Nancy Pelosi calls the insurance executives the “villains.” But is it really the case that the insurance industry is immoral?
The answer to this question was probably best provided by Jessica Rabbit, the femme fatale in “Who Framed Roger Rabbit?” when she said, “I’m not bad. I’m just drawn that way.”
I covered the insurance industry for Newsweek ages ago and became convinced that within the concept of insurance there were actually two moral impulses at war with each other.
First, insurance is supposed to “spread risk.” This is a moral good, and and on some level a deeply religoius insight. It codifies, in legalistic language and actuarial charts, the colloquialism, “There but for the Grace of God go I.” We may be fine now but life is fragile and we could have our day of despondency so let’s each make a small sacrifice (in the form of our insurance premium) in order to get the comfort that when our time comes, we won’t be destroyed.
The implicit message is powerlessness. Though we have some control over our lives, it’s not total, and on the big things — illness, fire, earthquakes — we are at the hands of fate or luck or God’s will. Insurance protects us from the power’s beyond our control, not powers within our control.
Early life insurance executives actually made explicitly religious arguments for the risk-sharing aspects of insurance. “The principles of life insurance are sanctioned by the spirit of christianity…[tracable to early Christians who] sold off their individual possessions and held everything in common,” wrote one executive, as quoted in Viviana Zelizer’s book, “Morals and Markets.”
But there’s another principle embedded within the concept of insurance. Personal responsbility and risk reduction. In truth, insurance companies are not only in the business of spreading risk, they’re also in the business of reducing risk. You get higher premiums if you smoke. You get lower home insurance premiums if you have an alarm. If you own a roller coaster, you’ll pay higher liability rates than if you sell mattresses.
This makes economic sense for insurance companies. If they charge more for higher risks, they can increase their profit. But often, this system of carrots and sticks has a social value too. By rewarding good behavior and punishing bad, it creates financial incentives for businesses and individuals to aspire toward healthiness and safety. An amusement park that tests its roller coaster regularly might get a lower premium than those that don’t. Some might take defensive driving courses to get lower auto insurance rates or put a smoke detecter in their home.
The problem is that from a business point of view, it’s in an insurance company’s interest to emphasize the second value over the first. And taken to its logical extreme, it leads to underwriting practices that don’t just mitigate risk but attempt to eliminate risk for insurance companies. This is why we have occasional “insurance crises” in which suddenly whole industries become uninsurable. It’s why we have companies refusing to insure people with pre-existing conditions. At that point, insurers have substituted both the first principle (risk spreading) and the second principle (risk reduction) with a third one, the legal obligation to maximize shareholder profit.
If your mutual fund holds stock in a health insurance company, you benefit from this practice. Health insurers are simply trying to maximize their profits by reducing their risk. They’re not bad, they’re just drawn that way.
Unfortunately, this form of risk reduction no longer has social value. What good behavior is encouraged when someone can’t get insurance because they’ve had cancer? It’s not like women will start saying, “Oh! Well, now that I see the financial risks, I guess I won’t choose to get ovarian cancer after all!”
Though there are some practices that are morally indefensible — deceptive marketing, for instance — insurance companies are mostly following, rationally, the logic of their business and their ethical responsibiliteis to their shareholders. If one insurer were to try to buck the system, agreeing to accept those with pre-existing conditions, they would see their profits and share price go down. Perhaps they’d even be subject to a shareholder lawsuit.
This is when government regulation become morally preferable. When companies are doing the “right thing” according to the rules of their profession and yet it’s leading to social injustice, then the rules need to be rewritten. That way, insurance companies can do the right thing by customers without feeling their doing the wrong thing by shareholders. Insurers need not be demonized. They just need to be drawn differently.
Also printed on The Wall Street Journal Online
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posted August 6, 2009 at 9:43 am
But you left out the principle of Profit. Customers put money in a pool shared with other customers. All members of that pool are allowed to dip into if they get ill (shared risk). No problem right? But the insurance companies take out their 21% overhead and profit before they provide coverage. In the event that many members of the pool get ill the insurance company does not minimize their profit or save on their overhead so that everyone is covered – instead they deny benefits people paid premiums for in earnest.
This is why a public option is important. I want to pay my premiums into a non-profit system with a 3% overhead, not a 21% one.
posted August 6, 2009 at 10:27 am
When you sell someone a product, or in the case of health insurance a policy, that you will cancel as soon as they need it when they become seriously ill knowing there’s a very good chance they will die before the administrative process, i.e. the lawsuit, ever makes it through the system, yes, you are inherently immoral.
Good business, but immoral non the less.
posted August 6, 2009 at 12:37 pm
Insurance is “best” when the insurance company is owned by the policy owners, as in old-fashioned mutual insurance. That way, operating profit is returned to the policy owners as lower premiums. You, the owners/policyholders, might contract with someone to handle the business aspects for a fair price, but without any incentive to withhold benefits.
