Bryan Caplan  

Clarification on my Punk'd Episode

M as a weighted average... Recalculation and State and Lo...
I finished my Punk'd post with this:
Question for Krugman: If our insurer wasn't extremely concerned about its reputation, why would they let a low-level functionary fix a $5k error in the company's favor after a single phone call?
In the comments, Steve Waldman wrote:

But the whole question is moot here, because the insurer had nothing to gain (even though you may have had something to lose) by letting double-billed hospital charges stand.

Steve's right about my own case: The company was refusing to pay $5k that no one but the company thought it owed.  I should have spoken more carefully. 

But I stand by my interpretation of the episode.  My insurer could just as easily have sent out this letter for the actual bill.  It could make a habit of sending such letters.  In the short-run, each letter would save the insurer $5k.  So why not send these letters out all the time - or at least any time the insurer had a semi-plausible excuse - and make them a giant pain to resolve? 

If the reason isn't the power of reputation, what is it?

Comments and Sharing

COMMENTS (20 to date)
Andrew writes:

Fraud law?

Joshua Gans writes:


I more interested in the 50% discount the insurance company gets. If the market is competitive why does the health care provider end up price discriminating that way. Surely, you know, with moral hazard and all, it should go the other way.

floccina writes:

This is a little off topic but the whole episode reminds me of a line in the article at a link posted by David where the author suggests a $50,000 annual deductible. In the article the writer points out that if we had food insurance pay for our groceries we would always have conflict with the insurer when they reviewed each of our grocery bills.

BTW it is my experience that Doctors recommend very different treatments when they know that you are paying out of pocket.

So what could be done to get deductibles up?

Here is my idea:

Kurbla writes:

You can find some claims on Internet about insurance, that

    "We were always instructed to deny ALL claims as soon as they were received," the former claims associate wrote in 2006. "No matter what the disability and no matter what the situation was. ALL CLAIMS WERE DENIED (sic). (Google knows the source)

There is no reason to believe that relation between unjustified denial and reputation loss is linear. It is quite possible that *relatively infrequent* unjustified denial results in no or little loss of reputation and that it is actually efficient method. And that threshold depends on type of insurance, nation, clients profile etc.

SydB writes:

I'm confused. Your insurer has a computer that automatically generates denial letters. And apparently sends them out without any good check (e.g. the double billing error in this case). And now you're using this as an example of an insurance company going to great lengths to protect their power of reputation? It doesn't sound like they're too concerned about sending out denials.

I suggest looking at the facts of the case unbiased by the result that you seek to prove.

z writes:

They DO deny payment of claims all the time for semi-plausible, less than plausible, and entirely erroneous reasons. That's why hospitals, medical groups, and physicians have huge billing departments. A big hospital may have hundreds of people in such a departmen, many of whom spend the majority of their day calling insurance companies to deal with denied claims. Sure, some of the denials are legitimate, but many of them are for things like "box number 54 was not correctly marked" even though, anyone looking at the form can plainly see that box number 54 is clearly marked. "Oh, sorry, we'll go ahead and pay that." Have a few of those slip through the cracks at thousands of medical facilities and offices daily and...PROFIT!

Have you even spoken with someone who works at a medical billing firm and gotten candid answers from them about how insurance companies operate? If not, you should.

And in agreement with Andrew above, it's things like The Maryland Insurance Administration and anti-fraud laws which compel them to pay claims for which they are contractually responsible. If you want to define that as 'reputation', well, I guess they're paying because they care about their reputation, insomuch as I pay my taxes because I'm worried about my 'reputation' with the IRS, because if they regard me as disreputable, I get big fines or go to jail.

Eager to see how your personal experience with defensive medicine colors your views on the provision and financing of healthcare in the US.

q writes:

yes, i have to say that caplan's reaction to this episode has really changed my understanding of who he is as a person. to have gone through this -- and to have basically followed along, taking doctors' advice and being batted around like a fly by large institutions -- and not to understand it in terms of the vulnerability of the individual in the face of these institutions? it's unfeeling, reeking of rationalization.

Daniel Klein writes:

Bryan writes:

"If the reason isn't the power of reputation, what is it?"


Virtue? (Specifically, justice.)


The "impartial spectator"?

Or are those the same thing as "reputation," as in one's reputation with "the man in the breast"?

(Not that those would diminish your basic challenge of those who see private companies as rapacious grafters.)

