Monday, December 10, 2007

Insurance Assurance

I'VE BEEN SHOPPING around for insurance lately, and it has been my pleasure to be able to talk at length to insurance agents about their trade, and about what is presently concerning them.

Our word 'insurance' as well as our words 'assure', 'ensure', and 'secure', come down to us through Anglo-Norman French, and eventually derive from the Latin securus, meaning 'without care'. How appropriate! Insurance, of course, is a way of avoiding anxiety.

In its purest form, insurance is a way of avoiding catastrophic financial loss. A policyholder wishes to avoid a particular kind of loss, and an underwriter estimates the probability of that loss and prices the policy accordingly. It is a simple system; policy cost is proportionate to risk. High risk policies, of course, are more expensive than low risk ones, but since the policyholder merely wants to avoid catastrophic loss — in other words, having a high deductible — the actual cost of the policy is relatively low. The insurance company offers a price, and if the price is too high — say, insuring a sixteen year old male driver — the buyer can take it or leave it, and even reevaluate whether they should be taking the risk at all.

This system, of course, is for those people who act like virtuous adults, who can rationally judge risk versus cost. Again, this system only insures against catastrophic loss; the policyholder himself takes care of recovering from minor losses and in reducing his own risk. This is beneficial for both the policyholder and for the insurer: the cost of insurance is low for the purchaser, and the cost of claims processing is low for the seller.

But judicial reform since the 1960s has trashed the system. For example, suppose someone skateboards down a staircase and gets injured; clearly they are negligent — after all, skateboarding is a crime (or at least imprudent) — but changes in the law state that they can recover from the insurance company. However, the policyholder may be immune if they follow mandated regulations, such installing handrails on stairs. The end result is that a property owner must incur an expense which would not have prevented the accident. Because the law of cause-and-effect is so often ignored by the courts, insurance costs have gone up dramatically.
These changes do not benefit policyholders nor the insurance companies, but rather reliably enrich product liability and personal injury lawyers, as well as provide a lottery-sized win for some lucky few plaintiffs. Instead of insuring against physical risk, we now are insuring against legal risk.

Saint Mary's Hospital in Richmond Heights, Missouri, USA - old wing.jpg
Old wing of Saint Mary's Hospital, in Richmond Heights, Missouri.

Health insurance has become more expensive and less available lately, and there are two main causes. Under the old system, a person would pay for their own health care, and if something catastrophic happened, then insurance would cover the extra costs. This is both simple and ultimately inexpensive for both the policyholder and the insurance company, as well as convenient for physicians and hospitals.

Managed care, which was largely developed under the Clinton presidency, is not insurance; rather it is pre-paid health care. This is not a simple system, rather it is very large, expensive, and labor-intensive, with the bulk of the expense not going to actual health care, but rather to management overhead. Physicians hate this system, hospitals hate this system, policyholders who explicitly pay for their own insurance hate this system, and small insurance companies hate this system. Everything about this system is tightly controlled and very expensive.

Those who seem to like managed care are big governments and the very large health care companies who make and control the system. However, those who do not pay for their own insurance, or who work for companies that pay for it, often like it because it is so cheap to visit the doctor: it is surprising how many people will not mind dropping $600 at a casino but will complain about spending $60 at the doctor. This is a form of childishness and shows a lack of virtue.

When something is free, there is a tendency of people to hoard it, and apparently-free health care is no exception. This of course is a vice against the virtue of justice, and leads to rationing, which tends to be highly unjust and arbitrary. Usually rationing is found in government-run health care systems, and you can tell what the government values by looking at how they ration: usually, birth control and abortions get the very best funding, while care for the elderly and permanently disabled tends to be neglected.

The other main problem with health insurance is with the patients themselves; more problems are now treated professionally whereas they would have gone untreated in the past, or very expensive proprietary medicines are used where older generic drugs would suffice. But I don't want to belabor this point, for in the old days so many people just suffered greatly and died, and at an early age, without regard to whether or not they had dependents. Out of charity, we ought to encourage good and better health care.

