Thursday, August 13, 2009

The insurance we have

CNN has a story about a former insurance executive, Wendell Potter, who is now working for a health care advocacy group.

He describes some of the "heads we win, tails you lose" practices that the "just say no" mobs are defending.
Potter described how underwriters at his former company would drive small businesses with expensive insurance claims to dump their Cigna policies. Industry executives refer to the practice as "purging," Potter said.

"When that business comes up for renewal, the underwriters jack the rates up so much, the employer has no choice but to drop insurance," Potter had said.
In June, Potter testified on insurance practices before the Senate Commerce Committee.

To help meet Wall Street’s relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick. Insurers have several ways to cull the sick from their rolls. One is policy rescission. They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as justification to cancel the policy, even if the enrollee has never missed a premium payment. ...

They also dump small businesses whose employees’ medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year’s premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether–leaving workers uninsured.

The testimony describes other skeevy practices, such as selling essentially worthless "limited-benefit" insurance.

You can read more from Wendell Potter at his blog.


Jon A Firebaugh said...

On one hand an Insurance Company can't continually lose money. After all, they are betting your claims and their expenses will be less than your premiums their investment income. I see a couple of rules that might be applied to allow insurers to stay in business, and policyholders to maintain coverage.
Apply a strict accounting standard regarding the profit in any particular year, and if the company's net margin for all policies is above a certain threshold they cannot raise rates sya more than 5% (arbitrary I know).
If their margin falls below a certain threshold the rate may rise by the above 5% for the first six months but if the company deemed it necessary to raise the rates beyond that they would have to notify the policyholder at the end of the term BUT not implement any rise in premium above 5% for six months. This would give policyholders a grace period to pursue other options. I know its a simplification but why not? Any underwriters out there?

Dave Ribar said...


This is a good point. There are two necessary conditions to a voluntary insurance transaction--it has to be beneficial to both the company selling insurance and the person buying insurance. Insurance companies need to be protected from adverse selection.

The canonical example goes as follows. Suppose that insurance companies were completely prohibited from screening customers AND that people weren't required to buy insurance. People would never purchase insurance until they got sick and would drop insurance once they got well. To remain in business, insurance companies would have to charge premia that were exactly equal to the costs of treatment. But this is what people would have to pay anyway, so effectively there would be no insurance.