What is an efficient insurer?

February 20, 2016
I got an interesting email today that I responded to in a fair amount of depth because they were issues I have been thinking about lately anyway. This post is the questions raised and my email response to them:
From: Anthony Komaromi <awkomaromi@gmail.com>
To: Thomas.Cox@standarderrors.org
Sent: Friday, February 19, 2016 12:47 AM
Subject: Administrative costs and efficiency
Dear Dr. Cox,
My background is political philosophy.  The biggest contemporary political issue for me is healthcare.  I support universal healthcare, though I have some questions about it.  I would greatly appreciate your expertise on some of my questions.

1.  Are administrative costs higher with public or private health insurance?  I have heard many people claim government health insurance programs (like Medicare and universal programs in Europe) have lower administrative costs.  But then I came into this (http://www.heritage.org/~/media/images/reports/2013/03/bg2779/table-1-825.ashx) from the Heritage Foundation, which claims Medicare’s administrative expenditures are much higher than private health insurance’s.  Are there any flaws in the way the Heritage Foundation (whose calculations are “based on Benjamin Zycher”) calculates administrative expenditures or are they calculating the way we should be?  How should administrative expenditures be calculated?

2.  What does it mean for an insurer (or type of insurance) to be efficient?  Does it mean not paying for services and refusing to cover people with expensive needs (like pre-existing conditions)?  What methods make one type of insurance more efficient than the other?

Thank you.


Anthony Komaromi

Hi Anthony,

It would obviously be better if I knew what your background was, how familiar you are with insurance, risk theory, economics and finance. But…. Also, a disclaimer. I think I have addressed all your questions by covering broader topics, but some quick thoughts before I go into the details:

You: ” I support universal healthcare, though I have some questions about it.  I would greatly appreciate your expertise on some of my questions.”

Me: I honestly don’t know what it means to support universal healthcare. Almost everyone pays lip service to universal health care. The question is always how will it be achieved? Some are willing to wait eons for imagined market forces to deliver the answer. So far this hasn’t worked anywhere. Others support a single payer, health insurer, hoping that this will result in universal healthcare. It will not. There will still be problems in access to care with a single payer because of the maldistribution of health care system capacities. Mere insurance will not bring health care to poor urban areas, rural areas and communities of color, race, orphan diseases…

You: “Are there any flaws in the way the Heritage Foundation (whose calculations are “based on Benjamin Zycher”) calculates administrative expenditures or are they calculating the way we should be?  How should administrative expenditures be calculated?”

Me: You cannot get much more flawed. You will see why below.

You: “What does it mean for an insurer (or type of insurance) to be efficient?  Does it mean not paying for services and refusing to cover people with expensive needs (like pre-existing conditions)?  What methods make one type of insurance more efficient than the other?”

There are obviously different types of insurance – I suggest that the aggregate of insurers (1 or many) that delivers the highest aggregate benefits for given premium revenues is the most efficient insurer. More on this below.

Point 1: I note that the link you gave has an interesting issue. They exclude payments made for dually insured people (Medicare + private insurance). Now why would they do that? I would suggest that the answer is politics. Not politics in the sense that Socrates might describe political discourse: How to manage the state from the perspective of “Truth”, but the more common approach of seeking consensual advantage independent of the truth.

So, when a Medicare beneficiary has dual coverage, the health providers routinely file against both insurances. Both Medicare and the private insurance process the claims, and in some cases only the private insurer will make payments, while in some case both Medicare and the private insurer will make payments. Regardless, the same amount of administrative work is undertaken by Medicare whether or not Medicare makes a payment. So the table is intentional obfuscation.

Probably not satisfying for you, but certainly not a surprise for someone as jaundiced as myself.

Point 2: We have hundreds of different insurers. Each of these insurers have sales departments, claims departments, legal departments, actuarial departments, underwriting departments, finance departments, accounting departments, administrative staff, executive teams and boards of directors. Now much of the work on claims is automated. Small claims are routinely paid because the costs of hand processing by people exceed the benefits to be paid. So the only claims that get a lot of human attention are medium to high value claims.

High value claims get different treatment in small vs large insurers. In small insurers all the department heads are informed about the management of high claims. For medium value claims the claims department head, underwriting, legal and financial department heads are usually involved in varying degrees depending on how large the claim is. In very large insurers, even fairly large claims get little scrutiny. Large insurers expect large claims, but it is rare that even the largest claims get a lot of attention.

All to suggest that the non-benefit expense ratios for insurers vary dramatically depending on the size of the insurer. As usual, the economic efficiencies of scale prevail though for different reasons than in a purely manufacturing environment.

Point 3: When I first started working in the actuarial department at Liberty Mutual Insurance back in 1982 I remember trying to engage the Exec VP for the department in a discussion of fraud. His response stunned me: “We don’t care about fraud”. But I soon learned why that was. Depending on the line of insurance and the regulatory environment, fraud simply increases the loss ratio. As loss ratios increased, the insurers sought rate increases. As the loss ratios increased the insurers got increased premiums and the assumed expenses went up as well even though the actual expenses didn’t rise at all. Fraud simply increased insurer revenues by more than the marginal increases in claims costs.

Point 4: Getting back to the hundreds of insurers. Is it really possible to imagine that all the duplicated departments in hundreds of insurers cost less than the costs of running the Medicare program? No. You really have to stretch credulity to imagine that hundreds of small insurers with duplicative administrative costs are operating, in the aggregate, more efficiently than a single payer could operate. So, why would anyone suggest that this was so? Oh, yes, insurers, in the aggregate, make a lot of money for investors.

