Bryan Caplan  

Punk'd By Krugman? What Happened When My Insurer Denied My Baby Coverage

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Business vs. Markets... M as a weighted average...
Back in August, Paul Krugman accused me of living in "an alternative universe in which insurance companies would never, never treat their clients badly, because that would hurt their reputations."  Of course, what I really said is that even when insurers deal with big, lumpy liabilities, reputation continues to work well.  I never said "never." 

Still, a month later I started wondering if Krugman had set me up for an episode of Punk'd.

Here's what happened.  About a month after I defended the power of reputation in health insurance, my baby was born.  A day later, doctors rushed little Simon Caplan over to the neonate intensive care unit (NICU) because he had an ugly rash.  (Don't worry, my baby's fine now).   He stayed in the NICU for five days while a series of doctors solemnly told me one statistical fallacy after another.  The doctors never figured out the problem, but the patient got better.

No sooner was my baby home from the hospital when we got a letter from our health insurance company.  The letter explained that the insurance company was denying coverage for the NICU, because according to their standards of care, he didn't need to be there.  The letter cryptically added that if our hospital was in the insurer's network, the Caplan family might not be financially liable.

At this point I looked around for Ashton Kutchner, Paul Krugman, and a bunch of hidden cameras.  The satanically evil health insurance industry was devouring its own apologist!  We capitalist running dogs expect a little more gratitude.

After I caught my breath, personal strategy and impersonal analysis interwove.  My thoughts:

1. Since I was extremely unimpressed with the doctors, I was willing to entertain the possibility that my health insurer was in the right.  Maybe it was inappropriate to put a baby in the NICU for a rash.

2. When my baby was in the NICU, I vaguely wondered how much it cost.  Now I suddenly cared.  A lot.  Could it be $5000 a day?  I remembered that two days earlier, I seriously considered taking my baby home against doctors' advice.  But when the care was free, I held my tongue.  Was my reticence going to cost me $10k?

3. The insurer and the hospital were going to start pointing fingers at each other.  Even if it was resolved in our favor, I foresaw massive headaches.  And frankly, I'm the kind of person who'd rather lose money than endure headaches.
 
4. Should my wife talk to her benefits rep at work to lean on the insurer?  I knew that had worked for my dad when he had a problem with his retirement account.

5. I was never deeply worried.  My wife is a shark of lawyer, and if worse came to worst, we could pay out of pocket.  But lest you think I'm a bigger jerk than I really am, I repeatedly reflected, "For most people, this would be scary, not annoying."

6. It often occurred to me that I might be morally obliged to pay the hospital out of pocket.  Wasn't there some point where I promised to pay any charges that weren't covered by insurance? 

When I told my tale to Alex and Robin, they said it was 80% likely that matters would eventually be resolved in our favor.  But we'd have to make a big stink about it, loudly refuse to pay no matter what, etc.

OK, so what happened?  A day after my inner dialogue, my wife felt well enough to actually call the insurance company.  They explained that they were denying coverage because there was a double billing.  When they checked their records, they realized that they had accidentally entered our baby's charges twice.  Their computer then automatically generated the letter denying coverage for the second set of NICU bills.  The insurer apologized, fixed the problem, and paid the hospital.  Despite all my mental gymnastics, everything hinged on a clerical error.  The end.

A couple days ago, we got the financial statement that shows how much the insurance company actually paid.  The hospital's official charge for our baby's stay was $16k total; the insurance company had a 50% discount, so it had to pay $8k.  I would guess that about $5k of that was for the NICU. 

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?

P.S. Would I be sharing this story if things had worked out differently?  Yes.  My conscience wouldn't allow anything else.  However, if there were litigation, I probably wouldn't have said anything until the case was resolved.


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COMMENTS (21 to date)
Matt Conover writes:

Similarly, a national automaker should care enough about its reputation to incur an economic loss rather than attempt to save cost when human lives are at risk. Oh wait, the Ford Pinto, forgot about that. Fortunately for us, insurance companies are more honest than automakers.

