Healthcare and the Economy
Gain more profits or help more patients?
Last week, Wendell Potter reported that Cigna’s share prices dropped after the company warned investors that profits are likely to slow in the coming year. In response, Ron is looking at the interesting situation that insurance companies are in. Unlike traditional companies which require a quality service or product, insurance companies do better when they do not provide their product.
The goal of a publicly traded company is to maximize the investment of the shareholders. All other goals are secondary to this one. This is not usually a problem. In most cases, the best way to maximize a company’s profits and, by extension, the investment of the shareholders is to produce a superior product or service. This is the beauty of the free-market system. In this sense everybody wins: customers are happy with a product and the company makes some money.
There are, however, some markets or situations where the way to maximize profits run counter to the product or services offered to the customer. That is one of the issues with the healthcare system in America today.
I’m looking at this from an objective economic perspective. One of the major problems with healthcare financing and health insurance in this country is that the consumer is not the purchaser. This might sound counterintuitive, but it is true. The actual purchaser, for most people, is either your employer or the government.
If you don’t believe me, think about this. You have probably heard about the problems with high deductible plans and how those are bane of the healthcare system, but the truth is that the patient only pays about ten percent of all healthcare costs. The other ninety percent is paid by an employer or a government entity. So, the purchaser is not the consumer.
When we have a market where the consumer is not the purchaser, we see unusual behaviors. We see the consumer over consuming the good or service since they are separated from the cost of their decisions, and we see the purchaser have an incentive to under fund or under purchase since they are not directly impacted by these purchasing decisions.
Consider cars and auto-insurance. For this example, let’s say that your employer offers you a benefit where they will buy a new car every for you every two years and all you have to do is pay a $500 deductible. Simply put, you pay the first $500 for the car and your employer pays the rest. I don’t know about you but if that’s my employer I am making an appointment at the Ferrari dealership. Since I am shielded from the actual cost of my Ferrari purchase, I don’t think about how it is affecting my company.
That is what I mean by over consuming when you are separated from the cost of your purchase. Let’s go a step further. Your employer agrees to pay one-hundred percent of your auto insurance and agrees to pay for all speeding tickets that you might get. Well, in that situation not only am I getting a Ferrari but I’m going to drive that thing at crazy speeds. Not only do you have a situation where you can get any car you want, you can also drive however poorly you want, and you won’t have to deal with financial consequences.
This is no different from employer funded health insurance where individuals suffer no financial impacts from decisions and actions like smoking, bad diet, and lack of exercise.
Now, let’s look at the other side of the coin: the insurance company and the employer. The financial incentives for both the insurance company and employer are to under purchase the car they offered you and the insurance they are paying for. They might also take every speeding ticket to court. Why? They have a financial incentive to not lose money.
Consider this: we know that five percent of the US population creates about half of the healthcare costs in this country. Imagine how profitable an insurance company would be and how much an employer’s costs would go down if they could figure out a way to get rid of that five percent. They would lose five percent of their revenue but also lose fifty percent of their costs. My point here is that the profit incentives in health insurance are diametrically opposed to the needs of the consumer or customer. The very people who need insurance the most are also the very customers that the employer and insurance company would like to get rid of. Insurance companies sell a product that should finance healthcare needs, but that product produces an expense for the insurance company. The best way to maximize profits is always to reduce expenses.
This has helped to create the problem that is America’s healthcare system. Insurance companies are doing a great job at maximizing their profits. And no, it is not because Americans are getting healthier. The insurance companies have been doing what their investors want them to do, even though this is not necessarily what their customers want or need.
Need more convincing? Over the last two years of the pandemic the stock price for Cigna, Anthem, and UnitedHealthcare have gone up about sixty-seven percent. You read that correctly; they had an increase of sixty-seven percent at a time when most of the US economy suffered. While that made many investors happy, the way they got there was not always good for their customers.
While we discuss solutions to this problem, I want to offer up my opinion of one suggestion. It is a suggestion that comes up every election cycle and has never made it very far. In fact, it failed in California last week without a vote. That is Medicare for All or a single payer system. Those things produce other problems that are likely to be even worse than the one we have now. On the flip side, I also do not believe that all insurance company executives are evil and deserve to be prosecuted. Like they say, don’t hate the player hate the game.
My point is that we have a problem with the economic system and how we finance health care. At the same time, I believe that problem can be fixed without blowing up the whole system and creating even worse problems. We must address these inherent flaws and come up with reasonable solutions. Think about this for a moment: at one point in our history, factory workers were getting injured at an alarming rate. Since these workers were easy to replace the companies had no incentive to make a safe workplace. We fixed that situation, not by federalizing all factories but rather by legislation and the creation of OSHA. Something similar can be done here.