First, let me state that I am quite open to alternate systems for health care, and indeed, think we need one. I would just like to make sure that we try to get the best one possible, rather than settle for mediocrity. My main point in posting on the subject with various people here is that I think way to many people latch onto a specific implementation, with almost no, or very little, justification for the specifics of that implementation, when in fact we have a lot of independent data which suggests that such systems are poor in general.
Geode advanced the notion that "critical" & "immediate" somehow related to the type of system we needed. I then pointed out that there was a glaring counter example if those where his chosen metric. You have no made some different points, and I would like to address them as I see it, and perhaps you could respond with your take.
In doing this, I will draw from computers for illustration. While the industries are very different, what I'm searching for, so far without success, is a concise explanation of why the differences should require such a radically different approach.
Let me attack this argument from the management / investor perspective and talk about “profit”. As I said in a prior post,
…Insurance companies are not in business to pay claims: Insurance companies are in business to collect premiums….
Computer manufacturers are not in the business of paying to design and manufacture product, they are in the business of collecting money from those of buy their products.
Geode also points out your above comment, but AFAIK, the same can be said about all business, unless you are Mother Teresa. All for-profit businesses are in business to make money, hence every aspect that costs money is viewed with an eye towards possible savings, while every aspect that increases income is viewed with an eye towards boosting profits.
Now clearly, any business might sometimes scrimp now, to boost the bottom line, and in so doing, possible hurt future business. The applies equally well to insurance as computer manufacturing.
You might notice that Dell has been beat up for a number of years now wrt to service quality. It was an area that they sought to save $ in, but in the end it negatively impacted business. However, you must firmly keep in mind that this negative impact is largely RELATIVE to competitors. Hence Dell must change or loss customers.
For some reason, you and many others think the medical insurance industry is immune to such dynamics. Why would you think that?
First – in general – what value do insurance companies provide? Simply insurance companies are arbitrageurs. They buy risk and bet that claims (expenses) are less than premiums (revenue) for which they earn profit.
No! Using your logic, we could save the same about Dell. It views that investing in computer manufacturing, while risky, will return more money than placing its bets elsewhere. The same is true of every investment decision. Risk is an element of all financial transactions, sure.
POINT 1: What “value add” do health insurance companies provide? As little as 20 years ago one could say that the “value add” was the sophistication in their forecasting (actuarial forecasting of sickness and mortality) part of which was shared with their customers the remainder resulting in higher rates of return on equity and assets than their industry brethren.
Well as a consequence of the computer & software revolution that value add is effectively “dead.” With a PC and Excel I can forecast better than the best company of 20 years ago. The distinction between one company and another due to this factor is probably now in the fractions of a percent rather than being the primary factor – as it was in the past.
I partially agree. I think the actuarial science side is not much of a IP issue anymore, hence not much advantage, although I see this as true mostly on a very short time scale. That is the stats on % of people getting any illness in the next year is pretty well known, as well as the cost of treating them in the next year, the costs looking out 5 or 10 years is much more problematic. So, I suspect that quite a few financial people make a living do this, despite your views as stated above.
POINT 2: As a general rule let’s says the capital markets demand that a publicly traded company increase earnings at a rate of at least 10% annually. How the heck do you do that when what used to be the principal competitive differentiator is now available to a 15 year old kid with a laptop? Furthermore, your addressable market (i.e., your potential customer base) is only growing at the rate of population growth (approximately 0.6% to 0.8% annually?
There are a number of problems with the above. Fundamentally, no company can grow forever at a rate substantially above the GDP growth. In essence, capital markets demanding high growth rates directly implies that capital markets expect industrial cycles, or lifecycles for a given business or industry. The best investments are made off young growing industries, while mature stagnant ones don't return, or even loose money from a stock perspective. You should also please note that a mature industry might have poor stock performance, yet good profitability. With the bulk of Americans having insurance, it is not a particularly good growth industry anymore. It can only grow at about the GDP level. It is a mature industry. I will admit, that perhaps it is not attractive for share holders, although, with dividends, it might be a good low risk holding.
Well the answer is simple and brutal. (1) You do everything in your power to overweight your customer base with “healthy people” (2) You do everything in your power to avoid paying claims (3) To the extent you can, you control general and administrative expenses (overhead).
Back to computers. Dell outsourced service, outsourced manufacturing, and largely outsourced design as well. Their crown jewels are supply chain management and direct marketing. However, ANYTHING they do that results in lower customer satisfaction GIVEN that the market has choice (HP & others) will result in their business declining, and the competition prospering.
You guys keep focusing on insurance companies rejecting claims. Why do you think this happens in insurance anymore than trying to sell lousy computers should exist in the computer business? If insurance company X collects premiums but does not pay for treatment noticeably worse than company Y, then if people buying insurance are awake at all, company X suffers and company Y prospers.
Instead, many people hop to the conclusion that we should replace X & Y and all others with only company A. What is the rational behind such thinking, and why would you think that is an improvement?
Now regarding the financial details.
I don't know how much you follow computers & CPU development, but I have for many years. Very roughly, there are two main CPU producers, Intel & AMD. Intel holds about 80% and AMD about 20%. There are many computer manufactures, with Dell and HP being the biggest.
Since about 2000, AMD has been a significant threat to Intel, otherwise Intel would be pretty much a monopoly. Without a lot of detail, I'm pretty safe in stating that the performance/cost of current CPU's is in the range of 4x-10x of what it would be if Intel had not had AMD breathing down it's neck for the last 6-7 years, split about equally between performance and cost. It is possible that the ratio is even worse than 10x.
However, Intel is for-profit, and as a monopoly its profits could approach 50% of sales, so taking it non-profit might wack this to 2x-5x. However, I'd argue that making it non-profit would also make it less efficient, so some of that reduction should be placed back in since the for-profit company is more efficient. No matter. The point remains, that a monopoly, non-profit system for CPU manufacturing would leave the customer with systems that cost 2x to 5x more for the same performance.
Yet this is what people want to do in health care.
So I could care less if 50% of my premiums go to overhead & profits IF the product I get is 2x as good for the money. What matters to me is what I get for what I pay, not how those who provide me with what I want divide their loot.
I know full well that computers & health care have many differences, the most significant being that health care is largely a service industry with high human components, and hence falls below the mean productivity curve advancement (as does education for example). But those issues are independent of choosing a payment structure for the industry. They must be addressed independently as well. |
