Econ-Atrocity: Can enlightened capitalism save health care?

By Gerald Friedman, CPE Staff Economist
Dec. 1, 2006

A recent article in the New York Times (October 25, 2006) entitled “Hospitals Try Free Basic Care for Uninsured” raises an intriguing possibility. The Times reports how some local governments and hospitals have found that by providing primary care, supportive services, and preventive care for the uninsured they can save money by avoiding higher costs when conditions worsen down the road. Following the experience of a diabetic patient at Seton, a Roman Catholic hospital network in Texas, the Times shows how preventive care reduced “costs for the hospital” by helping the woman avoid expensive emergency room visits. By improving her health, preventive care cut her medical bills nearly in half. “The money we save,” Dr. Melissa Smith, medical director of three Seton clinics, “money that is not hemorrhaging through the I.C.U., is money we can do so much more with to help her upfront.”

We could all hope that there will be enlightened insurers who will respond to these stories. The Times is certainly hoping to promote a free-market win-win where the poor will receive care that will help them stay healthy, and health insurers and providers will increase their profits by reducing total expenditures. But this worthy goal misses the fundamental flaw of for-profit health insurance: Capitalist businesses, including America’s health insurers, are not eleemosynary institutions. They do not set out to produce useful things. Instead, they seek to create profits; any social value or use is purely coincidental. In the specific case here, our capitalist health care industry is organized to produce profits; any quality health care that it provides is a desirable, but secondary, product.

As a for-profit enterprise, our health care system has been fabulously successful; and never more so than in the last 6 years. Since 2000, profits for health insurers have risen at double-digit rates for a total increase of over 120% on revenue increases of 21 percent. “They’re making boatloads of money,” said Tom Boldt, a senior health-benefits consultant quoted in Investor’s Business Daily. The health insurers have shared some of their profits with their CEOs. Average pay for the five top executives at 16 of the largest health insurers is now over $3 million a year. John Rowe of Aetna was paid $22 million in 2005; and Larry Glasscock at Anthem, was paid $25 million in 2003. Both pay packages are dwarfed by the $125 million received in 2005 by Dr. William J. McGuire of UnitedHealthGroup.

Even with these generous CEO pay packages, investors have done well. The stock price for the 17 largest health insurers has almost tripled since the beginning of 2000. Aetna stock, for example, has gone from barely $7/share to over $40/share today, giving an annual return of over 30%. Profits for companies providing health insurance have risen at the same time that more Americans are losing health insurance and a smaller share of premiums is going towards health care. This coincidence is no accident but is the result of carefully calibrated company policy to reduce coverage for sick people. Aetna, for example, has pushed up its stock while cutting its rolls to 13 million down from 21 million at the end of 1999. Despite a one-third fall in revenues, profits rose nearly eight-fold, to $934 million from $127 million. Company spokesman Fred Laberge explained that “We focused on profitable [emphasis added] growth rather than growth at any cost.” He added, “We lost a lot of membership, but we’re OK with that.”

The key to increasing profitability at Aetna and in the healthcare industry in general is the ever-rising administrative burden and the 80:20 rule. The empirical generalization that 80% of health care costs are associated with 20% of the population means that you can dramatically lower costs if you can identify the sickly 20% and get them out of your insurance pool. Insurers have learned that they can achieve these dramatic cost reductions even without directly denying coverage to the sick by discouraging them from remaining in the system by harassing them with bureaucratic regulations, pointless paperwork, and by refusing coverage for particular procedures or drugs. Refusing coverage contradicts the enlightened approach recommended by the Times. But while helping people remain healthy may lower costs somewhat, getting rid of the sick is guaranteed to lower costs dramatically. By reducing expenditures, a policy of harassment probably beats one of enlightened care in the short-run; and it certainly trumps enlightened care in the long run by driving the sickly 20% out of a health plan and discouraging other sick people from joining.

That is why health insurers have been adding staff even while reducing coverage. Extra layers of bureaucracy are wasteful from a social perspective–we would prefer those resources be spent on health care rather than administration. But bureaucrats make money for health insurers; through zealous oversight and by harassing sickly clients they drive away people prone to ill health, precisely the people that no private insurer wants to insure but who most need health care. The Times is absolutely right that an enlightened policy of promoting primary and supportive care would make Americans healthier and could save money. But we will never see such a policy so long as we treat health care as a profit-center rather than a social right.

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© 2006 Center for Popular Economics

Econ-Atrocities are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.