RL writes:

Out of curiosity, BC, would you mind elaborating somewhat on the many "statistical fallacies" the doctors told you? Did you correct them? Did the fallacies continue once they were aware you saw them for what they were? (I'm trying to figure out if you think the doctors don't know they are making statistical fallacies or if you think the doctors find it easier to provide a statistical fallacy than to explain a more complicated truth that ends up with the same recommendation...)

Steve Waldman writes:

Bryan,

Huh? I enjoyed this post, it seemed thoughtful and sincere, until... "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?"

The error was resolved in to the mutual benefit of you and the insurer. If the double-billing stuck, the insurers would be on the hook for the first, legit, hit, and would face some probability of being stuck with the second. Only the hospital would stand to gain from letting both bills stand. Of course, the hospital would have fixed the error as well.

Standing by and affirming the validity of a demonstrable error would constitute easily identifiable fraud. It wouldn't be much of a testimonial to reputational constraints that insurers avoid participating the sort of fraud for which they would very likely be caught out, and could face penalties that transcend reputation. 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.

Your nicely told story would be more effective if the moral were "it's easy to see malevolence, especially in common bogeyman like Big Insurance, where in fact there is only entropy and good-faith human error." Taking your experience as positive evidence for the power of reputation is taking your tale a step too far.

Kurbla writes:

Routinely denying first requests is an old trick of insurance. Probability of the accidental double billing *and* writing you letter without checking the facts once more is pretty low. They care for their reputation too much to do that *accidentally.* So, maybe they did it on purpose. You complained, and they automatically changed their decision.

You're not convinced. Maybe they tried to cheat you, maybe they didn't, right? And you're right. If we are honest, we cannot know. We can only hypothesize. Insurance has more than reasonable doubt on its side.

BUT, we can go meta: look at the outcome - you still trust this insurance company. You believe this case confirmed their care for reputation. So, if they knew in advance the way you'll react, it would be inefficient if they *didn't* denied your request first time.

BUT, they can go meta as well. They know that we know. But they know that we have no smoking gun. So, we will not be able to convince other people much.

They win.

:-)))

Lauren writes:

I'm glad it worked out well for you personally in the end--both with Simon's health and with the insurer paying.

About the clerical error that you discovered by actually making a phone call: For years now, my friends and I have been ranting, wide-eyed, about how absolutely nothing you buy or order or have fixed goes smoothly any more. Every transaction takes not one, not two, but three times before you get the billing right or get what you asked for or what you paid for.

If you bother to check a bill, it's often incorrect, requiring multiple phone calls and conniption fits till you reach someone with the authority and brain-power to comprehend the problem and fix it. Double-check your bank statements and over the course of two years you'll find at least one auto-scanned check that got cleared for the wrong amount, requiring multiple phone calls and even bank visits to fill out forms--not to mention bank managers remarking in astonishment that you must be the only person left who balances his checkbook. Double-check your utility or phone bills and you're in for hours of phone calls requesting mere explanation before you can even begin to figure out if the service change you agreed to on the phone two months ago and finally got around to verifying got implemented correctly. Sign up for a discount offer offered by a company you do business with, and if you dare to inquire what ever came of it, you'll find that it wasn't implemented--till you call and work your way through the hoops, including people denying that the discount offer ever existed or that you signed up on time. (Moral: print everything; take notes about times of phone calls and names of people you talk to even if the same person never gets on the phone twice, and don't misplace your notes the way I usually do!) If a serviceman comes to the house, or you take your car in for a routine service or repair, it takes not one but two or three visits, plus checking that the work you requested was actually done and checking the bill to make sure you weren't billed for more than you were quoted or agreed to or received. Things that are ordered from stores in person or online arrive incorrectly--and sure, the supplier will fix it at their expense, but you have to get on the phone, take or send the thing back, wait for the reshipment, and then check the reshipment all over again. Shipping charges get added to online orders showing one amount online and a different amount when your credit card is charged. Refinance your mortgage and accidentally discover that you double-paid a month's payment because you actually hired your own lawyer to do the arithmetic and represent you for what should be a simple refinance; and guess what--it takes a month of arguing with the bank and a phone call to your Congressman to get reimbursed.

