.2 percent. It seems like a small movement. But investors will think that’s ridiculous. And it’s horrible.

BILL MOYERS: That they’re spending more money for medical claims.

WENDELL POTTER: Yeah.

BILL MOYERS: And less money on profits?

WENDELL POTTER: Exactly. And they think that this company has not done a good job of managing medical expenses. It has not denied enough claims. It has not kicked enough people off the rolls. And that’s what– that is what happens, what these companies do, to make sure that they satisfy Wall Street’s expectations with the medical loss ratio.

BILL MOYERS: And they do what to make sure that they keep diminishing the medical loss ratio?

WENDELL POTTER: Rescission is one thing. Denying claims is another. Being, you know, really careful as they review claims, particularly for things like liver transplants, to make sure, from their point of view, that it really is medically necessary and not experimental. That’s one thing. And that was that issue in the Nataline Sarkisyan case.

Many of the people who oppose single-payer and other comprehensive attempts at health care reform may be doing so out of a sense of smug complacency. They may think they are healthy and have good coverage from their current employer and so life is good. Why mess with something what seems to be working so well for them? In fact, one of the most disgusting arguments that I have heard recently from opponents of health reform is that by adding the 40 million or so currently uninsured to the rolls, there would necessarily be increased waiting times to obtain medical services. In other words, in order to save a little time for them, they would like to see others have no access to health care.

The fact that so many other people suffer from either inadequate coverage or no coverage at all may not be sufficient to move those who think they have good coverage now to embrace reform. What they do not realize is that their seemingly comfortable situation could change practically overnight through no fault of their own. All it would take is for one or two of their fellow employees to get a serious illness for them to lose their own coverage. Potter explains how this happens as a result of deliberate policy by the health insurance companies:

But another way is to purge employer accounts, that– if a small business has an employee, for example, who suddenly has [to] have a lot of treatment, or is in an accident. And medical bills are piling up, and this employee is filing claims with the insurance company. That’ll be noticed by the insurance company.

And when that business is up for renewal, and it typically is up, once a year, up for renewal, the underwriters will look at that. And they’ll say, “We need to jack up the rates here, because the experience was,” when I say experience, the claim experience, the number of claims filed was more than we anticipated. So we need to jack up the price. Jack up the premiums. Often they’ll do this, knowing that the employer will have no alternative but to leave. And that happens all the time.

They’ll resort to things like the rescissions that we saw earlier. Or dumping, actually dumping employer groups from the rolls. So the more of my premium that goes to my health claims, pays for my medical coverage, the less money the company makes. (emphasis added)

Potter warns people who resist reform attempts that the very things they say they fear about single payer or socialized systems or even the public option are actually more likely to occur under the present employer-based system.

And another thing is that the advocates of reform or the opponents of reform are those who are saying that we need to be careful about what we do here, because we don’t want the government to take away your choice of a health plan. It’s more likely that your employer and your insurer is going to switch you from a plan that you’re in now to one that you don’t want. You might be in the plan you like now. But chances are, pretty soon, you’re going to be enrolled in one of these high deductible plans in which you’re going to find that much more of the cost is being shifted to you than you ever imagined. (my emphasis)

The private, profit-seeking health industry is a cold-blooded and ruthless business in which meeting the needs of sick people is at the very bottom of their list of priorities, while making profits for their shareholders and paying for their executives’ luxurious lifestyles is right at the top. Why anybody would want to preserve that system can only be explained either by their ignorance of how it actually works or because the politicians have been bribed by the industry.

POST SCRIPT: Billionaires for Wealthcare speak out

“If god loved the poor people, he wouldn’t let them get sick.” So true.

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