There is a far worse problem: many people now go to doctors for vague and difficult-to-diagnose conditions, and they often go to numerous specialists for a cure, and end up having a vast multiplication of possible diseases, while never getting a real cure. Often the patient is subjected to an array of novel and expensive treatments, and they never work for very long. The percentage of patients who have this profile has increased dramatically since the 1960s, and was first clearly identified in industrial urban areas in the late 19th century.

Of course, this is hypochondria, the unwarranted fear of poor heath.

Every medical specialty has an odd disease, of unknown origin, of unknown cure, that causes pain in the body, and is often related to sleep or mood disorders. A physician friend of mine once related to me a list of such diseases, but I won't repeat them here; they are ridiculously common, and patients take them very seriously. What is nearly certain is that if you have one of these diseases, then you would almost certainly be diagnosed with all of the others. All are caused by anxiety, and the potential cures offered by the physicians will no doubt increase that anxiety. The more a patient is prone to this kind of anxiety disorder, the more likely that they will insist on treatment, much to the annoyance of right-minded physicians.

Anxiety and depression have become increasingly common lately, now to the point where self-inflicted harm is the major health problem and cause of death for older teens and young adults. This is a spiritual problem, but because of the psychosomatic unity of humans — we are both animal and spirit — spiritual problems cause physical problems.

As Catholics, we know both the cause and cure for these disorders, but society does not. The problems we are seeing in our insurance industry are symptoms of a much greater disorder.


  1. The earliest and "purest" insurance were structures to share common risk. For example everyone who might have a farm burn down could create a system of pooled funds so that if/when the risk occurred the member could be covered and compensated. The whole point was to be ready for a somewhat inevitable risk. For example, a barn burning down would be devastating to a farmer, and was an occupational hazard. In early more innocent days no one would hassle the farmer if he stacked his hay too close to the lantern... people were all just average Joes trying to get by in harsh circumstances and fires from all causes (lightening, brush fire, heat or light source, etc) resulted in the same thing, a burned down barn that could happen to anyone. So TRUE insurance originated so that people who shared a likely risk could pool their funds and compensate the one who incurs the loss without judgment.Then with big business came the notion that insurance companies need to "manage" risk aka avoid paying for the inevitable risk. That was a huge departure from the original intention of insurance and in an odd way helped fuel dishonesty by making it a duel of wiles (get them to pay, get out of paying). You can see the difference by contrasting the old purer model with what happened in Katrina where a washed away house did not mean a washed away house, depending on the weasel words in the policy.

    The second devolution of the purity of insurance came when premiums accumulated into formidable investment vehicles, thus requiring management of their own and becoming the primary purpose of an insurance company (whether they admit it or not the modern business of an insurance company is not to insure, but to make money off of premiums). I've seen from the inside how the daily purpose of insurance companies is to rake in maximum premium, move the stock market with their colossal investment power to earn maximum profit, and "don't pay" on claims.

    In my opinion all the current dysfunction in the insurance system stems from those two root changes in purpose.

    Lots of luck, lol.

  2. You must be a pro! Thanks for the information!

  3. I agree, Typical majior medical insurance companies are obviously FOR profit. These big name big premium companies are in business for the stock holders and not the policy holders. I'm so glad i found this NON-Profit company 2 years ago. although it's not catastrophic coverage it's a heck of a lot better than nothing. I was quoted 680.00 a month 2 years ago by one of those big name companies and with a wife a 2 kids i couldn't afford it. but now i pay less than 200.00 dollars a month.

  4. As someone who works for an insurance company, there are a number of reasons why we have the problems we have.

    This is controversial to say... but the problems of our healthcare system have everything to do with Akrasia, or weakness of the will.

    The single largest factor (50%) in determining health outcomes is behavior. Among the biggest behaviors in question include cigarettes, obesity, drug abuse, excessive drinking, and promiscuous sex.

    Often the conditions caused by these behaviors do not strike until a person is in his late 40's or 50's, meaning that the conditions have existed for decades.