But not all insurers make handsome profits. In fact, many insurers fail every year. When insurers fail, they fail to pay policyholder benefits. Small insurers are sort of like the Wild West. They have high probabilities of either excessively high profits or excessively high losses. Their management teams get high bonuses in excessively profitable years and lose their jobs in very bad years. But, even failing executive teams tend to bounce right back, forming additional insurers days, weeks or months after their companies failed. Failing insurers serve a very useful function. They convince a gullible public that insurance is a high risk enterprise and that the high premiums insurers get are necessary to compensate them and their investors for the risks they accept.

Of course this is utter rubbish. Large insurers face little risk. Only small and poorly managed insurers face financial risks. But large insurers bail out the policyholders of failed insurers. This is a win-win for large insurers. Good public relations. Minimal impact on their bottom lines. They often continue to sell insurers to the grateful claimants they served.

Point 5: This one is a little more involved than the other points and goes to the heart of what has been done to make Medicare be inefficient and appear to be inefficient. Medicare does not operate at all the way it is generally described. Medicare does not simply get claims and pay them, an entire, unnecessary, profit yielding industry of intermediaries has been put in place to make Medicare more business-like. These intermediaries are paid the amount Medicare would otherwise pay directly and if they can “settle” the claim for less by either denying the benefit or squeezing the provider, they make a profit on the transaction. This is nothing less than a total scam as these intermediaries don’t save any money at all, they just make Medicare less efficient.

As well, as I describe in my book, Medicare also transfers insurance risks to health care providers. This is an even more inefficient way to manage risks than small insurers because the providers are far less efficient risk managers than small insurers. Again here, the details are a bit more complicated than an email.

Point 6: Even if we allow unbridled competition, despite the inefficiency of increasing the numbers of small, competiing insurers, there will still be millions of people insurers do not want to insure: People who are already seriously ill, the poor elderly who are seriously ill, poor people who cannot afford insurance premiums, inmates in prisons and jails who are straining the budgets of local cities, counties and states.

So, we still will need the state Medicaid programs. So, when we consider a comparison of a single payer to a competitive market we need to remember that a not for profit, single payer would eliminate all the inefficiencies of our private markets with hundreds of inefficient insurers, it would eliminate all the state Medicaid program infrastructure, and it would eliminate the costs of regulating the private insurance industry at the state level.

All of this can be accomplished by merely changing the age of eligibility for Medicare from 65 to 0. Medicare already covers the aged and disabled, people with kidney failure, and severely ill dependents of beneficiaries, so the entire administrative structure to serve as a single payer is already in place. Every imaginable condition has already been addressed.

Point 7: And this is the big point. The real problem with small insurers is not even their inefficient non-expense ratios. It is their inefficient risk management. To avoid excessive losses, small insurers need to cut benefits below those anticipated in their premiums. I explain all this in my book and it is too complex to describe in an email. But the bottom line, the smaller the insurer, the more they have to cut anticipated benefits.

At the same time, large insurers can actually offer far higher benefits for the same premium than they do offer, because really large insurers are very efficient risk managers and face no risk of adverse operating results.

So the real inefficiencies in having competing insurers are in the management of risks and how efficiently insurers turn premiums into benefits.

Three different states are worthy of notice:

I. Small insurers earning excessive profits because their policyholders are healthier than anticipated. In this case the insurers and their investors convert premiums to profits rather than benefits. With a single payer these “profits” would go to benefits for other policyholders.

II. Small insurers incurring excessive losses because their policyholders are sicker than anticipated. In this case the insurers fail and their obligations to policyholders are covered by larger, more profitable insurers. With a single payer these “losses” would be covered by the gains on other policyholders who were healthier than expected.

III. Very large insurers, facing no risk, who could offer benefits that would be 10-20% higher than they offer on the premise that they actually face risks as documented by the failures of small, inefficient insurers.

A single payer eliminates all three of these inefficiencies by being able to offer higher benefits, at lower cost, with less risk, and lower administrative costs.

Probably more than you expected and I would be happy to respond to specific questions. The only thing I ask is that you not simply drop a flawed table from an organization that is seeking narrow political debate advantage at the expense of Truth as part of your question.



Notes on efficiency

February 17, 2016

This is a post I submitted on February 17, 2016 on Peggy Chinn’s blog after following her posts on efficiency and productivity

…. and so we come full circle on the theme that first attracted my attention… efficiency. I was tempted to write these thoughts on the first post, but I figured it would be better to let that run its course…

and when combined with your mention of this political season I could no longer resist, one of my favorite topics: The efficiency of risk management, or “… all you wanted to know about insurance but were afraid to ask.”

Recent issues in the Democratic Party primaries have brought one of my favorite efficiency topics into view. What makes for an efficient insurer? Ask most lay people and they are likely to give a knee-jerk response: An insurer with a low loss ratio. But no, that is not the hallmark of an efficient insurer. That is the hallmark of an insurer that isn’t paying its policyholders’ claims.

Perhaps an insurer with a low, non-claims, expense ratio. That is certainly an important component of an efficient insurer, but not the most important component.

The hallmark of a perfectly efficient insurer is an insurer whose loss ratio (Total Claims Costs/Total Earned Premiums) is exactly equal to the loss ratio for the population from which it randomly selects its policyholders. No insurer is ever this efficient. The best any real world insurer can ever do is come close to having the loss ratio for the population insured.

Still, thinking about insurer efficiency can reveal a lot about one of the most important issues in the 2016 election: What is the best way to provide health insurance for the entire population of the USA? Is an incremental improvement in the proportion of Americans covered through the PPACA, as suggested by candidate Clinton, the most efficient approach, or is a single payer, Medicare for All, as suggested by candidate Sanders, the most efficient approach?

