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

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10 Responses to “Market positioning for private insurers in the face of statutory health insurance reform in Curaçao 2013”

  1. Thomas Cox PhD RN Says:

    Reblogged this on Standard Errors – Our Broken Health Care (Finance).

  2. dennisarrindell Says:

    Hi there,
    I’m Dennis Arrindell and study ‘European Public Health’ at Maastricht University. At the moment I’m doing a placement in Curacao (where I am from btw).
    I have no qualms about the inherent goodness or badness of economic actors; as long as they manage to generate incremental value for a population segment. Insurers generate value as you mentioned by providing ‘peace of mind’. The technical efficiencies of an insurance system can from this point of view even be argued to be negligible; value is created by the amount of ‘peace of mind’ an insurer (or charlatan for that matter) can offer or pretend to offer. The amount of ‘peace of mind’ is substantiated of course if the insurer can offer more than the physical paper on which the policy is written, but can also prove to be efficient in managing risk distribution and meet solvability requirements. The risk distribution however is not the purchased value from the consumers point of view; as long as they are damage free themselves, they cannot care less how their premiums are managed. The incremental value that they have purchased is an intangible state of mind.
    I think we ought to encourage and support not profitability margins or preferential treatment for private insurers, but encourage and support the generation of value by entrepreneurial endeavors, in whatever shape this value comes. For society it is simply necessary that we constantly encourage new ways to blend existing resources into something that is of greater value than the separate values of the combined resources and effort spent to combine them to a defined target group who is willing to pay the arbitrarily incremental price increase of the newly generated value.
    In my view, economic actors are bound to behave in a predatory fashion, constantly snatching away profit margins from others. Porter’s article on the five forces that shape market attractiveness for example, gives a good perspective on supplier bargaining power (e.g. a soda company threatening to switch to a different plastic bottle supplier or threatening to produce plastic bottles themselves) and consumer bargaining power (with the option of buying different brands, the consumer essentially ‘steals’ profit margins from the soda company when the soda company lowers their prices to maintain that consumer). In this sense, healthcare providers should simply find ways to cope with varying extents of bargaining power across the whole scene. It is not a matter of good or bad or which economic actors produce the greatest social good; it is simply an issue of which economic actors manage to maneuver itself into a better power position.

  3. Thomas Cox PhD RN Says:

    Hi Dennis,

    I knew this would be interesting.

    OK, let’s look at value. Certainly “Peace of Mind” is an important consideration in the mind of every policyholder, but I would argue that “Peace of Mind” has at least two components, one of which you address and the other you seem less concerned about.

    To the degree that insurance provides a service of value we must consider both components: 1) the mere existence of a policy that appears to convey the intent of the insurer to provide a benefit to the policyholder, in return for the premium paid and 2) The ability and willingness of the insurer to live up to that promise.

    As I understand your point, you feel that an insurer and a charlatan are offering the same exact value and ought to be able to charge the same amount, or perhaps even that the charlatan ought to be able to charge even more than the insurer.

    But I sense that you feel the charlatan need not live up to the promises they have made and quite possibly the insurer may elect not to live up to the promises it made.

    I would argue that this is a situation of a market segmentation. We might think of bonafide insurers who actually do pay their claims and non-bonafide insurers who will not, or cannot pay its claims due to malfeasance.

    I think that most policyholders are actually buying the right/ability to make claims against the assets of the insurer and have those uncertain, future claims paid by the insurer, not just “Peace of Mind”.

    As well, the creation of value may be done efficiently or inefficiently. I prefer to think that just because the current costs of one megawatt of power are lower for a company that uses environmentally unsound methods, fuels and engages in other environmentally unsound practices because it can get away with it, is not at all the same as an energy producer who delivers the same power, at higher current cost in dollars, but which uses environmentally safe methods and fuels and does not accrue the environmental damages of the first firm but has to pay more to produce the electricity.

    At least here in the US we do not have a sound mechanism for accounting for all the true costs of a megawatt of power so we fail to distinguish between two such enterprises despite the fact that the known costs of one megawatt of power are far higher for the first than for the second.

    You might argue that the first firm will eventually lose in the market place but the question of course is when and at what cost environmentally and who is going to pay the costs for damage to the environment that the first firm caused?