None of this--except perhaps with the health industry--appears to be intentional. But it's absolutely rampant.

The incentive structure with regard to billing has changed in the last 10-15 years. No one bothers to check bills, invoices, or statements any more. There is a false sense of security that computer-generated bills or orders are unlikely to go wrong. Also, no one checks or follows up because the bills are often so complicated to read and so full of lingo and unexplained charges and surcharges that it's not worth the consumer's time. Or, that the amount of the error is probably too small to bother checking for, much less spending time resolving. So billing just goes on out of whack, till someone finally gripes; and even then no one fixes it globally because there is no feedback to the company. Complaints are viewed as individually resolved, and companies are very skeptical that customer complaints could possibly stem from general problems. One satisfied customer reporting his happy story of resolution in a followup survey or online is all the reputation a company may need to justify or advertise itself.

Modern life's inconvenience has filled almost all the time saved by using computers and the internet--at least for the traditionally housewifely-portion of our economic activities. The portion of our time devoted to checking and getting things fixed or double-checking has been sacrificed at the cost of--well, cost. Either you triple-check everything and follow up with your time and annoyance for a few months, or it likely costs you financially.

The only companies that get it right almost all the time are Amazon and local self-employed contractors who hand-create their bills. That's reputation in action.

So, anyway, setting my rant aside--great that you and your wife pursued the question; and, that it was a billing error is no surprise to me. I think you are right about the reputation matter for the insurer authorizing someone to fix it for you and your wife; but the real question about reputation is: Did the insurer follow up internally to try to figure out why you got double-billed in the first place so that it doesn't happen again for someone else? I'm going to guess they haven't done that.

c writes:

"He stayed in the NICU for five days while a series of doctors solemnly told me one statistical fallacy after another."

"Since I was extremely unimpressed with the doctors, I was willing to entertain the possibility that my health insurer was in the right."

Could you please elaborate on the above statements. I'd be interested to know what statistical fallacies were presented to you. As well, what was your basis for being 'extremely unimpressed'? We're they poorly dressed, poorly communicative, or not nice enough to you? What previous experience do you have in the NICU or treating neonatal medical conditions are you drawing from here?

Or, from another perspective, maybe the staff was overly cautious (too much/unneeded work-up/care) with your child because they had gathered that your wife was a 'shark of a lawyer'. My guess is you got to experience defensive medicine first hand. They probably thought your kid was alright, too, but they wouldn't get a medal or any extra benefit from sending your kid home. However, consciously or not, you are obviously well insured so the hospital would get paid for whatever care was provided, and the providers could be extra cautious to make extra-sure to rule out anything bad that would expose them to liability, the fear of which is heightened by treating a lawyer. Look at the incentives for all parties and tell me that's not exactly what happened.

"I remembered that two days earlier, I seriously considered taking my baby home against doctors' advice."

Ah...everyone is a genius in retrospect. I remember that time back in November when I almost bet the house on Google stock at 262...

c writes:

Come to think of it, I'd love to see your next post titled:

"NICU visit opens economists eyes to costs of defensive medicine."

Maybe having a 'shark lawyer' for a wife compels you to underestimate the impact medical liability (real and perceived) has on medical practice, but I would encourage you to explore the issue further. The economic incentives are readily evident, the economic impact will horrify you.

y81 writes:

"For years now, my friends and I have been ranting, wide-eyed, about how absolutely nothing you buy or order or have fixed goes smoothly any more."

I don't understand where the "any more" comes from. Let me adduce the following data points (aka anecdotes):

My father has told me stories about how his father used to walk the neighborhood every Saturday (or maybe every other Saturday, I don't remember) settling his bills (with the cash from his pay envelope). There was quite a bit of haggling and argument, which embarrassed my father, which is why he remembered it.