First, the landscape. We hear a lot about some of our biggest insurers/health benefit plans: AETNA, Humana, United Healthcare, Kaiser Permanente, etc. We have also heard about some colossal insurer failures: AIG, Reliance Insurance Company etc.But the real issue of inefficiency has to do with the hundreds of smaller health insurers/health benefit plans we have. Most of these hundreds of insurers are terribly inefficient, often paying only a small portion of their premiums in the form of policyholder benefits, nowhere near the loss ratio appropriate for the population insured.

So, what is the magical ingredient in efficient insurance? Volume, Volume, Volume. The more policies an insurer issues, the closer its loss ratio falls to the expected loss ratio for the population insured. The importance of this proximity to the loss ratio for the population is critical. The more accurate an insurer’s loss ratio the easier it is to convert premiums into health care benefits. If an insurer knows exactly what its claims will be, year after year, it faces little or no risk of adverse operating results. The lower the insurers risk, the less need there is to reward investors with profits and the lower the “risk premium” it should have to charge for its risk management services. As these two items decrease, the insurer can convert more of its premiums to policyholder health benefits.

Now the thing about insurers, as I suggested above, is that the more policyholders, the more efficient the insurer becomes, the higher the benefits it can offer, the lower the premiums it can charge, and the lower the risk of bankruptcy.

For every population there is ever only one maximally efficient, risk managing, insurer. The largest insurer possible, or a national health insurer. Let’s imagine we have an “efficient enough” health insurer, insuring 1,000,000 Americans and converting 75% of its premiums to health benefits, having a profit goal of 5% of its premiums, charging a risk premium of 5% for its service as a risk manager, and having non-loss operating expenses of 15% of premiums. This insurer can reliably convert 75% of its premiums to policyholder benefits.

Year after year, in some years it will have lower losses than expected and it will earn higher profits than expected. In other years it will have higher losses than expected and it will incur operating losses, using up the 75% of its premiums earmarked for policyholder benefits, eating through its 5% risk premium and eliminating its expected profits. In really bad years it may lose all the money it has, it will become insolvent, shut its doors and deprive some policyholders of their benefits. This happens fairly rarely for insurers with 1,000,000 policyholders, but it happens quite often for insurers with 5-10,000 policyholders.Precisely because they are inefficient risk managers, small insurers earn excessive profits, or incur crippling losses, fairly frequently.

But we are interested in efficiency, not inefficiency. So we need to look the other way. While an insurer with 1,000,000 policyholders may be efficient enough, it isn’t going to be efficient enough for people like us who want to see real efficiency. So, lets think about the relative efficiency of an insurer covering all 323,000,000 Americans, the Bernie Sanders solution.

I specified the 5% profit margin and 5% risk premium for a reason. Together with understanding the Central Limit Theorem, these assumptions are based on the notion that the standard error for the loss ratio for our insurer with 1,000,000 policyholders is 5% of its premiums. In about 95 years out of 100, our efficient enough insurer will have a loss ratio between 0.65 and 0.85. That is ok but it should be clear that a 20% spread in how much of the premiums will be left each year will make life difficult for everyone.

How would our insurer covering 323,000,000 policyholders compare? Well, to calculate the risk management efficiency of a national health insurer, we invoke the Central limit theorem and we find that the standard error for the loss ratio for our insurer with 323,000,000 policyholders is not even close to 5%, it is only 0.002782%. Our largest possible insurer will have loss ratios that vary between 0.74722 and 0.75278, about 95 years out of 100. This insurer is so efficient that it will never go bankrupt because its losses never exceed its premiums. On the downside it also has very few years when it makes substantially higher than expected profits.

It is this very efficient insurer that lies at the heart of the current political season. Will America be better served by 323 “efficient enough” insurers that cannot plan to provide benefits of more than 75% of their premiums as benefits, or would America be better served by a maximally efficient insurer that could pay almost 85% of its premiums as benefits? Most would probably pick the insurer that pays the most benefits. Yet, all but one Republican party candidate, and one Democratic party candidate tell us that a national health insurer is the wrong choice for America.

This is, of course, only a teaser. A glimpse at some of the ways in which insurers can be efficient. I have a nice little paper that covers all the turf, covered by my book “Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them” that I am distributing gratis as my contribution to rational discourse on the topic of how to achieve universal coverage. For a free copy pick the small paper up from my website: http://standarderrors.org/WorkingPapers/2012/JSM073111PaperFinalWorkingPaper09262012.pdf.

In 2016 everyone should understand how insurance really works or we will blindly face the Woody Allen Dilemma in the balance of the primaries and throughout the election year:

“More than any other time in history, {wo}mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”

What Would Florence Nightingale Do (WWFND)?: Nightingale and 21st Century Health Care Reform

May 13, 2015

Bates Center Blog


Editors’ Note:The mythology surrounding Florence Nightingale has often ignored or glossed over her role as an innovative applied statistician. Nightingale was doing sophisticated polar graph charts and thought experiments before think tanks and blogs existed. As we wrap up this year’s National Nurses Week and celebrate Nightingale’s 195th birthday, we thought it would be a good idea to look at how Nightingale would approach our modern health care issues. What follows is a fascinating scenario from Nurse and Mathematician Thomas Cox which positions Nightingale in the 21st century to make sense of our current healthcare reforms in the US.

