Compulsory Greed

The ignorance-to-outrage pipeline

EDIT: In the hours since I posted this, I’ve realized that my understanding of the insurance industry is (ironically, given the subtitle) not as full as I’d like. Nothing I say below is exactly false, but it does give a misleading picture; the cost-ratio issue is only a small part of a much more complex picture of dysfunction (I stand by the statement that the real problem is providers, not insurance agencies). I am not an expert in the billing aspect of healthcare, and should probably not have ventured out this far on a limb based on what I thought I knew after reading a book or two. Apologies. Leaving this up because it’s not exactly wrong, but take everything written here cum grano.

Imagine, please, that you are a salesman in a clothing store. Like many salesmen, you work on commission. In fact, you in particular are paid entirely on commission, and have no other wages or salary. You get a fixed percentage of the price of every suit or dress you sell, which encourages you both to sell more clothes and if possible to see that the customer buys more expensive clothing. You do this because you have rent and bills to pay, food to buy, and so on, and more money just plain makes your life easier. Everybody knows and accepts this.

But then, a big change! People aren’t so interested in buying suits in the store anymore, since it’s a hassle to go there in-person. Everything’s online now. So your store shifts to a new model, where customers order suits and dresses off the website. Since the website is the same everywhere, different brands have different sections on the site where they can promote their brand identity with slick pictures and videos, and your role as a salesman is limited to operating a chat window to help people find the right suit or dress from their bewildering profusion of options. You can direct people to the best deals and the hottest sales to fit any budget! At least, that’s what they tell the public. You’re still paid on commission, just like before. And now everyone hates you; you’re supposed to be helping them get the best deals but you keep insidiously steering them towards the Armani and Prada.

This post, as you may have guessed, is not actually about clothing sales. It is about insurance¹. It is not a strict allegory about insurance—that is, I did not describe the actual process by which we wound up with our current awful insurance situation, because that would take ages and be insanely complicated². But the central point is the same: we loathe insurance companies because we believe it is their job to help us afford our healthcare, when actually—in effect—we pay them a cut of every dollar we give to the doc. They’d go broke trying to cut our costs. So they don’t.

Mind you, the entire idea of health “insurance” in the American sense doesn’t make a whole lot of intuitive sense. It isn’t really insurance—that is, it isn’t primarily designed to hedge against small but unaffordable risks. It used to be, but we pay them on commission so they expanded the number of ways money can flow through them and be skimmed en route. It can function as true insurance—as in, a high-deductible or “catastrophic coverage” plan, which is what I use—but mostly it’s just a really big middleman.

Instead of paying doctors directly, we give a lot of money to a large corporation, with big buildings and tons of salaried workers, all of which take money to maintain, and they pay some fraction of that same money to the doctor, and this is expected to result in lower costs than if we simply paid the doctors ourselves. This … does not make a whole lot of sense on its face. The idea is supposed to be that the insurers would use their power and expertise to haggle a savings. But they don’t. Because they’re paid on commission.

We don’t call it that, which is the source of much confusion. In fact, we’re doing all this to discourage profiteering; we don’t like insurance companies, so we very deliberately forbid them, by law, from making excessive profits³. If they don’t spend more than a given percentage⁴ of a given year’s premium income, they are required by law to refund the excess to their customers. This sounds very good until you stop and think about it. Turn that rule around, and what it actually says, to the clever people who handle the money, is “you get to keep a fixed percentage of every dollar you spend.”

No, that’s not what we meant it to say. So what? Companies, like people, obey the laws as written, not as meant. The law says (roughly): if they take in ten million dollars, they get to keep one million. If the other nine gets spent, they keep the tenth. If eight million gets spent, they, in theory, give back the ninth, and they still keep the tenth. That basically never happens, because the more money actually gets used, the more they can justify raising premiums. Which means next year they take in eleven million, and keep an extra hundred thousand⁵! They will remember this whenever the time comes to negotiate prices with providers, who know the law as well as they do and will make appropriately mournful noises about rising costs in their industry.

Now, there’s an obvious difficulty here, which is that they have to take in the money first, and count on only spending their ninety percent. They don’t really earn a set commission, as such; the law doesn’t care if they don’t make a profit at all, as long as they don’t make too much. So they have to thread the needle, every single year: they won’t have as much money to play with next year if they use too little, but they won’t have as much money at the end of this year if they use too much. Naturally, they have a lot of extremely smart and well-paid people working hard on this problem.

But the end result of all that hard work is, yes, they frequently reject your claims. They reject your claims all the time. They don’t cover this, they don’t cover that, they don’t cover the other thing, fine print, too bad, so sad. Why not? Even if you force them to pay in the end—which can often be done with prior authorizations and other paperwork hassles—they keep a bigger chunk of money for that much longer, which lets them earn infinitesimally more interest on it. Fractions of a penny add up if you do it enough times. The point is to keep their expenditures on track against their projections in an environment dominated by hostile regulators. That this makes your life miserable is beside the point; they don’t need to worry about you jumping ship because all their rivals are forced to play the same stupid game with the same stupid rules. It’s convergent evolution due to shared environmental pressures. Complaints are more pleasant than bankruptcy.