My mother used to spread the bills over the dining room table once or twice a month and go over them line by line. I don't remember how often, but she certainly found things to argue about on occasion.

The first checking statement I ever received (circa 1973) from my very first checking account had an error. (A check had been paid for $0.10 more than it was written for.)

SydB writes:

My wife was turned down for health insurance by Aetna because she had breast cancer years ago. Too big a risk apparently. Fortunately the state of california has a system in place to ensure people who have been insured all their lives can get insurance when a switch is made.

The system is broken, your example notwithstanding.

RL writes:

c, I have written on defensive medicine, and I think the problem is derivative.

If we didn't have third-party payments, patients paying out of pocket would demand to know why studies were being ordered. I doubt they'd agree to pay for studies because I want to "rule out a rare and very unlikely possibility, just to 'be sure' (i.e., not get sued)".

If we have tort reform WITHOUT a change in third-party payments, doctors will face less risk of being sued. But it WON'T drop to zero. And the cost of ordering more studies will still be essentially zero. So there is no good reason to believe that tort reform alone will end the practice of defensive medicine.

Pedro writes:

Matt: From what I remember when studying the Ford Pinto case in class (a few years ago),
1) Obviously no car is perfectly 'safe' - noone would pay for such a car
2) The Ford Pinto was no more prone to fire (the 'defect' that started the scandal) than other comparable cars at the time
3) The cost-benefit analysis that many point to as evidence of Ford's evilness was either (I can't remember which) done by a government agency or done at the request of a government agency

c writes:

"If we have tort reform WITHOUT a change in third-party payments, doctors will face less risk of being sued. But it WON'T drop to zero. And the cost of ordering more studies will still be essentially zero. So there is no good reason to believe that tort reform alone will end the practice of defensive medicine."

Ummm...who said tort reform would end defensive medicine? I was just pointing out that the extra care provided to baby Caplan, which was even recognized as probably unnecessary by the non-medical B. Caplan, was probably excess caution in the form of defensive medicine. I didn't say tort reform would end all problems with healthcare.

And as far as "tort reform alone won't end defensive medicine" - sure, it won't end it, but it certainly won't increase defensive medicine, and it will almost certainly decrease it.

I agree with you with regards to third party payors distorting incentives, in line with my post. Caplan thought about early, but why leave, when someone else is picking up the tab? So how do you intend to removed third party payors from health care (and the government, be it medicare, medicaid, whatever concocted form emerges, is exactly that)?

"I doubt they'd agree to pay for studies because I want to "rule out a rare and very unlikely possibility, just to 'be sure' (i.e., not get sued)"."

Ha Ha Ha Ha Ha!!! This is priceless. Spend a night in an urban ER, and let me know how you think the majority of patients will perform as 'informed consumers'.
1. When you're unconscious, unresponsive, or otherwise in extremis, it's not a consumer situation like looking for the best deal on a widget at WalMart.
2. Doctors spend 4 years in medical school and 3-7 years in residency to learn how to decide what to do...hard to think the average person is up for understanding the implications of their decisions. No te mention someone with less than a high-school education.
3. So if you come in with a heart attack and need bypass surgery (somewhere in the $100k ballpark) or you find you need a heart/lung transplant for some reason (easily $250k+), how do your mythical 'informed medical consumers' to pay out of pocket for that without the help of a third party payer (again, anyone that is not the patient is a third party payer)
4. I can't wait to see the Dateline episode on 'When Mothers Choose Handbags over Medical Care for Their Children'. "I didn't think it was worth spending $100 to test little Johnny for disease X like the doctor wanted...who knew he had what would have been a treatable cancer at that time, but now it's too late.

Glad you've written on the subject -- although having done so doesn't make you credible. Your comprehension of medical certainty, and the dilemmas faced in every day practice seems limited at best -- as evidenced by your supposition that average individuals can function well as informed consumers.

Anonymous writes:

You sound like a guy who, when his baby was ill, momentarily understood that a little extra caution (rather than a guess at whether this baby is the one whose rash indicates a potentially fatal condition) was appropriate when YOUR infant's life was at stake.

