Every day it seems there is another story on the Web or in the newspaper about the horrible, money-hungry uncaring executives who control medical insurance companies and kill us (literally) with denials of medical care. The latest is a California family who blames Cigna for refusing to authorize a liver transplant for their daughter.
Seventeen-year old Nataline Sarkisyan was in a vegetative state with liver failure. She had had leukemia, then a bone marrow transplant and had liver damage, which is a known complication of the medications. The medical and ethical issues here are anything but clear.
Some would say a liver transplant is contra-indicated. Some would say it is futile. Others state that there is no evidence to support its use in this specific situation. If you saw the 1997 movie called The Rainmaker, Nataline’s case is nothing like that story.
The family of course wanted everything remotely possible done for their child. When Nataline died, they quite naturally wanted – emotionally needed – to blame someone and who better than the big, bad monster insurance company?
An insurance company does not exist to deliver care: its primary purpose is profit. Providing (paying for) care is how they spend money, not how they make money. When they save rather than spend, they are doing just what the System wants them to do. They are protecting YOU, or at least your money. I bet your pension plan holds stock in one or more insurance companies. If these companies lose or waste money, you lose. When they are profitable, you make money.
Nataline Sarkisyan’s specific problem was not an evil insurance empire. It is the reality that current treatments for leukemia have side effects and complications, including some fatal ones. The larger problem for all of us is the confusing, contradictory way that money flows in our healthcare system.
System MD
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8 comments ↓
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[...] of our problems are NOT: the medical insurance industry; the candidate’s campaign speech; or the procurers of Humvees for Iraq. Our problems are, [...]
[...] A short time horizon provides no financial incentive to pay for preventative care, such as for diabetes, asthma, or heart disease. These all take a long time before they put us in hospital (read expensive). Your current HMO is betting you will be gone – in some other HMO or dead – before they have to pay for illness care. Besides, they have all sorts of ways to deny or delay payment. [...]
“[an insurance company's] primary purpose is profit.”
Interesting.
So what distinguishes an insurance company from, say, a gas-station owner or a hat shop proprietor?
What distinguishes a health insurance company’s profit from the others is one, critical contradiction called perverse incentive structure.
A gas station or hat shop makes profit by giving the consumer what the consumer wants.
A health insurance company makes profit (is rewarded when) it delays or refuses to give the consumer what he or she wants.
Health insurance is a classic example of perverse incentives: it rewards what we don’t want and penalizes what we do.
System MD
“A health insurance company makes profit (is rewarded when) it delays or refuses to give the consumer what he or she wants.”
Piffle.
You re repeating urban legend, not engaging in factual analysis.
If insurance companies were not paying benefits, their costs would be low. Instead they are very high.
Your distinction is fallacious. My question remains unanswered.
Respectfully, the statement is not urban legend, much less “piffle.” It is simple economics (micro-).
By law, insurance companies must pay out the benefits to which they have committed to the premium-payers, you and me.
That outlay is, as you write, very large. However, the longer they delay (or better, deny) payment, the longer they get to hold on to our premiums, which are paid up front.
So, the longer they hold the money, the more they can make it grow. Even a 2% growth rate while holding on to (not paying out) $1 billion in premiums is $20 million in profit over and above what profit they make by paying less than the going rate for goods and services (whatever discount they negotiated with the providers.
Insurance companies make profit on the “vig” or interest or growth on money they hold instead of paying immediately for our benefits. The previous statement is clearly true, otherwise, what financial incentive does an insurance company have for not instantly paying our health providers.
“Insurance companies make profit on the “vig” or interest or growth on money they hold instead of paying immediately for our benefits.”
Piffle again.
Medical insurance companies hold back a portion of premium as “claim reserves.” These are roughly equal to 75 days worth of claims, plus / minus a few days depending on the company. 75 days represents the average time from the date a medical service is rendered – and therefore the insurance policy has liability – to the date when the insurance benefit is actually paid out.
Medical insurance benefits are paid out within 30 days of receipt for the vast majority of claims. (The other 45 days represents the time between the service and when the bill is actually submitted for payment.)
Medical insurance companies do earn interest on the claim reserves they hold. That interest is not a source of profit for the companies because rate regulators in every state require insurance companies use the interest to reduce premiums.
You appear to confuse medical claims with casualty claims (property liability etc). Casualty claims can take years to settle thus investment income on reserves can be a significant part of a casualty insurer’s profit. It’s a common belief the same is true for medical insurance – but it’s not. Thus “urban legend”.
My original question remains unanswered.
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