    Now, 85% of the money paid in health claims are for hospital visits. Now a great portion of this 85% has everything to do with the acceleration of conditions that correlate to these behaviors, such as hypertension, heart disease and lung cancer.

    So, it could be said that with the health care crisis, the chickens have come home to roost, as the consequences of sex, drugs, and rock'n roll catch up to the baby boomers.

    The other piece of this puzzle is what we call "trend". Trend is the year over year increase in claim dollars paid by the insurer. What few people fully understand or realize is that average trend is 14%!. That means that the average increase in claim dollar payouts is 14%. So now do you see why it is so important to invest the premium $$$?

    There are a couple other elements to discuss with the increase in trend. One of these is the high cost of new technology. The other is spiraling provider costs.

    The spiraling provider costs are in part due to rising malpractice premiums. But a much larger part of this is the burden of the uninsured. Often the uninsured receive treatment and do not pay. Because of large fixed costs, providers tend to cost-shift the cost of treating the uninsured onto those with insurance.

    Often the uninsured clog up the emergency rooms with trivial issues.

    The last piece of this has to do with plan designs. Traditional co-pay plans are expensive and bad. Because co-pays are so low, insured behave as though the supply curve is off the charts, frequently resulting in the over-utilization of unneeded care-- e.g. getting an MRI for a broken fingers. Doctors are equal culprits in this by ordering unneeded tests to protect from liability. Often the cost sharing through co-pays covers lest than 1% of the claim costs. That means that the cost increases are tacked on the front end to their premiums. And this has become a dilemma for employers- how much can you cost shift premium increase onto employees?

    So what's being done about it?

    Insurance companies are trying to aggressively address the behavior issues with program that focus on wellness- stop smoking programs, weight counseling, etc.

    Provider costs are being addressed through aggressive provider contracting in which reimbursement rates are clearly stated ahead of time. This means that provider give insurance companies discounts ranging from 15%-40% off the sticker price.

    Thanks to the Medicare Modernization Act of 2003, you have innovative plan designs out there with deductibles that range from $1100-5000. The premiums on these plans are much lower than on traditional co-pay plans. For someone my age, a single male in his 20s, they can cost anywhere from $50-$150 a month. The maximum allowable out-of-pocket max is $5000 for singles, $10000 for couples and families. To help you manage your cost sharing, the MMA provided the introduction of Health Savings Accounts (HSAs). Think of these being like 401(k)'s for health. You contribute, invest, and spend pre-tax dollars in these things. So for someone like me in his 20's, these can be huge, as good health and the benefits of compounding help deposits to appreciate.

    Many people don't realize that often the cost of employer provided health plans can be more than $1000 a month because of the plan design.

    What you get with HDHPs is a much more predictable trend rate-- because it takes much longer for claim costs and inflation to erode the high deductible.

    The challenge is getting people to save. As you know, in America, the average propensity to save (APS) is infintesimal, due to bad behavior, the culture of consumer goods, easy credit, and inflation.

    Part of the problem with Katrina is that flood insurance is different from the general property-casualty insurance that most people carry on their homes. This is because it is not needed by homes outside of a flood zone, and these home-owners should not subsidize the flood coverage of those who choose to live in a flood plain.

    Dennis Hastert got into trouble when he said it-- but he posed the question whether and why we should rebuild portions of New Orleans that flooded. However he posed an important question-- is the gain to be had from building on high risk property in a flood plain exceed the loss to be had in a hurricane like Katrina.

    Interestingly, there has been a return to "purer" structures. Most plans sponsored by large employers are self-insured. So what that means is that the plan sponsor hire the insurer to pay claims out of their bank account. In addition, they carry a stop-loss policy for catastrophic risk- typically $100,000 individual stop loss- or aggregate stop loss in the excess of $10 or 20 million. You see that the HDHPs are a similar vehicle, in which ordinary expenses are self-insured and catastrophic expenses are covered by the insurance company.

    Interestingly, managed care is not a Clinton-era invention but dates back to the passage of the HMO Act during the Nixon administration