    In insurance the situation is similar, I would argue that efficiency in insurance has to do first and foremost with delivering benefits to policyholders and claimants and secondarily with rewards for investors.

    After all, the reward for the stockholders is predicated on their being willing to take a risk with their capital. If the primary goal of the insurer is rewarding investors one might assert that paying no claims at all is the most efficient way to transact business, especially in a situation where the incorporation costs are low.

    Unwary policyholders may become serial victims of an illicit band of insurance executives who open and close insurance companies on an annual basis: Issuing “Peace of Mind” policies every January 1 and steering the insurer to insolvency and closure at year end without paying a single claim.

    So, I partially agree with your suggestion:

    “For society it is simply necessary that we constantly encourage new ways to blend existing resources into something that is of greater value than the separate values of the combined resources and effort spent to combine them to a defined target group who is willing to pay the arbitrarily incremental price increase of the newly generated value.”

    Which is precisely why the charlatan and the bonafide insurer are different. One provides value and one provides only the “illusion” of value and we need to be able to distinguish between these two real world states.

    You go on to suggest that:

    “It is not a matter of good or bad or which economic actors produce the greatest social good; it is simply an issue of which economic actors manage to maneuver itself into a better power position.”

    But isn’t one every important rationale for free markets that without intending to do good for society at large, good is nevertheless done?

    I am inclined to think that a far better measure of the overall effect of an economic choice would be an incremental increase in value globally and that mere increase in power/wealth for one economic group, particularly if it occurs as a result of a loss in power/wealth and an overall decrease in value globally is not desirable. Here we can at least imagine an ability to rank order the impact of economic choices starting with the global increase in value and then perhaps choose secondary sorting categories.

    I would suggest that if a single economic actor achieves great increase in value and everyone else loses all their wealth this is not such a great outcome.

    That is not of course a purely economic position so much as it is an ethical stance. But the alternative is also not a purely economic position so much as it is an ethical stance.

  4. dennisarrindell Says:

    I find it admirable how your ideas are underpinned by strong values and not purely based on self-gain. I understand that the charlatan models I laid out are not sustainable in the long run. It was just meant to give an example of what I think the insurer is really selling, backed up by a mechanisms that increases this value –the peace of mind- by being able to competently pay out claims. Similar to a Ponzi scheme however, I would stress that for the consumer, it does not matter how the investments are organized, as long as they get their return when they ask for it. Therefore, the chosen ‘efficiency’ mechanism is irrelevant; the investment banker can be doing real investment or may simply organize a Ponzi scheme.
    However, since I have a natural inclination towards sustainable models (which the charlatan one is not), I would opt for the efficiency (in your terms) option.
    When reviewing sustainable models, the theme shifts towards the second topic: stealing away profit margins from other economic actors. In general, I think of economic arrangements in two extremes; one that is based on shrinking economic wealth of other actors and accumulate it to your own (but the net value of the total market remains the same since you just take from others) and the second one is based on the creation of value.
    In general, most markets have a hybrid of this; when bargaining lower prices from a producer, you are shrinking their economic wealth. On the other hand, as you are still purchasing from that producer, you are still paying for the arbitrary added value of all the resources that the producer has combined.
    A producer has combined resources worth 5 units (including time) and has created value for a purchases. The initial price is 10 units, but the purchaser, through threatening and bargaining and bitching, manages to get the price down to 8 units.
    This means that for the market, 8-5= 3 extra units of value have come into existence. For the producer, 2 unrealized units (as a result of bargaining) are ‘lost’ as a result of predatory economic actors. Overall, this hybrid of stealing profit margins and producing value still provides an incremental gain to the total market.
    I suggest that predatory models are not sustainable; one cannot commit to a life of stealing profit margins as it invites innovative responses from the other actors to circumvent this situation. In practice, sustainable models arise from mutual gain models (say whatever you want about human race, but we trade a lot more for mutual gain than we steal from each other since that is not durable). An insurer working arranging health purchase activities can also increase volume for the healthcare providers, increase exposure (a form of advertisement).
    Another fascinating example I found from a Dutch insurer is the following: services provided by a small provider (owner operated) that are NOT in the insurance policy can be sold by the small provider on credit to people who are insured by the health insurer that the provider has a contract with. Since the insured is already in the portfolio of the insurer and has an ongoing payment structure with the insurer, the insurer is in an excellent position to serve as a factoring agent for the small health provider. Factoring is a great hassle for small companies and it seems like a reasonable deal to let the insurer take care of that in return for favorable deals with the insurer. This example –which I find highly fascinating- illustrates how an incremental gain can be made in the total market. Maybe my thesis up to now does not illustrate this point well enough, so I will surely incorporate it.

