David R. Henderson  

Health Insurance: What Krugman Didn't Say

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Stop Us Before We Cheat Again

In his pitch for the Obama health care restructuring, Paul Krugman quotes a Reuters story about a young man who was denied benefits for a pre-existing condition even though he didn't have such a condition when he got his health insurance. A check of the article shows that Krugman referenced it accurately. The young man sued and got a $10 million settlement. It's hard to read that story and not believe that the company, Assurant Health, cheated him. If so (and the only reason I'm hedging is that my only source on this is Reuters), then the verdict was just.

Krugman uses this case to argue for the Obama bill. What's the connection? Well, if insurance companies couldn't exclude people for pre-existing conditions, then such cases would no longer occur.

But here's what he doesn't tell you. First, in that same Reuters story, someone else agrees with Krugman, namely, Don Hamm. Who's he? None other than the president and CEO of the self-same Assurant Health. Here are the last two paragraphs of the Reuters story:

During his appearance on June 16 before the House Energy and Commerce Committee, Hamm, the CEO and President of Assurant, urged Congress to pass the new health care legislation, in part, to prevent such practices.

"We can achieve the goal we share -- providing health care coverage for all Americans," Hamm said. "If a system can be created where coverage is available to everyone and all Americans are required to participate, the process we are addressing today, rescission, becomes unnecessary."

What about another alternative: allowing more competition. In the 1970s, when the Interstate Commerce Commission limited the number of companies in the business of moving people's household goods, one nightmare Americans had was of having some of their valuables destroyed. Then, in the late 1970s and early 1980s, the ICC deregulated and we got more competition, lower prices, and more accountability from moving companies. Why not try the same thing with insurance: letting people buy health insurance across state lines so that they can choose states with relatively tough enforcement of laws against insurance companies that cheat their customers.

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COMMENTS (23 to date)
Nick writes:

Why are all credit card companies located in North Dakota.

No insurance company would operate from a state with strong consumer protection laws. It would simply be a race to the bottom. Most republicans cite that as evidence costs would go down. In an industry dominated by a few large players its likely you will get open access but less accountability not more.

By the way the moving industry remains rife with fraud and there is very little accountability though the deregulation was a good idea.

David R. Henderson writes:

It's not "all", as you say, but I think you mean South Dakota. I'm pretty sure it has to do with relatively liberal, or no, usury laws. I got a credit card from Arkansas in the 1980s because of their tight usury laws. So we don't always race to the bottom.
It would be a race to the bottom only if consumers wanted to go to the bottom.
I'd be interested in seeing your data on the moving industry. I admit that I don't have any hard data, but I'm comparing horror stories I heard in the 1970s with almost none in the 1990s and 2000s.

Mike Hammock writes:

One argument I have heard against interstate competition was that market power on the part of insurance companies provides a counterbalance against the monopoly power of hospitals. It seems to me that a better policy would be to reduce the market power of both hospitals and insurance companies, but perhaps that is not practical.

Martin K. writes:

We would only benefit from buying insurance across state lines if we steered away from employer-based insurance coverage. When there's an individual market you get insurance plans that are more tailored to individuals, not the businesses that usually buy the plans. Most credit card companies may reside in Delaware or South Dakota (not North) but they don't all have the same policies or rates. Furthermore, I keep track of the companies that use unfair or unethical business practices and because of the many options available I don't ever have to do business with them.

Tom Beebe writes:

Probably late to suggest inserting some common sense, but here's a try: 1. Make sure everybody pays some part of every health care bill (a deductable). That will be the greatest restraint on costs... we look after our own money better than someone else would. 2. End the tax deduction fostering employer provided health care. that would put us all on an equal footing in buying. 3. Eliminate the exemption from anti-trust for health care insurance. 4. Eliminate restrictions on interstate sales. 5. and the most important, make all health care costs, including insurance, and dental, and vision and hearing aids, and gym memberships, all tax deductable. If any of this is an "entitlement" (how I hate that word), then why must we pay both for it and tax upon the money we spend on it? Less government, not more. But of course, who would be buying our Congressmen?