View original post 1,329 more words

What Would Florence Nightingale Do (WWFND)?: Nightingale and 21st Century Health Care Reform

May 13, 2015

From the Bates Center Blog at the University of Pennsylvania:


April 17, 2013

Comment I made on the Advances in Nursing Science Blog

Of course I am inclined to think that the most significant problem affecting health care policy, the health care system and the quality and quantity of nursing care has to have a timeline that goes back even further than Richard Nixon’s support for health maintenance organizations and the promotion of capaitation as a major form of payment for health care services.

This even longer time frame, two centuries, dating back to Carl Friedrich Gauss’ work on measurement error and the normal (Gaussian) distribution is necessary to really understand the mathematical and statistical basis of the fundamental flaw of capitation financed health care: That capitation cannot work in efficient health care (finance) systems ergot, capitaion cannot drive our health care (finance) systems toward an efficient state.

The core problem of 21st century nursing has to do with resource constraints and insurance risk bearing by health care providers. While resource constraints by themselves are more than adequate to negatively impact the quality and quantity of nursing care the real problem is far more injurious.

When health care providers: Hospitals, Physicians, Nursing homes and Home health agencies bear the insurance risks associated with the care of their patients AND the obligation to care for their patients, it is a simple matter of getting hit from both sets of demands.

Under a fee for service mechanism as the intensity of care required by patients rises so does the revenue stream associated with patient care. As a health care provider steps up to meet the needs of more complex, more intense or longer duration care the health care provider is compensated for the increased level of care rendered.

Under capitation-like health care finance mechanisms the level of payment for care is fixed at the outset. As the intensity of care required by patients rises there is no increase in the revenue stream associated with patient care.

Rather than being able to step up to meet the needs of more complex, more intense or longer duration care the health care provider is compelled to manage the fixed revenues AND deliver the increased level of care rendered.

The problem here is that health care providers have been failing, financially and clinically, at alarming rates since the introduction of the first risk-transferring efforts incuding Kaiser Permanente and the post-Nixonian decision to require employers to offer health maintenance organization coverage to their employees.

The crux of the issue has to do with the proximity of the average cost of providing care to the average for the population cared for. The basis of insurance is that unlike individual policyholders, insurers have an advantage in managing risk that no single policyholder has: While some policyholders will have very high claims which the insurer will have to pay, most policyholders will not.

Large insurers can offer insurance protections to their policyholders at a cost close to the average claim cost per policyholder and still earn very predictable profits every year.

Individual policyholders cannot do the same and small insurers do not do as well as large insurers.

When the insurer is very small: A single Physician, Nurse, Hospital, Nursing home or Home health agency the variation in avaerage costs for their patients, during any specific financial period: Patient, Shift, Day, Week, Month, Quarter or year is far too high. Such risk bearing providers’ service costs may be higher, or lower, than the payments they will receive and the core premise of capitation-like health care mechanisms is that these risk-bearing health care providers will become “more efficient” by reducing the cost of the care they provide.

But, in an efficient health care (finance) system, individual providers do not have the ability to control the severity of illness of their patients. The only way that risk-bearing health care providers can control the costs of care, in efficient health care (finance) systems is by reducing the level of care they provide, lest they, at the end of any specific financial period, become insolvent.

The issue of how health care, and more specifically how nursing care is financed is the defining issue affecting the quality and quantity of nursing care in the 21st Century. If the advocates of capitation succeed in implementing capitation as the sole method of financing nursing care, the quality of nursing care will plummet in all settings.

While the rich will be able to access care on a fee for service basis, the overwhelming majority of the population will not. The poor, disenfranchised, people of color are the ones most impacted by the manner in which health care services are paid. It is the poor and the powerless suffer the delays and denials of diagnosis and treatment that come with capitated health care finance.

Until nursing puts its attention on the singularly most impactful aspect of modern health care, until nurses understand the impact of risk transferring health care finance mechanisms and nurses address these issues in their worksites and at a national level, nursing will continue to offer suggestions for care that will be ignored by the seemingly more sophisticated players at the tables, the people who have the stacks of financial analyses, the reams of paper on how much patient care costs and who seem to understand (But do not) how the health care service system can respond to capitation-like health care finance mechanisms.

Market positioning for private insurers in the face of statutory health insurance reform in Curaçao 2013

April 3, 2013

I recently got a chance to read a very interesting draft of a thesis, Market positioning for private insurers in the face of statutory health insurance reform in Curaçao 2013, prepared by Dennis Arrindell.

The thesis describes the context of health care and health care finance in the Netherlands Antilles and got me thinking about all sorts of things. I suggested to Dennis that we dialogue on a blog about some of the issues it raised for me.

This is the first of what I hope will be several posts/exchanges about topics covered in his thesis and in my work on Professional Caregiver Insurance Risk.

I will leave it to Dennis to introduce himself.

I chose to focus on “efficiency” in this post because I think it is a poorly understood term in the ongoing debate about health care (finance) reform in the US and elsewhere in the world. So here goes…

I think the first thing is that the word “efficiency” is being used in multiple contexts without ever really formulating a coherent definition or standard of efficiency.

I am perhaps hyper vigilant for it because I struggle with it so much myself. So I would suggest careful review of the chapters on how epidemiology, service capacity, service delivery and payment determine the costs for health care, who gets treated and at what overall cost.

The problem as I see it is that no private, for profit insurer can ever really win the “efficiency” argument if by efficiency we refer to converting the maximum amount of premiums into health benefits for policyholders.

The most efficient insurer, based on that definition of efficiency will always be the insurer that elects to operate without a profit margin, without charging a risk premium and which need not set aside any surplus reserve at all because in times of insurance catastrophe it can rely on the unique capability of government to print debt or sell bonds.