  5. Thomas Cox Says:

    Hi Dennis,

    Glad you gave a concrete example because it alerts me to a potential problem not necessarily obvious to a non-clinician but increasingly obvious to doctors and nurses.

    According to your example, we start with an investment in widget production of 5 units. The market price for the goods/services produced using those 5 units of resources has been 10 units.

    Now you see an insurer stepping in and negotiating a new price of 8 units, perhaps because it has lots of patients.

    Your assumption seems to be that faced with a reduced price for the goods/services previously produced and sold the health care provider will suck up the loss in net wealth increase it has been accustomed to achieving and that it will continue to produce the same goods/services it produced originally.

    The problem here is that there is absolutely no empirical evidence in the health care sector that supports this conjecture systemwide. You can occasionally find an anecdote where this happens but the usual response of health care providers is to improve “efficiency’.

    So I would suggest something quite different is going on: As the preferred insurer’s payments drop so do the amount of resources used to provide the services that are mandated.

    Rather than simply sucking up the shift from a net gain of 100% of investment, most health care providers are simply reducing the resources devoted to care.

    If you want to cut their net revenues by 40% they will respond appropriately, from their perspective.

    Suppose Doctor/Nurse X used to see 100 patients a day. Now, your insurer cuts Doctor/Nurse’s payments by 20%. Doctor/Nurse X starts seeing 125 patients a day. Doctor/Nurse X has no interest in adding more hours to his/her work schedule so the only way Doctor/Nurse X can do this is by shaving time from each patient encounter.

    Most patients won’t notice the difference. An office visit is an office visit is an office visit and patients really have no way to tell whether Doctor/Nurse X does a complete exam or a half-hearted exam. Patients won;t know whether their care was substandar, barely adequate, good or excellent for years when they discover that they have metastatic cancer because Doctor/Nurse X did a sub-standard exam and missed obvious signs of cancer, leading to a 2 year delay in diagnosis of colon cancer.

    So there really is a difference. Doctor/Nurse X doesn’t do the same quality of assessment and doesn’t spend as much time thinking about a uniquely tailored health care intervention when their per patient/per visit reimbursement is decreased.

    A few patients notice, they tend to be sick, and they tend to really need the type of care that Doctor/Nurse X used to provide to all their patients. But that care is no longer available to the policyholders for the insurer that dropped the reimbursement rate to 8 units..

    At this point, the health care system most Americans access has changed dramatically as Doctor/Nurse X has adapted to managed care, capitation financing, DRGs and the Prospective Payment Systems. Patients are not diagnosed correctly, the diagnosis is delayed or missed completely. Doctor/Nurse X is more concerned with volume than quality and the answer offered by the economists who caused the problem is reduced payment for low quality care. duh!

    Where a single nurse might have had 6 patients 20 years ago, the standard now might be 12 patients. Most patients won’t know what care was like 20 years ago because most patients have never been in a hospital before and they have a lot more to worry about than the nursing care.

    More to the point many Doctor/Nurse Xes simply do their best to avoid any patients that might require more than 5 units of resources. High risk pregnancies are avoided as are any intense conditions.

    Hypertenseion – OK

    Diabetes – OK

    Hypertension and Diabetes – Not OK – You need a a higher cost specialist because Doctor/Nurse X does’t do complex care.

    If you have cancer, diabetes, hypertension, emphysema, and liver disease forget it – find a good mortician because Doctor/Nurse X doesn’t do any patients that require such expensive care.

    In the world of academic finance and economics, people like Kenneth Arrow think that providers will immediately find more efficacious treatment strategies. In the real world they do exxactly what you ideal insurer does – they look for a better deal – in this case, reducing the costs of the resources they devote to patient care to maintain their profit margins.