Matt C writes:

So why not send these letters out all the time - or at least any time the insurer had a semi-plausible excuse - and make them a giant pain to resolve?

I think the first half of your supposedly-absurd hypothetical is not terribly far from the reality.

I have dealt with a lot of medical bills and mistakes are (to me) unreasonably common. I don't recall ever seeing a mistake to the patient's benefit. Other people report the same experience.

I admit mistakes are usually easy or at least somewhat easy to resolve, but I am sure you are familiar with the concept of "heads I win and tails we call it even".

You mentioned this earlier in passing, but I think it is important. You are an assertive guy with an outrageously high IQ and a shark lawyer for a wife. I am reasonably intelligent and reasonably assertive, and able to keep my cool when some clerk is stonewalling me. What about those people who are not smart and don't deal well with bureaucracy? Do you suppose they get a rougher time of it and stuck with bad bills a bit more often than you or me? Is that OK?

You are a swell guy, but I agree with the earlier poster that you seem to have an axe to grind here. The medical "market" in this country is hardly a market at all. It's not a state run service either. It's some other thing, and that thing is a mess. Maybe I'll tell you about buying a nebulizer in some other post.

David writes:

I think Bryan may be overestimating the quality of the reputation insurance companies enjoy. Of course, reputation would matter more and be a better signal if the average person had any choice of carriers and plans.

The most important lesson from Bryan's story is not to take a crazy Explanation of Benefits letter too seriously.

Steve Roth writes:

>If the reason isn't the power of reputation, what is it?

Just plain honesty is part of it, no doubt. Just like people give to charity anonymously. (Though you could argue they're just improving their reputations with themselves and/or their spouses etc...)

But yes, if insurance companies routinely deny claims for specious reasons, in the long run it will catch up with them. (Though perhaps via legal and regulatory avenues, rather than reputational.)

But you do hear stories about certain insurance companies' default denial techniques, requiring great effort to reverse. Would probably be profitable in the short term. I've never followed them up to see if they're true.

kebko writes:

I have to agree with the other commenters. I'm really happy that you posted this episode, because I think this is a good chance for you to think about the commenters' reaction & to reassess your feelings on the matter.

This is out there now for all the dingleberries of the world, like Krugman, to play "gottcha" with, but don't let that stop you from reassessing your reaction.

I think it's kind of ironic that in your PS, you defend the post as if you're afraid that we'll think you waited until the episode was a success. Bryan, this was not a success.

This is exactly why people are not happy. There is nothing to defend in this episode. Oh, wait, after your wife, who happens to be a well-qualified lawyer, talked to them, they agreed not to charge you thousands of dollars for a fraudulent bill. You CAN hang your hat on that victory, I guess.

RL writes:

It DOES seem strange to suggest "reputation" would be a strong force in a politically restricted market. Reputation without competition accomplishes much less than reputation WITH competition. Given the illegality of interstate purchase of health insurance and the strong political lobbying insurance companies do to maintain market control through regulations and restrictions, it would be amazing if reputation was as powerful in this market as it is in, say, the computer or car markets.

To say the force of reputation wouldn't be as strong as in other circumstances does not mean, of course, that it would be non-existent. The health insurance market is huge. In an industry that may well do 1,000,000 transactions a day, even a 99.9% success record leads to 1,000 anecdotes per day about how bad the industry is.

David R. Henderson writes:

We can speculate a lot about what this means for reputation, and many people have, in what I think is one of the best sets of comments on this blog recently.
One thing that would help us all, because then we could apply this one sample point to our own priors, is the name of the insurance company. Care to tell us, Bryan?

floccina writes:

Strangely contrary to many of the posts here the insurance companies seem to have a very good reputation with consumers because most people have low deductible heath insurance which ensuring maximum interaction between consumers and insurers. Another piece of evidence is that so many people have health insurance even people healthy people in the sweet spot of having between 1 and 2 million dollar of assets where they have enough assets to pay for almost any thing that would hit but not enough to not care about the expece of the insurance have insurance. Maybe if people where less interested in buying insurance the insurers would give better service.

BTW well over half of the people with insurance will lose by having it.

Even those that get insurance through their employers could be asking their employers to drop their insurance or raise the deductible and increase their pay by the difference.

RL writes:

"BTW well over half of the people with insurance will lose by having it."

That's only true if you view buying insurance like you view betting on red in Vegas. That's like saying you lose money by buying fire insurance unless your home burns down. In other words, it assumes no value in diversifying risk, no value in increasing peace of mind.