When we specify the epidemiology, system resources, treatments that will actually be provided and the amounts that will be paid, at least as broad societal averages, we can begin to set a standard for efficiency with respect to cost, waiting times, diagnostic delays, and treatment delays.

The danger, as it occurs here in the US and around the world is that we simply assume that government insurers MUST be less efficient when their inefficiencies tend to be manufactured rather than unavoidable.So, for example, here in the US, Medicare/Medicaid COULD compel physicians, hospitals, pharmacies and other providers of health related goods and services to cut their profit margins but the special interests involved prefer to hamstring these programs, forcing them to operate inefficiently.

Private insurers are not intrinsically able to bargain better than governments – after all, in the final analysis bargaining takes place between human beings, it is only the red tape designed to make government agencies operate inefficiently that prevents such accomplishments.

But I think there is an even deeper issue here. If I read between the lines, the implication appears to be that it is inherently good for private insurers to engage in profitable operations and that we ought to encourage and support them in this.

I think such a case can, ad should, be made, but one has to be careful that in making this case one is not arguing in contradictory ways.

You have made the point that when profits in the insurance sector are high, the industry accumulates and that this wealth may be distributed to shareholders, re-invested in these insurance companies, expanding their ability to offer insurance, new products or support government through bond purchases or consumers through mortgages.

The wrinkle here is that physicians, hospitals, pharmacies and other providers of health related goods and services can make an identical argument that their profit margins are inherently good because as their wealth rises they will also use that wealth toward the betterment of society. Given adequately strong profits, their wealth may be distributed to shareholders, re-invested in their health services operations, expanding their ability to offer new products and services and/or support government through bond purchases or consumers through mortgages.

If the only way private sector insurers can build their profit margins is by shrinking profit margins of other entities I personally think there is little justification for preferring financial transactions to have higher profit margins than the components of the health care system that actually provide health care services and products.

So, framed this way, the question becomes: What intrinsic value do insurers bring to the table, what benefit to society do insurers produce, that is of such estimable value that it is acceptable for them to extract their profit margins from the profit margins of other economic actors?

Keywords for health care (finance) system reform

March 31, 2013

I am not sure how this blog is indexed by search engines, so these are some keywords that are particularly relevant to my work on health care (finance) system reform:

Average Cost Based Reimbursement Systems

Professional Caregiver Insurance Risk

Standard Errors

Efficient Statistics

Parameter Estimation

Unbiased Statistics

Health Care

Health Care Finance

Probability Theory






Policyholder Benefits

Maximum Sustainable Benefits



Risk Assuming Health Care Provider


Prospective Payment Systems

Diagnosis Related Groups

Diagnosis Related Group






Risk Theory




Policyholder Surplus

Stockholder Surplus




Denial of Service

Delayed Diagnosis

Deferred Diagnosis

Denial of Care

Risk Management

Risk Theory

Health Care Risk Management

Enterprise Risk Management


Social Worker

Registered Nurse



Chartered Property Casualty Underwriter



Insurer Efficiency

Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them

March 26, 2013

There is a new version of my book on health care finance reform.

Well actually it has been available for a while but I have neglected this blog. So not only is there a new version of the book, as of September, 2012, but there was also a brand new website…

To go directly to purchase a copy of Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them you can use this link:

Buy Standard Errors/

If you want to visit the site, you can go to:


If you would like a copy of my dissertation, you can get it at:

Risk induced professional caregiver despair: A unitary appreciative inquiry/

My working papers, well those that have found their way to the website, can be reached through:

If you think that capitation, the Medicare/Medicaid Prospective Payment Systems for hospitals, physicians, nursing homes and home health agencies are bad, but do not wuite understand how bad, or why they are bad,

Standard Errors: Our Failing Health Care (Finance) Systems And How To Fix Them 

has the answers you are seeking.

Insurance works best when a great many policyholders all buy insurance. Insurance does not work at all if we all buy our insurance from the person living next door. Insurers need a lot of policyholders to benefit from the Central Limit Theorem.

As insurers issue more and more policies, assuming the premiums are correct for the risks being insured, the insurer’s ratio of losses to premiums will more closely approximate the population loss ratio.

As it turns out this is a really good thing because a loss ratio close to the population loss ratio means the insurer can plan for its economic liabilities and will know exactly what its losses will be before it writes the policies.

Rather than having a great deal of risk, a very, very large insurer has virtually no risk at all.

Thoughts on “Why Aren’t State Exchanges Embracing Prudent Purchasing Strategies?”

March 19, 2012

Why Aren’t State Exchanges Embracing Prudent Purchasing Strategies?


The following are some of my thoughts on a March 19th, 2012,  Health Affairs Blog by:
by William Kramer

See: http://healthaffairs.org/blog/2012/03/19/why-arent-state-exchanges-embracing-prudent-purchasing-strategies/

for the original blog.

My Thoughts:

It is easy to miss the real problems with the state exchange model. When this happens it is comforting to think that we might tweak a system a bit that was, in what will be the final analysis, guaranteed to fail from the start. Under the tweak approach we can fix a few isolated problems in much the same way that Copernicus fixed a few of the problems with the geocentric universe.

The problem, unfortunately, is that in insurance markets there actually is a single best, most efficient, and least problematic design. The optimal size for an insurer is the largest possible portfolio possible. In the case of health benefits this would entail eliminating hundreds of smaller, less efficient health benefit plans and insurance policies in favor of a single insurer covering all 309,000,000 Americans.

This single insurer, with a single set of benefits, a single set of forms, a single set of standards for evaluating the costs and outcomes of interventions, is the most mathematically efficient insurer possible.