R. Richard Schweitzer writes:


If there is to be any effective form of Federal regulation of, or intermediation in, any class of insurance, it must be totally “integrated,” and cannot be limited to any one function such as “Premium Rate Regulation,” or “Sales Across State Lines,” as has been recently proposed by the President and others.

Some years past, there were proposals to replace state regulation of insurance with a Federal system. If insurance business, or any class of it, has become such a definitive part of interstate commerce that it now merits some of the recent legislation included in proposals for dealing with “HealthCare,” then some of the former concepts of the past should be revisited.

Among those concepts:

Create a Federal Insurance Commission.

Any insurer could elect to be chartered and licensed exclusively Federally, or exclusively by the states, or by both.

Exclusively Federal insurers could operate in any state without state supervision, limitations or provisions for state-mandated policy benefits.

Federal charter and licensing legislation would follow the patterns of state regulations in matters of financial requirements and actuarial soundness of operations. All mandated policy benefit provisions would, by law, require actuarially (not politically) determined premiums, as is the case with state licensing and rate setting by the states.

In order to establish the broadest possible “Risk Pool,” consideration should be given to requiring all large-scale businesses that now “self-insure” rather than purchase contracted coverages for their employees to obtain a form of Federal license. That form of licensee (and certain other forms) might be allowed to elect exemption from Federally mandated benefits requirements.

Some form of Reinsurance Pool or Assigned Risk Pool (or both) should be established for transfers of the various classes of pre-existing condition risks (they do vary) and for lifetime benefits extensions, or for any other such extra-ordinary benefits (e.g., guaranteed issue, regardless of condition), transfers for dis-similar plans, etc. Funding of either of these pools might require spreading the costs of these benefits over the tax-payer base rather than over the premium payer base, at least in part. This is cost-spreading, not risk-spreading.
If there is inadequate Federal participation, then consideration could be given to the formation of a GSE insurer, under that same umbrella.

All the preceding is no more than a skeleton. Much will be learned in any structuring; and, if tried, there will be errors and many politically induced misadventures.

Please note that this relates to insurance only and not to “HealthCare Costs.” There seems to be some misconception or propaganda that rising premiums are a “cause” of HealthCare costs, rather than the obvious reverse. However, to the extent that those costs are to be delivered into the economy in large part via insurance premiums, insurance policies and their regulation will have specific effects on consumption of services.

Now, quite frankly, from over 50 years of domestic and international experience in insurances and reinsurances, I am opposed to the implementation of any of the above proposal in the U.S. However, if there is to be Federal intrusion, this just may be the least damaging. There is no point in saying “do no harm,” but at least do as little harm as honest objectives allow.

Nick writes:

@David R. Henderson

I worked as a technology consultant for a large moving broker for about 6 months in the early 00s. I was not a sales person but my desk was in with them and we talked quite a bit. Many were industrry veteran estimators/sales people. Their mantra was 'never a satisfied customer' and hearing the customer call backs it certainly seemed that way!

It is equal parts unrealistic expectations, most of your things were never intended to be moved ( did your furniture all come assembled , i suspect not bust most people move it that way). However fraud is abundant. One of those news magazine shows (dateline maybe?) ran an expose on movers about a month before my contract was up, they're expose was dead on for about 30-40% of people who called back.

Typical story mover shows up tells you its far more than they estimated (usually using forged weight slips) , either you pay or you never get your stuff back. You can try the police, but it is your word against the mover and the mover has more legal rights to your stuff than you do!

Also a lot of them hire very shady people from day labor staffing places to load/unload the truck, leading to more items broken/stolen/etc.. including my personal favorite callback where a customer reported one of the laborers had defecated in the moving boxes.

@Martin K.

How do you know if the insurance company is going treat you unethically. The only emperical evidence available (that I am aware of) is sites on which people complain. That seems like selection bias. It seems like with regards to insurance the consumer is in a position of very low power, because you have paid in maybe for many years, and if your claim is unfairly denied what can you do? you have no recourse and cannot change carriers. Just look at the recent scandal at Assurint regarding their treatment of HIV patients. Stuff on even longer time horizons is even worse. What is the incentive for an unregulated long-term-care plan to pay in a timely manner? In many cases they know you are going to die relatively soon, so the incentive is to delay payment as long as possible even though you may have paid in for decades.

spencer writes:

Looks to me like Hamm agrees completely with Krugmann.