    More often than not this leads to compromised care.

  6. dennisarrindell Says:

    Very insightful. Thanks.

    Since I already finished most of my thesis fairly early in my placement, I am currently working on developing a health purchasing arm tailored to the local context (feasibility etc.) to keep the health insurance portfolio viable. Assuming that this approach is not in the best interest of health care, what do you suggest?

  7. Thomas Cox Says:

    Well, I think this tends to be the problem with most health care (finance) system innovation. People tend to forget that there is a very simple issue that ought to be at the center of any effort at reshaping these systems: How do we get the maximum amount of high quality health care at the minimal feasible cost?

    So, for example, what happened to the 2 units trimmed off by the insurer’s aggressive pricing in your example? What were the insurer’s profit margins before and after its aggressive pricing effort?

    If the insurer simply converts the “savings” to its own profits there is no improvement in total cost of care and there is quite likely a degradation in the quantity and quality of health care. This is essentially what happened in the US with the implementation of managed care. Managed care companies became very wealthy but the quality and quantity of care plummeted as providers attempted to maintain their overall profitability under both models.

    That is the worst possible result of innovation.

    To the degree that the insurer’s risk exceeds the risk of the providers, it would be fair to have the insurer compensated for the risk it is taking.

    But if the insurer’s risk is substantially lower than the provider’s risk I can see little justification for the insurer to have a higher profit margin than the provider because the insurer’s service to society is insubstantial in comparison with the provider’s service to society.

    If all we do is change an inefficient health care system into an inefficient insurance system we have not made any improvement at all. There is simply no reason to prefer an inefficient insurance system to an inefficient health care finance system.

    In your case you have a very difficult case to make in trying to replace a public insurance system with a private insurance system.

    You should be able to demonstrate that the private system will be able to deliver the same quality/quantity of care at a lower cost. The usual approach, as you know, is to simply assume that the private insurer can and will deliver the same quantity and quality of care at a lower price.

    If I was trying to do this I would be focusing on real, versus assumed inefficiencies in the government program. Perhaps it is impossible to get the legislators to authorize government insurer infrastructure improvements. It may be that a private insurer can greatly improve the policy issuance and claims handling practices, leading to faster payments to providers, less paperwork, and faster authorizations for care than the government insurer.

    But if all the private sector insurer accomplishes is denying more payments for care, there is little justification for such innovation.

    So, IMHO, the key to your success is finding a balance point where the insurer is adequately/fairly compensated for shuffling paper and moving money from one account to another but not overly compensated for this activity and the providers are adequately/fairly compensated for providing services.

    Back in the 80s, before Reagan’s de-regulation of the banking and insurance industries, both operated for decades with few failures, low profit margins, and provided a good deal of service to society.

    After de-regulation, bankers and insurers began taking inordinate risks and these eventually led to some quite large insurer and bank failures and little service to society.

    Insurers benefit most directly by being large, efficient, low risk financial transactors. But this paramount benefit of insurance is not present in the following situations:

    Small, high risk insurer

    Carved out profit center within an otherwise large, risk free insurer

    Small size, high risk health care providers who manage the insurance risks for relatively small numbers of their patients

    So, the ideal insurers would, in order of preferability:

    A very large insurer based outside Curacao

    A very large insurer based inside Curacao – likely impossible

    A fairly large domestic insurer that is part of a larger international insurer

    A fairly large domestic insurer with reinsurance agreements with external resinsurer(s)

    The very bottom, in preferability, would be insurance risk assuming health care providers, right behind poorly compensated health care providers.

  8. Thomas Cox Says:

    Correction:

    “There is simply no reason to prefer an inefficient insurance system to an inefficient health care finance system.”

    should read:

    “There is simply no reason to prefer an inefficient insurance system to an inefficient health care system.”