By efficiency I refer, of course, to the proximity the insurer’s loss ratio to the population loss ratio for the population served. No smaller insurer will have loss ratios as close to the population loss ratio as the single largest insurer possible. In fact, simple applications of the Central Limit Theorem will allow us to specify how much further from the population loss ratio a smaller insurer’s loss ratios are likely to fall.

If a relatively large and reasonably efficient insurer, our Paradigm Insurer, has a loss ratio that wobbles around the population loss ratio of 0.7500 from year to year, in a manner that suggests that about 95% of years will produce loss ratios of 0.6500 to 0.8500, how far from 0.7500 would our national health insurer’s loss ratio be likely to fall over the same number of years if it is insuring 309,000,000 and offering identical benefits?

The answer is that the national health insurer’s loss ratio would lie between about 0. 7443 and 0.7557. This assumes that the standard error of the estimate of the population loss ratio for the Paradigm Insurer is 0.0500 and multiplies this by the square root of the ratio of the size of the national health insurer’s portfolio to that of the Paradigm insurer. In short, the standard error of the estimate of the population loss ratio for our national health insurer is about 0.0028, far lower than the Paradigm Insurer’s standard error.

Among the advantages of this largest possible insurer are that it would have a higher probability of achieving reasonable profits, it would have a far lower probability of incurring solvency threatening losses, it would provide higher benefits per premium dollar than any smaller insurer, and it would need far less surplus to assure its solvency. From a purely mathematical viewpoint there is no number of insurers greater than 1 that can compete with these operating characteristics.

No amount of political ranting and intentional misinformation can overcome the obvious advantage of a national health insurer yet this does not stop either the ranting or the intentional misinformation.

Even beyond the mathematical superiority of a single, optimally sized national health insurer, is the elimination of all the inefficiencies that accrue with hundreds of insurance companies, thousands of specific benefit benefit plan inclusions and exclusions, the resulting uncertainties about benefit eligibility, and the massive litigation over benefits, not to mention the waste and inefficiencies involved in insurance underwriting, rate making, reserving, and capitalizing all these inefficient insurers.

So, given that there actually is a mathematically, single most efficient insurer, we must focus on why we continue to look everywhere else but there for solutions to our problems, with all too predictable results.

In the final analysis the answer seems clear enough. Our current system of hundreds of health insurers and health benefits companies accomplishes something that the national health insurer will never be able to accomplish. We succeed in rationing care, limiting access to health care, delaying and denying potentially expensive health care services at arm’s length through our current system.

If we implement a national health insurer we will actually have to decide, and explain in detail, what benefits everyone will be eligible to receive. Politicians and benefit overseers will have to go on record and state that certain kinds of services will not be paid by the national health insurer. Perhaps we will not provide liver transplants to life long alcoholics. We may not provide tube feeding for near comatose patients in their 90s who have not communicated with anyone for years, but are lying in nursing homes because some entity is paying for their care.

This enormously successful ability to ration care, at arm’s length, with the notion of “Plausible Denial” about what we are doing, is the most obvious benefit our fragmented and fractured health care (finance) systems bestow at this point. Unfortunately, our fragmented and fractured health care (finance) systems provide this cover at far greater cost to individual patients, health care providers, payors, and the public at large, than would be the case with an optimally sized national health insurer.

So, the answer really is that the efficiencies the authors suggests could be achieved by combining state health insurance exchanges purchasing with better, more efficient benefit plan purchasers is exactly what our policy planners, researchers, and politicians are working so hard to avoid – a coherent, well documented, health benefit plan that would equally well serve everyone in the United States, where everyone would know what benefits were available, and in which those benefits would actually be provided.

Combing purchasing would eliminate the finely orchestrated system of inconsistent benefit entitlement determinations that have been finely tuned by insurers and insurance risk assuming health care providers, who are motivated by the increased profitability that denying and delaying services provides to them.

This finely tuned health care rationing system saves trillions of dollars each year compared to any imaginable system in which everyone would have the same exact access to health care services whether they were active duty military personnel, homeless veterans struggling with war zone injuries and PTSD, senior citizens, the poor, transients, college professors, or factory workers.

Apparently almost nobody in America really wants an efficient health care finance system or we would already have one since the mathematical basis for such a system is abundantly clear.

Governing Bodies and Spaces: A Critical Analysis of Mandatory Human Immunodeficiency Virus Testing in Correctional Facilities

March 17, 2012

I just read this article and since I was recently working in a prison correctional system I was intrigued to see if it would offer some new insights into the experiences of prisoners and my own reflections on the experience of correctional health care and correctional nursing.

The upside of such an article would be that it might draw correctional nurses into a new way of viewing the world they encounter and and become more politically aware of the environment. I am not sure this will happen, not because it would not be good, not because of what I see as some fundamental flaws in the article, but because correctional nurses are probably far less likely to entertain such thoughts than ANS’s readers, bloggers, and authors and even far less likely to read ANS than non-correctional nurses.

I would never suggest that my reflections are a fair representation of the reflections of anyone else. Since first reading Rosenhan’s “On being sane in insane places” I have been acutely aware that intentionally creating an opportunity to immerse oneself in an unusual role and environment, and intentionally reflecting on one’s own experiences, in such a setting, is far from normative behavior and that the insights, experiences, reality constructions, and descriptions of these environments by intentionally self-selecting and self-reflective individuals tend not to be anything like the insights, experiences, reality constructions, and descriptions of these environments by their customary participants.