Maximum Liberty writes:

Joshua Gans asks:

"I more interested in the 50% discount the insurance company gets. If the market is competitive why does the health care provider end up price discriminating that way. Surely, you know, with moral hazard and all, it should go the other way."

Health providers routingly have a list price for services that bears no resemblance to the prices they actually charge. For customers that belong to a PPO, they charge a discounted price negotiated with the PPO. For customers that are part of the big government programs, they report their list prices as prevailing rates, then get paid what the government allows (which is set based on prevailing rates for geographic areas). For cash customer who can shop around, they give a big cash payment discount. Some bloggers might say that last one is about signalling.

The only ones who pay list are customers that they have to bill (because they often don't pay) or uninsured customers who enter the hospital while unconscious, so have to pay list. That's probably less than 10% of all health care expensidtures before the discount.


z writes:

"Another piece of evidence is that so many people have health insurance even people healthy people in the sweet spot of having between 1 and 2 million dollar of assets where they have enough assets to pay for almost any thing that would hit but not enough to not care about the expece of the insurance have insurance."

What? That's because many of people with between 1-2 million in assets have jobs, and have insurance as part of their job. They could take the extra pay, but due to tax implications, they'd get less in pay than they get in insurance.

And, they'd like to keep that 1-2 mil in assets they have, so they have insurance. A diagnosis of cancer, or a heart condition, or any of a host of other medical problems can quickly run up several hundred thousand dollars in medical costs.

Your statements do nothing to prove your idea that, lots of people have health insurance, so insurers must have good reputations. Damn near everyone has a cellphone, but most people think cell phone providers suck. Lots of people fly, but most people think airline service sucks. When there's only one (or a highly regulated, and therefore relatively uniform regardless of absolute number) game in town, reputation goes out the window.

SydB writes:

I will for the record report that I've never had any issues with my insurance--even though I still think it stinks that my wife--always insured by group policies--was rejected by one insurance company when we went self-insured. To me, that's a problem. Change jobs or forms of employment, and one can end up scrambling.

Insurance companies--in particular Blue Cross--seem to do the run-around and play games with paperwork and billing, but we've never dealt with a significant denial--at least not yet.

Lauren writes:

Hi, Bryan.

I think the relative cost of letting your reputation take it on the chin a little bit has gone down for companies in the last 10-15 years. So, companies today buy a little less reputation and more ex-post fixing.

Here are two reasons I can think of as to why that relative cost has declined.

First, the advent of offshore calling centers (with improved language skills) has reduced the price to a company of making mistakes and fixing them only after someone gripes. It is now cheaper for a company to not work as hard in advance to catch errors, and instead to let some kinds of errors slip by, only to be caught by some percentage of alert, motivated consumers.

Second, the ability of consumers to use the internet as a tool in addition to the traditional word of mouth has changed the incentive structure--at least during some learning period--for firms' reputations. A prospective purchaser can read all kinds of product reviews online. Even if a typical person puts less weight on them than on a friend's recommendation, the reviews are available and represent a kind of democratic vote on a company's reputation.

Companies are savvy enough to notice that if they spend a lot of money fixing things in advance, so that only the worst problems get by (at some normal rate--no company is perfect), and if in turn they spend less on customer service making it hard for consumers who receive that flawed product or service to complain, then a few of those customers will gripe heartily on the internet. Unsolicited online praises probably occur at a lower rate per quantity of output sold--analogous to the rates at which mail historically reflected problems or praise. But spend less on fixing things in advance, coupled with fixing problems pleasantly and instantly afterwards, and a whole chunk of people who previously might not have bothered to compose an online comment about their perfect experience may be motivated to compose a comment or review about the great service they received!

I think the first reason is more important. The second strikes me as a question of the supply and demand for online reviews, some of the supply for which is able to be influenced at the margins by companies. Consumers and firms are both savvy, of course, so the equilibrium probably moves around a lot as consumers and marketers learn about each other's behavior through the price of the product--including time spent fixing errors. (That's my pitch for using the Hayekian approach.)

Your insurer's "allowing" a low-level individual to fix an apparently large billing error may not be unusual. Maybe a lot of billing errors of that order of magnitude are made all the time. Maybe it's cheaper to train customer service individuals to keep an eye out for such errors than to hire proofreaders to check that the bill went out right in the first place.

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