An institutional analysis can focus on only almost any corporation or industry and identify ways in which that subject detrimentally affects individual freedom conceptualized in concrete terms as choice, health, and safety.
Let’s consider the private health insurance industry and its business model. At the core of it is this calculation: the medical loss ratio. This figure refers to the amount of money insurance companies have to pay out for medical care. The higher the medical loss ratio, the worse off is the company’s bottom line and the less excited are the owners about the company’s stock. Despite the widespread notion that the purpose of health insurance is to cover persons in need of medical care, actually covering medical care is a bad thing from a business standpoint.
Looking at a range of data publicly available, the average medical loss ratio in the insurance industry ranges from around 75 to around 60 percent. The latter number is the more attractive number from the point of view of the investor. If I am looking to invest my money in one of the fastest growing industries in the country, and I want to maximize my return, then I am looking for companies with something like a 60 percent medical loss ratio.
UnitedHealthcare, a subsidiary of UnitedHealthGroup, whose “mission is to help people live healthier lives,” is one of the largest health insurance company in the United States. United has a medical loss ratio of 74 percent. This means means that less than three-quarters of every dollar customers pay United to help them “live healthier lives” is actually spent on medical care. The rest of the dollar goes to the bureaucracy, including executive pay (United CEO Stephen Hemsley makes more than $100,000 per hour), and income for shareholders (quarterly revenues for UnitedHealthcare are in the quarterly 20 billion dollar range and growing).
That 74 percent number could be lower from an investor standpoint. If I were the executive for a company like UnitedHeathcare, I would find ways of reducing that figure and make my company more profitable for the stockholders, thus attracting more investment in the company, which would in turn allow me to raise my salary, earn bigger bonuses, and buy more stock on Wall Street (what I would do with my more than $100,000 per hour would be my business).
In order to make this happen, I need to eliminate sick people from the rolls and roll back coverage for paying customers. It’s the sick people who need medical care; they’re the main cause of medical losses for my company. And many of these tests the doctors in network are ordering will need to be rationalized as unnecessary.
One strategy I use is called “policy rescission.” I instruct my employees to scour the policies of sick persons to find evidence of minor illnesses and pre-existing conditions that I can use to justify canceling policies. If, for example, a policyholder has Barrett’s esophagus, that person is more likely than a person without it to develop cancer of the esophagus. Esophageal cancer is a very costly cancer (although the patient usually dies quickly, so it’s not as bad as it could be). For an insurance company, this “more likely” part suggests a potentially higher medical loss ratio. The policyholder with Barrett’s esophagus has to go.
Another strategy I use is called “purging.” When I identify an industry where there are too many sick persons relative to healthy persons on the rolls (and I determine this by looking at the medical loss ratio), I raise rates for that industry to very high levels that I know policyholders can’t afford. The more customers drop off the rolls, the more my medical loss ratio improves.
Another strategy I use is to instruct my employees to delay payments for procedures with the expectation that some customers won’t have the time to devote to challenging those decisions and thus cover this or that cost out of pocket. Hassling customers is a good way of getting off the hook for covering their health care needs even when the policies they hold cover those services. I go after the smaller payouts with this stratgy. Four hundred dollars here, eight hundred dollars there. Is it really worth the time and effort to make my company pay up? Hassling involves a range of tactics: making customers file multiple appeals (and the state regulations my lobbyists obtained prevent customers from suing my company until they have done so – and good luck beating me in court), “losing” referrals and other paperwork, dropping calls, re-routing the customers to nowhere, etc.
My company also spends a lot of money making sure that the government doesn’t regulate the insurance industry too aggressively. If the government mandates a medical loss ratio of 85 or 90 percent, and prevents me from using rescission and other strategies to cut costs, then my stockholders may look for other avenues of investment and my salary won’t be as high and the bonuses will be less. I can’t earn less than $100,000 dollars an hour.
Even worse, the government could move to a single-payer system or something like Medicare for everybody, programs that would have bureaucratic costs of five percent or less, since they’re not-for-profit. Such developments would be terrible for my industry. So a good chunk of revenues, instead of going to cover the medical needs of my customers, is dedicated to lobbying the government to not force me to cover the medical needs of my customers. This way narrow private interests can prevail over broad public ones. We call that the “free market.”
The effects of this for-profit health insurance dynamic on individual freedom are significant. Those in need of medical services often find themselves without coverage, paying higher premiums to keep their coverage (and going without in other areas of their lives), and spending an inordinate amount of time struggling with insurance company representatives to get them to pay for the services they are supposed to cover. The number one reason for bankruptcy in the United States is medical bills.
Often those who lose their coverage can’t get coverage elsewhere and wind up in emergency rooms with more costly illnesses. And sometimes those without insurance, because they lost it or because they can’t afford it, die from their situation. According to a Harvard Medical School study, nearly 45,000 people die in the United States each year – one every 12 minutes – because they lack health insurance and cannot get good care. That’s more that those who die from drunk driving and homicide combined.