So, some thoughts that I had during and since my participation in correctional health may be of interest, or not. I am however, almost certain that very few nurses working in correctional health will read them in this forum. Even more jarring, I find that my views are changing, cycling repeatedly as I adopt different perspectives for my self-reflections.

I was pretty sure, upon entering the system, that I would be dissatisfied with the quantity and quality of health care provided to inmates. I was right and I continue to be deeply troubled by that, though as I will suggest, there are some mediating issues.

I also assumed that I would find little, if any, “left of center,” or “liberal” political rhetoric in the environment. It was actually quite a bit worse than I imagined. Most of my training and orientation activities were with new correctional officers and/or correctional officers having mandatory annual training. These are not left leaning groups. It brought back a lot of memories of what it was like to be against the Vietnam war in 1964 when most of the country was still believing the party line that it was necessary and appropriate.

Before I get too carried away, I should focus on some of the surprises. I had previously worked in a maximum security prison as a mathematics teacher. Despite some exposure to some really bad, deeply damaged human beings, I still had a tendency to romanticize prisoners. It is not at all hard to do this as I think the article does to some degree. To be certain there are innocent people in prisons all across the world. This is a travesty because prisons are not good places for the thoroughly corrupt and amoral, and most certainly not for the innocent.

But innocent is a relative term. In my own area one doesn’t have to look very far to see that there are an awful lot of people who are not in prisons who ought to be there: Repeat offenders in crimes of assault, manslaughter, armed robbery, breaking and entering, sexual assaults, etc. I have become ever so much more acutely aware when I read local news stories that someone committed a crime who has been convicted of, or plead to, dozens of crimes in the past and has been repeatedly released only to commit new crimes.


I remember asking the Warden at my facility, after a neighbor who had been arrested for possession of firearms, drug dealing, possession of drug related equipment and materials, and a few other crimes came back home after a one night jail stay, “What does someone have to do to be incarcerated in this state?”

So it is perhaps important to recognize that very, very few people who are incarcerated in prisons today are completely innocent. They may, in fact, not be guilty of the crimes for which they were convicted, but there is a good chance that they were guilty of other crimes and that the notion that there are large numbers of innocent, political prisoners, in American prisons and jails is likely a fantasy. This was certainly not true in the first half of the 20th century, somewhat less true in the second half, and far less true in the second decade of the 21st century.

So, even being far more reflective and generally of a persuasion that prisons are filled with political prisoners than virtually all of my co-workers, I have to say that innocence is likely to be a very rare commodity in prisons.

This then goes to the heart of some of the issues addressed in the article. Yes, prisoners are segregated in prisons for a variety of reasons and their activities are closely monitored, though I would argue that they are not monitored anywhere near as closely as they ought to be. If they were more tightly monitored there would be far fewer prison assaults, thefts, and rapes. Security in prisons, as in the world, tends to come at the expense of freedom to do as we please. In prisons this is necessary because we are dealing with a population that is already starkly different than the non-prison population.

I was alternately surprised and appalled at the caring and uncaring attitudes of doctors and nurses, the skills and lack of skills, the commitment to patient’s well being and the lack of such commitment. In the setting I was in 60-70% of the nurses were agency/temp nurses. Many did not come back after their first 1 – 2 shifts either because, like me, they realized they could not accept the level of care being provided, or risk their licenses in a dysfunctional setting. But many were simply unwilling to work so hard.

Far too many nurses came in, sat down, and their attitudes toward their roles/patients brought to mind Bob Dylan’s lines from “Just Like Tom Thumb’s Blues”:

“Because the cops don’t need you
And man they expect the same. “

Far too many nurses felt that merely arriving, sitting in the nursing station, and feigning only the slightest interest in patients, was more than anyone ought to have expected from them.

As it turns out, upon looking into the matter, I realized that there were an overwhelming disproportionate number of registered nurses with “9”s as the first digits of their license numbers within 5 miles of the facility. There were four people in my nursing school graduating class who I knew had prior criminal records, all of whom had the tell tale “9”s in their licenses while all the rest of my classmates that I looked at did not. So I knew what I was looking for when I did a geographic analysis of nurses in the area around the highest concentration of prisons in the state.

So one of the most important lessons I took away from the situation was that the nurses with whom I worked in the correctional health system, were not really reflective of the nurses I went to school with, nor with the nurses in the community. This is of particular importance when we consider the manner in which test results were reportedly conveyed to patients in the article. To say I am not surprised that the communication was callous, understates the reservations I have about the quality of care in correctional health systems. The problems prisoners face in accessing care in prison facilities ought to be of farm greater concern than the incidental harms presented by mandatory HIV testing.

But again, I think it is important to contextualize some of this. While the nurses’ behavior was poor, it didn’t take long to realize that the behavior of prisoners was part, though certainly not all, of the problem. Prisoners are confined to prisons, for the most part, because they routinely violated community norms of behavior, intruded on the rights of others, lied, cheated, and manipulated people during their careers as citizen criminals. These behaviors continue inside prisons and many of the issues related to supervision and control occur because prisoners have 24 hours a day, 7 days a week, to sit around thinking about how to screw with the system and how to make trouble for, and manipulate correctional staff.

It doesn’t take long to realize that the relationships between prisoners and correctional nurses are nowhere near as healthful and sincere as the relationships between nurses and patients outside of prisons, though I would be the first to argue that the relationships between nurses and patients in the community are more and more likely to be deceitful and fraudulent because of the way we finance health care in the US.


It is, at best, a challenge to be a nurse in a correctional environment because nursing is always, and quite frankly ought to be, subordinate to security in correctional health settings. I personally struggled with one of the most difficult standards of interaction: referring to “patients” as “inmates,” finally all but abandoning the word “inmate” in any of my discussions about health issues. Some patients and staff resented that, some appreciated it, and most seemed to take no note at all.

