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Monday, April 19, 2010

Has Misery made Health Insurance and the Financial Services Strange Bed Fellows

There's nothing like a good mixed metaphor in a blog title. As a health insurance trench worker, I have experienced the misery of the scolding by the media coverage during health reform legislation. That experience has made it tempting to be gleeful about the misery that the financial services is experiencing as Congress debates an industry overhaul. However, that experience should make health insurance and the financial services strange bed fellows. Or just strange as both industries are experiencing social critiques while new legislation being pursued that will reshape their future.

During the coverage of the health insurance industry, the statistics used were often exceptions rather than really tell the story of the industry. Articles claim that health insurance companies spent 30% of the cost of health insurance on administration and profit. What is missing is that this represents the individual line of business which has higher administrative costs. Senator Rockerfeller commissioned this report which provides great analysis of how much carriers spend on medical care by different lines of business and how it varies by state. While it is used to show that carriers are not meeting the new requirements of spending at least 80% on medical care for individual insurance, the other side is that they are only 5% off this threshold. Considering that the cost of insurance is increasing 10% every year, the 5% reduction does not really address affordability. For employer group business, this report does show that they generally are meeting thresholds or are a few percent off.

Finally, keep in mind that this report is for national carriers. Local insurance plans tend to lower administrative costs and spend more on medical care. The actual story is much more complicated than the easy characterization.

The high increase in health insurance rates like Anthem's infamous 39% increase in California as well as the rhetoric has led to the Massachusetts insurance regulators' refusal to allow rate increases. Massachusett's plan was to blame the insurance companies for the double digit rate increase rather than their own regulations around community rating or the fact that prestigious hospital systems demands have grown to rock star proportions. The elite Massachusetts hospital systems reimbursement demands are fairly comparable to the rock star who demands a peeled M&M's in a bowl by every toilet they use.

In general, the focus has been knocking 2 or 3 percent off the 15% of the health care dollar (insurance administration and margin) rather than addressing the 85% of the health care dollar (actual medical costs). The insurance reforms being put in place are long overdue and will make health care more humane but they are not following the big money.

This mischaracterization of the cost structures and real cost drivers of the health insurance industry has caused me to wonder if the characterization of the financial services industry and banks are really fair and balanced. This is despite listening to This American Life's story about the hedge fund Magnatar, which made me forget my MBA diploma in favor of a pitch fork and torch for some populist rage. In this story, Magnatar (named after a black hole which is something else that sucks), made a lot of money by exacerbating the collapse of the mortgage industry even worse. Currently, Goldman Sachs, who are kind of the peeled M&M eating rock stars of banking world, are being sued by the SEC for their role in similar schemes as Magnatar. Finally, I really can't think of a reason not to reinstate the Glass-Stegall Act which placed additional regulation on banking. Keeping investment and commercial banking separate sounds like a very logical idea. Combining them has been a very costly experiment.

All of this should even get the most stoned and M&M bloated rock star angry. However, I could find similar material on health insurance companies and disprove it with my industry knowledge. The financial service industry has countered that these reforms will reduce consumer and business access to credit by making the cost of capital more expensive. These risky financial products that were dubbed Weapons of Mass Destruction allowed banks to lend more and increase credit because of the lack of impact on their capital requirements or balance sheet. However, these new reforms will unlikely change the bonus system or bank's fee structure. Consumers who want to borrow more money than they can afford to buy power boats will still find a way to do so.

I think the spitting and sputtering vitriol that has been spent on the health insurance industry, banks, and Duke Blue Devils is due to the fact that we know what we don't like in a health insurance or financial system but we don't know what we do like. Well, with the Blue Devils, we actually know what we want their underdog opponent to win and Duke to lose in the 2nd round of the NCAA basketball tournament every year. But we do hate this team as much as we hate those other industries.

Regulations and the popular media are looking to punish these two industries rather than advocate for and build a new system because we don't know and can't agree on what a new health and financial system should be. With health care, we want care to be affordable enough that everyone can access it but aren't ready to get really serious about the decisions to create such a system. We can't expect everyone to be able to access as much innovative and invasive care as they want for a cost less than 20% of the US GDP.

With financial services, we believe in access to easy credit is essential to the American dream to pay for college, start a business, buy a house, and start a cocaine habit with really premium cocaine. Access to credit has become a key platform in civil rights issues. However, we haven't come up with a better way to determine credit worthiness and sound lending that is not too conservative. These last 5 years was an interesting experiment but should we be surprised that people with a bad credit history make bad financial decisions? Should we be surprised by the results when banks can figure out a way to get paid for giving bad loans and pass the risk on to someone else?

With health care, balancing access, quality, and cost is the iron triangle. A common joke tells people that they can have 2 out of 3 of those. With financial services, the balance of risk and return while greasing the financial wheels is the holy grail. These are tough challenging problems and there is too much with anger with companies to really come up with tough answers. Hopefully, we will realize that the current reform has some good ideas but is mostly a catharsis. After our anger has passed and we can all sing folk songs together, we'll be able to address these tough questions.

1 comment:

Tony said...

According to the market-research group Datamonitor, medical inflation is the reason for yearly increases of 8% in health insurance premiums. The steady progress in the development of new drugs, therapies and equipment used to diagnose medical conditions and the resulting costs are an obvious reason for this. This is understandable and everyone wants the latest in diagnostics and treatments. Equipment becomes obsolete with time and invariably the very words newer and improved mean a rise in cost.

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