He says the problems Krugman describes are real
and that we need to modify the system to make it illegal.

Sure looks like his position is a lot closer to Krugman than it is to yours.

Nick writes:

@Richard Schweitzer

There seems to be some misconception or propaganda that rising premiums are a “cause” of HealthCare costs, rather than the obvious reverse.

well you've pretty much hit the nail on the head there, too bad no one in the political class will acknowledge it.

ray l love writes:

R. Richard,

I do not see any advantage to what you are advocating as opposed to what is in the existing bill:
Sec. 2718 would essentially allow profits to be regulated down to whatever regulators deem fair. “Rebate” being the key word.

‘‘(A) REQUIREMENT.—Beginning not later than January 1, 2011, a health insurance issuer offering group or individual health insurance coverage (including a grandfathered health plan) shall, with respect to each plan year, provide an annual rebate to each enrollee under such coverage, on a pro rata basis, if the ratio of the amount of premium revenue expended by the issuer on costs described in paragraphs (1) and (2) of subsection (a) to the total amount of premium revenue (excluding Federal and State taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act) for the plan year (except as provided in subparagraph (B)(ii)), is less than—
‘‘(i) with respect to a health insurance issuer offering coverage in the large group market, 85 percent, or such higher percentage as a State may by regulation determine; or
‘‘(ii) with respect to a health insurance issuer offering coverage in the small group market or in the individual market, 80 percent, or such higher percentage as a State may by regulation determine, except that the Secretary may adjust such percentage with respect to a State if the Secretary determines that the application of such 80 percent may destabilize the individual market in such State.”

The key consideration is: “or such higher percentage as a State may by regulation determine,…”. It is also important to understand that the Insurance Industry has not been transparent about the MLR and so the bill allows unlimited flexibility to the State regulators. Combine that to their ability to enforce rebates, and, this provision could in fact be used to squeeze every last bit of inefficiency out of the Insurance Industry. And there should be a chain reaction effect because as regulators squeeze insurers, they will in turn apply more pressure to providers.

If the importance of Sec. 2718 is understood, and then if that understanding is applied to the Maryland model : http://online.wsj.com/article/SB125288688445707403.html , it becomes fairly clear that though the MLR regulating may be the most effective way to drive down costs, there may not be anywhere close to as much inefficiency as some thought there to be. The ‘cost-shifting’ that the Maryland experiment clearly shows also suggests that in the other 49 states Medicare and Medicaid reimbursements, being below cost, do maintain ’some’ downward pressure on payments from insurers. This because insurers were negotiating their costs downward to what the market would tolerate. What little inefficiency as what might exist would therefore need to come from lower compensation for doctors and related industry executives, and less from iatrogenic costs. These though will not make a significant difference without limits on care

Patrick R. Sullivan writes:
I'd be interested in seeing your data on the moving industry.

I don't have data, but my family moved several times when I was a child in the 1950s and 60s, prior to trucking deregulation, and the scams were all too prevalent back then. It was common to have your furniture held for ransom by the moving company.

Now, there are many more options available, including renting a van from Ryder, Penske, Budget et al and doing the driving yourself.

The last time I moved using a commercial mover, I contracted with a company that unloaded several small containers at my house, which I loaded myself (with friends). When I was ready, I just called them to pick them up. Very smooth procedure, and no surprises when they were delivered.

That's what would happen with health care too, if actual competition were allowed; more and better options.

Nick writes:

@Patrick R. Sullivan,

Good point, however the innovations you are citing are innovations in self-moving. The full service moving industry has seemingly not really improved in terms of accountability (which is Dr Hendersons assertion) as holding your stuff for ransom is still relatively common. Interestingly www.movingscam.com cites the 1980 deregulation as the cause of the increase in fraudulent practices in the moving industry.

I'm not sure there are a lot of innovations you might see in the insurance industry which are analogous to ryder or pods.

David R. Henderson writes:

spencer writes:
Looks to me like Hamm agrees completely with Krugmann.
He says the problems Krugman describes are real
and that we need to modify the system to make it illegal.
Sure looks like his position is a lot closer to Krugman than it is to yours.