To save your career as an industry-protective columnist, though, you NOW, hypocritically, are recasting your view to coincide with your position that insurers should deny care that later proved to be unnecessary.

Nice that you got a quick and pleasant resolution (allegedly because your denial, unlike similar ones, represented a clerical error). Those of us who are not shills for the insurers and/or don't have an aggressive attorney for a wife often have a different experience.

Look at your son for a moment, and then tell us that medical caution for a possible risk was unwarranted.

RL writes:

Sorry, c. I assumed from your initial comments you were a fellow physician. It's become clear from your follow up you don't really have an understanding of how it works. Next time you see your doctor and he orders tests, tell him you're paying out of pocket and ask why he's ordering each test and how much it costs. He'll quickly change what he orders.

Some areas of medicine are NOT covered by insurance. For example, some parts of plastic surgery; refractive eye surgery. Ophthalmologists and plastic surgeons tell me their patients ask detailed questions about charges. Seems knowledge asymmetries are not insuperable, in health care or any other aspect of the market.

And it's true that writing on a subject does not imply advanced knowledge. Why, I see it in blog comments all the time.

z writes:

RL,

Great tactic, resorting to the personal criticism without addressing any of the questions I raised.

I'll be sure to tell the 45 year old that comes in GCS 4 post ACOM aneurysm rupture that she has several choices with regards to diagnosis and treatment. Would she like to skip the CTA and go straight to angio. Would she prefer her aneurysm be clipped or coiled. I'm sure she'll be ready to make informed decisions at that point with regards to cost and outcome. And, no doubt, she'll be ready to write that $100k check for her treatment and hospitalization, what, with you wanting to get rid of third party payors and all.

Sure, you can let the market work in outpatient elective medicine (like certain optho procedures, most derm, and some plastics). Hard to really get past information and knowledge asymmetries in acute medical conditions. "No doctor, I don't want to pay for the MPS, the coronary CTA, or any other diagnostic test. My chest hurts and I have enough money for the bypass, but only if we do it without doing anything else."

If someone knocked you out, woke you up at a Chinese car dealership (and you don't know Mandarin), and gave you 30 seconds to pick out the car that would be best for you in a crowded showroom (and you're never heard of any of them)...do you think you'll walk out of there with a good deal.

I look forward to your ensuing substance-less personal attack.

Under you proposed consumer choice system...who makes choices for those incapable of choosing for themselves (minors without responsible adult parties, unconscious, incoherent, demented, or otherwise non-responsible people)?

If a patient decides to forgo a recommended treatment because, in their (untrained) 'infinite' medical wisdom they don't think it's a 'good deal', will society get stuck with the tab (despite your claim of 'no third party payors') when their medical condition worsens? Sounds sort of like bank bailouts -- privatized savings/gain; socialized losses.

Feel free to actually offer up your 'expert' insight into any of these issues. Or, you can go for senselessly criticizing me again, without addressing anything of substance to support you proposed fantasy world of consumer driven health care. Given the recent issues with home mortgages, credit cards, etc. I would offer up that if consumers can't be trusted to make such purchases without much outcry for 'consumer protection', it stands to reason that they probably won't be very good medical consumers.

Dentistry is actually a great example. See the recent Slate.com series on dental care. Dental care is very much left to consumer choice. Yet how many people have significant morbidity/mortality related to complications of dental disease. If the general population doesn't make great choices about their oral health, good luck letting them decide how to manage their esthesioneuroblastoma.

Babinich writes:

Bryan,

Glad to hear your baby is doing well.

One statement by Bryan sticks out to me more than any other:

"And frankly, I'm the kind of person who'd rather lose money than endure headaches."

Bryan, the moral of your story (if you allow me to be so bold) is this:

You demonstrated personal responsibility. You took it upon yourself to analyze and understand the bills presented to you as those you'd be responsible for. Your due diligence, more than likely, saved you money.

