Tuesday, March 02, 2010

Demonizing for political gain

When you want to generate a lot of support for some political program, a common ploy is to create in the minds of those whose support you seek the idea that somebody is mean, evil, wicked, bad and nasty.

The demon in the effort to impose greater government control over our health care is health insurance providers, who are attacked for all manner of improper and/or self-serving behavior, both imagined and real. House Speaker Nancy Pelosi, leading the charge, calls the insurers “villains,” but speaks in generalities and fails to show evidence of actual “villainy.”

We’ve heard the criticisms of health insurers, and some of them have done bad things. However, people in every industry and type of business occasionally do bad things, so insurers are no worse than anyone else.

The most questionable of these allegations is that the insurance companies do horrible things to their customers, such as dropping someone’s coverage when they have a serious illness; rejecting coverage for people with pre-existing conditions, or charging them higher premiums; and imposing large rate increases, in pursuit of excessive profits.

Last August Dr. Mark J. Perry, professor of economics and finance in the School of Management at the University of Michigan at Flint, demonstrated that health insurers like Cigna, Aetna, and WellPoint, had a profit margin of just 3.3 percent, ranking last on a list of 86 business categories.

People often mistakenly judge whether a company makes excessive profits by how many dollars it made. But what really is important is how much money it kept from what it collected from selling what it produced: profits divided by revenue. A multi-billion-dollar profit figure isn’t really meaningful without knowing how much revenue the company had. A company with $13.2 billion in profits and $400 billion in revenue achieved only a 3.3 percent profit margin. You can get a 3.3 percent return on your money by investing it in a three-year CD, even in today’s depressed market.

Compare that margin to more profitable business groups, like beverage producers/brewers at 25.9 percent, wireless communications at 11.1 percent, and general entertainment at 6.8 percent. If health insurers are mistreating customers for high profits, their strategy is a failure.

Most business decisions have a fundamental economic reason behind them, even large rate increases like WellPoint’s 39 percent hike in California. Fox Business Channel’s Stuart Varney explained this in the “Back of the Book Segment” on Fox News’ [begin ital] The O’Reilly Factor [end ital] recently in a segment titled “Making money off people’s illness.” "There's a recession in California and 800,000 [new participants] have gone onto Medicaid [roles],” he said. “Doctors who treat Medicaid patients lose money on every patient, and they transfer that loss to privately insured people,” which raises the insurer’s costs and creates the need to raise rates.

The title of that segment, “Making money off people’s illness,” indicates that the often- sensible Mr. O’Reilly believes health insurers are behaving immorally. But think about it: if you are in a business that deals with illness, you have to make money to stay in business and pay your employees. You must therefore make money off people’s illness. Millions of Americans are guilty of this “crime,” and we should be thankful for that. This is an example where emotion impeded clear thinking, and when this occurs people are easily taken advantage of by demagogues like Nancy Pelosi.

The Government Accounting office informs us that in 2008 the median number of insurers in individual states was 27, although that varies from a low of eight or fewer in three New England states to a few dozen in other states, and that the five largest insurers provide 75 percent or more of the policies nationwide.

Consider that there are 1,262 companies in the United States that provide health insurance, according to the business information provider, Manta. However, insurance companies are licensed by each state individually, which means that every health insurance provider might be faced with 50 different sets of criteria in order to qualify to sell to everyone in the U.S. That, and widely differing population numbers, explain why some states have dozens of providers and others have only a handful, and also why the largest companies are able to adapt to such a wide and varied set of rules, and smaller companies cannot.

Obviously, it would improve the cost and performance of health insurers if we could foster greater competition among them, and surely if we freed up all 1,262 companies to sell to anyone in the country, the variety of plans and cost levels that would emerge would satisfy the needs of the vast majority of Americans, and do so at much lower costs than we have now.

Since the Tenth Amendment to the U.S. Constitution (supposedly) protects state sovereignty against encroachment from the federal government, Congress cannot mandate uniformity of requirements for health insurers. However, that does not preclude a federal recommendation of sensible requirements that states can voluntarily adopt.

This is a vastly superior solution to health insurance reform than the destructive government takeover now being jammed down our throats by a blind, deaf and ideologically controlled Congress.

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