That said, I remain both appalled and deeply concerned about the quality and quantity of health services, available to prisoners, the manner in which those services are provided, and the nature of the relationships between nurses and patients in correctional settings. But, I also think the issue of HIV testing is a bit more complex than that portrayed in the article.

In normal nurse-patient, and citizen-citizen interactions, there is at least a thin veneer of sociability and reciprocity. People in ordinary, non correctional settings still engage in risky behavior on many levels. But one is highly unlikely to encounter a sociopath in the community because the sociopaths are disproportionately represented in prison populations (Well, except for Wall Street investment firms). But in correctional facilities the number of sociopaths is very high (See below).

Even when prisoners do not qualify as true sociopaths, their behaviors are very likely to mimic those of true sociopaths. So, a case can be made for isolation, supervision, identification, and control of prisoners who are HIV+/AIDS, have Hepatititis, or other communicable diseases because in prison settings these people are far more likely, than in civilian populations, to knowingly and intentionally infect others.

Not restricting such inmates from working in food preparation areas would be an actionable tort if such inmates were allowed to work in these areas and used that opportunity to harm other patients. In fact, one might imagine a series of articles on the failure of prison officials to protect general prison populations from harm if they allowed prisoners who are HIV+/AIDS, have Hepatitis, or other communicable diseases access to food preparation areas.

As I suggested above, prisons are dangerous places. I think a strong case might be made that in general the most sensitive, caring, compassionate, and altruistic prisoners are less so than the least sensitive, caring, compassionate, and altruistic correctional health system nurses. It is all too easy to compartmentalize on either side of the rights of prisoners and the duties of nurses. It is far too easy to romanticize prisoners and denigrate correctional nurses.


Prison budgets are inadequate and becoming more so. Prisons house a very large number of socially maladapt people as prisoners and staff. But, we ought not forget that we have prisons, with all the problems and contradictions this entails in modern day democracies, because there are some people who, if left to their own consciences, will intentionally and repeatedly harm others.

In the 2002 article: Fazel, Seena; Danesh, John (2002). “Serious mental disorder in 23 000 prisoners: A systematic review of 62 surveys”. The Lancet 359 (9306): 545. doi:10.1016/S0140-6736(02)07740-1; the authors suggested that 47% of male prisoners and 21% of female prisoners had antisocial personality disorder. I’d go a step further and suggest that adopting the attributes of people with antisocial personality disorder may be a necessary and appropriate adaptive response to incarceration, elevating the number of quasi-sociopaths one is likely to encounter significantly when one is inside a correctional facility.

In the final analysis I come back to something that disturbed me at the very beginning of the article, when the authors stated:


“We begin this discussion by rejecting the idea that testing prisoners without their consent is somehow justified or somewhat necessary. We also reject the notion that more aggressive forms of testing are warranted in correctional facilities and the common perception that early detection is inherently beneficial for prisoners.”

I think the premature rejection of these ideas weakens the authors’ arguments.

There are, I would suggest, compelling reasons for differentially identifying, isolating, and restricting the behaviors of some prisoners whose biological capability to cause lethal harm to others, exceeds those of prisoners without such biological capabilities, because the populations of prisons are dramatically different than the populations outside prisons. Failing to address the most significant reasons why it might be appropriate to engage these prisoners in different ways than other prisoners fails to be compelling chiefly because it ignores the most profound considerations involved, and hence fails to refute the case that might be made by people who see the issue differently.

I think one could analyse the failure to identify and segregate, given the capability to identify and segregate, in much the same way the authors approach their work. Would it not be incumbent upon prison officials who could identify and segregate some prisoners who represent a significantly higher than average risk of harm to others, to do so? Indeed, would not their failure to act, to protect staff and other prisoners, be a classic case of negligence?

In the end, the best way to preserve one’s own individual liberties is by not self-selecting conduct highly likely to lead to incarceration. The more one avoids such conduct the less likely one is to suffer the consequences of incarceration.


It is important to note that I assume that incarceration is highly likely to be life threatening because of the obvious inadequacy of care in penal settings. Prisoners are far more likely to be affected by callous denial and delay of diagnoses than by premature diagnoses. In my limited experience I would be inclined to think that even so short a prison stay as 5 years is highly likely to result in premature death from treatable but undiagnosed and/or untreated conditions, and that these harms are more significant and affect more prisoners than the harms resulting from mandatory HIV testing.

In fact, one might argue quite the opposite, that mandatory testing carries with it the possibility of legal action; by, or on behalf of, prisoners, to demand treatment from prison systems notoriously disinclined to diagnose and treat HIV+/AIDS patients.


We know what we know about the incidence and prevalence of highly communicable diseases in prison populations because of mandatory testing protocols, without which we would know so much less than we do, and this knowledge can potentially lead to better care, rather than harm to the prisoners affected, which would be inconceivable without such protocols.


I suspect I spent a lot more time, during entry and exit,  between the two main gates, doing Sly Stallone’s assessment, as John Rambo, in First Blood, of how to escape from the facility I worked in than most of my colleagues. It helps me in thinking of how the prisoners themselves view their situation, and how they interact with each other and the staff. It leads me to conclude, at least at the moment, that prisoners appropriately spend most of their time trying to figure out how to attain and maintain an advantage in a very dysfunctional environment, and that many of the ways they would do that would involve inflicting knowing and intentional harm onto others.


This alone may be sufficient to justify the disparate treatment accorded to those with communicable illnesses.