Lauren writes:

y81 writes:

I don't understand where the "any more" comes from....
Quite right. Your anecdotes are excellent reminders that it's not a recent phenomenon that billing matters often require followup--on both the paying and receiving ends.

My argument should be restated. Incorrect billing is certainly not a new phenomenon. I'm arguing that incorrect billing has become more prevalent because of reduced incentives in the last 10-15 years to check in the way our families always did, spreading out the bills and double-checking them on a regular basis.

Today, people trust a lot in their computer, online, banking, credit card, automated, phone, medical, employer, employee, mortgage, tax, government, and other contractual service relationships when it comes to paying bills. Intervening servicers such as insurers, mortgagers, banks, utilities, government, or otherwise non-locally located intermediaries make it even one step harder to get the factual details to check. Dare to challenge any of that infrastructure by actually checking a bill that turns out to be wrong, and you are triply-whammied with spending valuable time working on it, having to keep records of your questions or complaints, and all that on top of probably not getting even the most legitimate or obvious complaint resolved in even a first or second pass. My argument is that the costs to checking by both buyers and sellers have increased to the point of exhaustion.

The family's and business's time and energy to do routine followups to bills or invoices or statements has been replaced by either accepting these reports at face value or spending hours on the phone complaining and working up through the ranks, or reviewing procedures or even appearing in person to try to fix internal billing.

Once each individual problem is resolved, for a business with an online presence today that business doesn't have to do much more to keep its reputation good. So long as no one complains about you online, you are in good shape. Better still, send out 1000 questionnaires asking something like "Were any problems you had resolved promptly and to your satisfaction?" and get back a good rating of 3-4 out of 5 for almost every respondent.

What's the tradeoff in your business's online reputation if it has 1000 complainants--perhaps only a fraction of those who actually had problems--of whom 995 were so excited and happy when your staff quickly responded and resolved their personal situations that it resulted in 5 people taking the time to describe their satisfaction online, in blogs, surveys, or email what a great job you did in resolving their personal problems when they called, versus if you as a company fix everything you know about, reduce the number of complainants and the staff you need to resolve those easy complaints, yet still have 5-10 remaining complainants whose problems you couldn't resolve of whom 1 complains bitterly? When almost every squeeky wheel who complains is easily made happy and then follows up by reporting in surveys or blogs that he had a good experience with your company, it must mean you must be doing everything right, eh? For a reasonably low cost, even the most legitimate company can potentially swamp the negatives with positive feedback and perhaps even temorarily deceive itself about how well it is doing in the modern internet world. I'm not sure about the cost tradeoffs, but it seems possible.

The incentives for acquiring good reputations are differently skewed today, with a lot to learn on both sides.

Walt French writes:

If it is the job of the insurance company to “handle” financial claims from providers, it sounds like the single thing they're meant to do, they failed to do. Your wife did their work for them.

They send you scary computer-generated denials, no details, no personal contact for the maybe a thousand dollars a year of EBITDA they receive *from you* personally.

How many industries can be so grandly indifferent about their service reputation that they utterly screw up their job, and can get lackey running dog apologists to blog favorably about it? What table scraps in the way of ideological comfort level makes up for being kicked in the ribs like this?

Caitlyn Nesbitt writes:

This story I am sure can apply to many out there when the all of a sudden some random letter or e-mail saying that they will not cover the bill. I personally do not think they care at all about their reputations as insurers otherwise there would not be as much hatred towards them all.

I know for a fact that they tend to make these kind of mistakes quite often through personal experience and think that is very selfish and rude. This country has enough to worry about without them making it more difficult.

I am glad to here that they did make up for their mistake and took care of it, even though your wife and to tell them about it first.

Victor writes:

Is your "insurer" truly at financial risk for your claims, or is George Mason University?

jenizaro writes:

Well, I don't see how this proves the insurance companies care much about their reputations. It was an administrative mistake: they should fix it!! It has nothing to do with reputations. It's not like they decided to cover an expense just to maintain your good perception about them. I don't understand your point.

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