Exactly. That's why I wrote the post and subtitled it the way I did.

Colin K writes:

@ Spencer "Looks to me like Hamm agrees completely with Krugmann."

It looks to me more like Hamm agrees completely with the government requiring people to purchase a product his company sells.

Krugman merely provides a respectable hook on which to hang an otherwise sleazy hat.

As for South Dakota, let's not forget it also has cheap labor, cheap land, and is roughly equidistant from most of the population of the US, all very desirable features for these types of businesses.

Lo Statuz writes:

Why stop at state lines? Why can't I buy medical insurance from an Indian company? For small stuff and emergencies, it would work like a U.S. policy. But if I need major work done, they'd ship me off to Bangalore and do it there.

Would I actually buy such a policy? If it were cheap enough, I might well. Or if I'd grown up in India.

R. Richard Schweitzer writes:

@ Ray I Love ???

You actually pinpoint the type of "partial intrusion" that requires full integration of regulation.

Besides - there are plenty of young fellows out there practicing in the insurance and reinsurance fields who will just waltz their clients right around that kind of statutory jargon, drafted by staffers who have no idea how (and are startled when) the toilet tissue can be rehung from the right to left wall of the stalls. Perhaps I should return to active practice for another year or two; guess not tho'

steve writes:

Companies can already sell insurance in other states if they want.


ray l love writes:

R. Richard,

It matters not how much experience you might have, you need to support your assertions. This: "waltz their clients right around that kind of statutory jargon," explains nothing.

Ray L. Love

Peter writes:

David Henderson,
Based on the information given, the suit appears to have gone forward on the basis of breach of contract and to have been initiated by Mr. Mitchell through the court system. There's nothing in the story that indicates a role for insurance regulation or regulators. Therefore, I can't conclude that allowing Mr. Mitchell to shop for a regulatory jurisdiction would have made a difference in his situation.
I'm not defending the current regulatory status quo. I'm critical of the logical jump you made from the story to your statement about the manner in which breaking down the current regulatory system would help insurance consumers.
In my view, allowing people to shop for their preferred regulatory and legislative environment would no doubt place a constraint on the ability of state legislators to rely on a captive population to buy mandated coverage.

jstaples writes:

My take away from this is that the man who was denied benefits sued and won. He got his benefits and the insurance company was punished. Seems like a success to me.

Now let's repeat that same scenario with the government in charge. The patient who is being denied benefits has ZERO chance of winning that lawsuit.

The US government is already the largest health insurer in the country (Medicare, Medicaid, SCHP, VA, etc...) As a solo practitioner I can tell you that Medicare and Medicaid deny far more claims than the private insurers. Since last July I have seen 4 fee decreases from Medicaid and a slew of benefits that will no longer be covered.

Even if these people now WANT to pay for these services themselves, I can not provide it for them due to the provider contract with Medicaid. Even though I have been seeing these people for years, they now have to seek out a non-participating provider if they want to pay.

At least with the current system we have some recourse.

R Richard Schweitzer writes:

Ray I love ??

No I don't. The legislators don't support their assertions do they? Been there, done that!

Besides, I am not trying a case, or trying to win an argument.

R Richard Schweitzer writes:

Ray I Love, et al. --

I don't know why I bother, since I don't "advocate" that proposal in this case, simply caution the need for an integrated approach to a much more complex set of issues.

But, here is an example:

Take a look at the feature of Investment Income as a source of net (not operating) gains.

Charge a premium that is likely to result in rebates (subject to state regulations)hold the money at investment rates for a full year plus, then pay the rebate without regard to investment earnings.

That's just for starters. Don't even begin to look at what can be done with reinsurances.

Mark Bahner writes:

"Why can't I buy medical insurance from an Indian company? For small stuff and emergencies, it would work like a U.S. policy. But if I need major work done, they'd ship me off to Bangalore and do it there."

Why not allow U.S. companies to offer policies that do the same thing? Or at least allow U.S. companies to offer lower premiums for people who agree to have X percent of major work done in less expensive foreign countries (e.g., Cuba!).

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