It’s easy to complain about “greedy corporations” causing all our problems⁶. But businesses must grow, and we have structured the incentives such that the easiest if not the only way for health insurance businesses in particular to grow is for them to allow healthcare costs to increase at a steady, predictable rate they can manage with their limited resources. What else are they going to do?

Consider this report right here. It shows, quite plainly, that industry-wide premiums have increased over ten years from about $500 billion to $1.2 trillion. Healthcare costs have increased in almost perfect lockstep to allow a measly profit margin (though, again, the way profit is defined can be tricky based on how you do the accounting). This picture is complicated by the passage of the Affordable Care Act in 2010, since that added government-subsidy fuel to the already raging fire, but we’re talking about both figures more than doubling in a decade⁷. This is only the private insurers, mind you; we’re not even getting into the nightmares of Medicare and Medicaid, which consume another trillion and change. We cannot keep dumping all this money into the healthcare system. It’s insane.

All this is invisible to the general public⁸. Intuitively, it makes sense to cap insurers’ profits, because everyone knows they’re too greedy. Most of us are aware that the US spends too much money on healthcare⁹, and we generally like and respect doctors while we have endless, continuously frustrating interactions with our insurers. So we readily buy that insurance is the problem. We already know they’re dicks. We just don’t realize that they’re dicks because we have legally required them to be dicks. Nor that they are simply a cover for healthcare providers, of various sorts¹⁰, to keep padding the bill forever.

All of which is why we clap and cheer when a dreamy young assassin guns down an insurance executive like a mad dog in the street. Greedy bastard had it coming.

1. Right at the start, I want to give a shout-out to David Goldhill’s Catastrophic Care, which is now a bit dated (written in 2012 when Obamacare was brand new) but really gives a good CEO’s-eye view of the perverse incentives clogging up American healthcare. His proposed solution feels a bit clunky to me, mind you, but his diagnosis of the problem is spot-on.

2. It begins with Franklin Roosevelt making employers’ contributions to employees’ health insurance tax-exempt. That, ultimately, is the reason why you can be nailed to your job by its insurance coverage. FDR had a clever idea. Ironically, his clever idea to greenlight the Manhattan Project might have saved more lives and avoided more suffering.

3. I have previously written on another way the desire to hit people we don’t like with the law, rather than use it to pragmatically solve problems, has terrible, terrible consequences.

4. For the sake of this post I will pretend it’s a nice round 90% to make the math easy, but I’m pretty sure the real number is much higher, and their legally-mandated profit margins are not much better than grocery stores’. Which numbers they actually report depends whether you read what they report to the government or to their shareholders; I understand that, due to the complexities of accounting, they can report wildly different figures and not be lying.

EDIT: The actual figure, at least since the ACA, is 80-20, but the twenty has to include administrative overhead, etc., which is why their final listed profit margins are so small; 80% has to go directly to the healthcare providers or else get refunded.

5. This picture is obviously grossly simplified. The actual workings of the insurance industry are mind-bogglingly complicated and I don’t pretend to understand them all. This is barely good enough for an illustration. One wrinkle: they actually invest some share of their premium income each year, because the interest adds up when you’re working with a big enough number. Enough to keep you afloat on a thin margin until the next set of premiums rolls in.

6. Criticizing a corporation for being greedy is like criticizing a pole dancer for being too suggestive. A corporation is created to make money, and corporations like money as much as the rest of us. In fact, if they’re publicly traded (as I believe all major health insurance companies are), they have no choice but to make the maximum possible profit by all legal means; they have a fiduciary duty to their shareholders. If they fail to maximize profits in a way that a lawyer could plausibly paint as a foreseeable error, their shareholders can take them to court and gut the company like a fish. Shareholders do not like the idea that they invested money in your company and got suboptimal returns on it—it basically means you ripped them off. “Being less greedy” is simply not an option under these circumstances.

7. Costs go up more in ‘21 than in ‘20. Not going to bother digging into the timelines to find out whether inflation or Covid is more to blame—I suspect the former—but either way it’s a relatively smooth upward trajectory over the course of a decade.

8. Like the huge sums of money employers spend propping up their insurance; they think the amount of cash they personally burn on healthcare is maybe half as big as it actually is because they don’t see the money wasted on their behalf behind a curtain.

9. I think many other countries spend too much on healthcare too, because they follow this same general model where you deliberately pay a middleman to obscure your real costs from the people who actually consume the goods and services. But they don’t, apparently, waste on the same epic scale as the good ol’ USA, so they get to act smug about it on the internet. Something like that. This is all based on vague impressions, mind you; I have learned to bow out of arguments were some schmo tells me we just need to copy SOMEOTHERCOUNTRY’s approach. Especially if they tell me the problem is corporations being “greedy.”

10. It is frankly insane how much money surgeons and specialists make. Do note, though, that America also has a big problem with legal liability, so when the money is done firehosing through our health insurance the malpractice insurers get to take a cut too. I don’t want to leave people with the impression that this is a simple problem with only one cause. I don’t understand the full picture myself, being just a grunt. I’m only pointing at one particular local growth of a metastatic cancer in the system, so to speak. This disaster has been brewing since FDR’s decision almost a century ago.