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Health insurance the problem

BY JUSTIN SUGG | NOVEMBER 09, 2009 7:20 AM

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Wendell Potter looked like a stereotypical insurance man.

He wore dark-rimmed glasses, a simple black suit/tie combination, and spoke in a slight Tennessee drawl. There was nothing flashy about his appearance or Nov. 4 presentation at the IMU.

Potter is the latest voice to emerge in the health-care reform debate. He recently left a high-paying job at CIGNA to testify against the insurance industry’s rampant greed, claiming that it is undermining our nation’s health-care system.

Potter’s call for greater government control is admirable, but he’s arguing for the wrong reasons.

That could have serious negative consequences.

He worked for various insurance companies for many years — but as a public-relations representative. He may look the part, but Potter has no experience in what he called the “line side” of the business: underwriting, claim adjusting, or actuarial work.

I knew this before attending his lecture and was skeptical about his credentials. I grew even more skeptical as he raged against health-insurance companies and their unchecked greed. Rage might seem like an inappropriate way to describe the mild-mannered PR rep, but his comparison between the insurance industry and Frankenstein’s monster had all the emotional charge of an angry football coach — but without the volume.

I did not doubt his passion or his sincerity, but I did doubt his expertise. In my experience as an underwriter, I met few (if any) in the PR department who understood the nuts and bolts of insurance. Potter, at first, seemed no different. He was quick to present the number of uninsured Americans and the dollar revenue of health-insurance companies but glossed over any specific figures regarding profit margins.

That was telling. Any company — if led by greedy-enough execs — should have a sizable profit margin. No doubt that health-insurance companies are bringing in big bucks. UnitedHealth Group, the largest publicly traded health-insurance company, made more than $81 billion in 2008. But that only translated into a roughly 5 percent profit. And it was one of the higher earners. The health-insurance industry as a whole averaged a 2.2 percent profit margin, according to an Associated Press article last month. That is hardly a robust margin.

Blaming greed for insurance companies’ failure to manage costs is inaccurate and misguided. Potter’s advocacy for community rating is one particularly glaring example.

Community rating was the rudimentary system in which insurance companies charged all their clients the same premium. Companies were able to keep premiums low for high-risk clients by averaging their rates with low-risk clients. Eventually, however, companies shifted away from community rating because when the company had to raise rates on one client, it had to increase rates on everyone.

Companies had to do this because of the Law of Large Numbers, a mathematical rule that states a person who incurs a loss (treatment or accident) is more likely to incur future losses. Insurance companies then moved to a tier rating, which rated people separately and according to their risk.

This had the unfortunate consequence of increasing rates for high-risk customers and even excluding them from coverage. Insurers abandoned community rating not because they were selfish and greedy but because it wasn’t a sustainable system. And it wasn’t sustainable because insurance is the wrong way to manage costs.

Insurance is about paying for potential, yet unforeseeable losses. Human health deals with probable and foreseeable losses. This discrepancy has lead to spiraling health-care premiums — not greed.

I agree with Potter that the insurance industry is unsustainable; I disagree with his reasoning. If anything, greed has shed light on the health insurance’s unsustainability. Condemning greed only leads people away from that conclusion.


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