The basic issue with modern companies is that what is “good” (profitable) for the business owners is “bad” for policyholders (lower benefits).
In religious/ethical terms, sharing risk (providing for the unfortunate) is good, but profiting from adding to someone’s misfortune is evil.
posted August 6, 2009 at 1:18 pm
If I were to pay my “friend” $20 for something and then turn around and sell it for a $100, would that be moral? Yet isn’t that how our entire system essentially works? I pay for your labor but your labor nets me more money than I actually pay you. It’s strange to me how most people would consider the first unacceptable but are perfectly comfortable with the second.
If you really believe that one should love ones neighbor as oneself then you must accept that profiting monetarily off of other peoples’ work is wrong.
posted August 6, 2009 at 1:26 pm
Is the health insurance industry immoral? Until it faces up to its policies and practices of recission, it is. That practice is motivated by profit.
posted August 6, 2009 at 11:28 pm
As you point out, doing right by the shareholders of health care stock the insurance industry CANNOT do right by the patients they insure. As you said, the rules need to be drawn differently.
Just yesterday, I sold my health care stocks because I just realized that by holding such stock, I was contributing to the problem…..Now there is an idea! Why not start a campaign to sell health insurance stocks as a vote against a system that, as you say is “leading to social injustice?”
posted August 7, 2009 at 3:23 pm
Granted, insurers need to be regulated to insure (pun intended) social equity, but what the majority party in Congress, at Obama’s urging, is seeking is the takeover of the entire health care systemm to turn it into an entitlement run by the government (while maintaing a separate VIP ((read: private insurance quality)) health care system for themselves). Entitlement=votes. Votes=lifetime power. Lifetime power=loss of our freedom. Health care reform=rationing and denial of service.
Thus, we citizens get the DMV, IRS and INS all rolled into one running our medical and hospital systems, and the pols get what we can get now through private insurance (if we’re lucky not to be excluded, as you note)–the best medical care in the world.
posted August 12, 2009 at 4:49 pm
The health insurance industry isn’t any more immoral than auto insurance, business insurance, home insurance, renters insurance, etc. Just businessmen trying to make a buck…
posted August 14, 2009 at 6:52 pm
Obama had the best analogy, he compared the public option to the post office. He said it didn’t eliminate UPS and FedX. Actually, no matter how bad the post office is, the law precludes any private competition for 1st class male (the government wants to monitor your male, exclusively).
From 2003 to 2007, Obama said he favored single payer, and saw reform as a route to single payer. Even today, in 2009, Barney Frank says the current bills are just a roadmap to single payer.
When Obama tells us the public option is not leading to crowding out private insurance companies, he’s being very misleading. Mendacity is a word that comes to mind.
Obama has said so many things and then changed his lines to the opposite, it is difficult to trust anything he says.
Obama said, during the campaign, that he opposed a “mandate.” Now he’s for it. He was a major critic of McCain, for suggesting a tax on employer health benefits, now Obama is supporting it. He’s on video as late as 2007 saying we need a transition phase to get to single payer, but now he’s pretending it’s not a halfway station.
Bottom line: You can’t trust anything he says. Health care reform should wait until we get a new president, an honest one, a minimally honest one.
posted August 19, 2009 at 5:33 pm
Health insurance is important but our of control. I mean, in California, it’s the law to have auto-insurance. see the web link posted. but because it was mandatory, everyone wins. the insurance companies just keep racking in profets, but at least we get cheaper and cheaper insurance.
posted August 29, 2009 at 3:49 pm
Yes, Obama is not going far enough. We need socialized medicine. Honest doctors want socialized medicine to ensure that all doctors are not receiving kickbacks from pharmaceutical companies, et al. The ones that are raising the biggest stink are those already on socialized medicine (i.e. Medicare, Medicaid, Veterans). They are afraid they will lose their wonderful benefit. They don’t want all Americans to have what they have. So then they complain that Senators shouldn’t have better than they have…isn’t that being hypocritical? Yes, insurance companies need to prove they can make a profit, but don’t forget the ambulance chasing attorneys who are out to make their cut in all of this. It is really tough to sue the government, so just the reduction in lawsuits will save a bundle!
posted September 23, 2009 at 2:57 pm
If the insurance industry is unwilling or unable to solve the problem of rising premiums and denying higher risk individuals or groups, the system needs to be reorganized in a way that addresses all the problems associated with health insurance. I work for a company that is in a segmented market that annually pays a higher premium that the large companies. We need to do away with segmented markets and have one rate for each state. We need to require insurance companies to work together in every state to find ways to lower premiums by consolidating overlapping functions and combining into one cohesive entity that is not run by the government. Insurance companies have lost their way in fulfilling their original purpose to spread risk and thereby reduce cost to the insured. This bubble is about to burst because of the all the ways the insurance companies cheat the people who are willing to transfer risk with a monthly premium.