  9. dennisarrindell Says:

    I have been giving these ideas some thought and I think I found a very simple logical omission in your central hypothesis. The mathematical model is of course correct; smaller insurers claim patterns fluctuate in a more volatile fashion of which inability to accurately foresee the fluctuation trends naturally induces an insurer to act pre-emptively and deny and delay as many claims as possible.
    The logical omission I would like to point out is a well-known one: allocating resources to one large, very efficient insurer will give room the same problems that socialism is faced with: resources fall in the hands of individuals who may not always be as qualified to run them or worse, will knowingly re-direct resources to areas where they will achieve personal gain. For example, a large insurer can selectively contract only hospitals located in marginal constituencies to advance (non-health related and non-effectiveness related) political goals.
    Even more interesting, let’s stay within the sphere of poor insurance management example you provide: namely health benefits (no threat of financial ruin but high volume) versus indemnity insurance. If we were to follow your advice and vest all power within one large insurer that insures the whole population, what guarantee do we have that the next generation of management in this large insurer does not fail to realize this distinction and comes up with the noble idea to use the surplus funds to reimburse other products that doctors recommend (e.g. milk and diapers for babies, fruit for the obese) or lobby for (because they are financially affiliated with a new medical product)? How would you safeguard against this?
    Keeping insurance companies fragmented does indeed mean that they have (1) duplicated overhead costs and (2) a significant increase in the ‘fog’ of being able to predict end of the year costs and therefor a necessary increase in overly aggressive cost containment with all accompanying health adversities. The good thing though, is that in a fragmented construction of entities, there is a reduced chance of ‘one’ view being able to dominate for any extended period of time as all the entities are (driven by self-interest and fear) autonomously evaluating the opportunities and threats.
    I would therefor suggest that, though the mathematical model your put forward appears to me to be correct, your theory should incorporate safeguards for the very simple human element that we can witness when there is one view and one commissar directing the one and only efficient insurer. How long will the organization be able to follow Cox’s dogma’s until the new generations of management gradually start directing the operations towards areas of their own (or the parties) interests or incompetence?
    Lastly, have you considered the option of achieving the same effect of mapping out the standard error amongst fragmented insurance companies in order to organize effective risk-equalization schemes? It seems to me, that risk equalization maps out the overall risk of all the fragmented insurance providers and then redistributes this. Therefore, it somewhat removes the incentive to deny and delay claims without resorting to vesting all power in one entity.

    • Thomas Cox PhD RN Says:

      I think the key here is your assumption that employees in government are inherently self-serving and prone to abuse their positions for personal gain, whether financial or political.

      You state:

      “The logical omission I would like to point out is a well-known one: allocating resources to one large, very efficient insurer will give room the same problems that socialism is faced with: resources fall in the hands of individuals who may not always be as qualified to run them or worse, will knowingly re-direct resources to areas where they will achieve personal gain. ”

      While this remark is commonly made by people who wish to criticize socialism without using facts it is absolutely incorrect. It most certainly is not proof of a logical omission on my part. You are simply “assuming” that socialism, rather than free markets, attract people interested in self-aggrandizement and personal gain.

      In fact, I would argue quite the opposite, that free markets encourage selfishness, self-aggrandizement and the seeking of personal gain to a far greater degree than socialism. If you can actually show that the people who inhabit government hierarchies are fundamentally more self-serving than those who inhabit private sector employer hierarchies I will be more than happy to hear that case – but merely assuming what you should be proving is not compelling, it is logically fallacious.

      The reality is that the same basic types of people that you assume work only in government insurers also occupy positions in private insurers. There are actuaries, underwriters, claims personnel, managers, executives… in both government insurers and private insurers. They often move between these domains quite fluidly.

      Good example. Look at the history of the Reliance Insurance Group. Reliance was an old and venerable company. It operated for a century before Saul Steinberg took it over. In a few decades he siphoned off all the assets, led it toward extremely risky insurance markets and to collapse – the largest insurance failure in history before AIG.

      Saul Steinberg was not a government worker nor was he a socialist! He was a private sector, free market, capitalist entrepreneur working in what he perceived to be his own best interest – stripping a large, viable and solvent company of all its assets and converting a large portion of those assets into his own personal wealth.

      If you are going to fault “socialism” for its excesses and failures must you not also fault “free markets” and “capitalism” for the excesses and failures they spawn?

      The key to analysis is understanding what happens when everything goes right as a starting point. Once you get that correct you can look at various ways in which it can go wrong. But if you never get the ideal case worked out correctly you are dead in the water.

      So, what is the core concept of insurance? There are a set of benefits and variations in how and when those benefits are used – epidemiology. The insurer’s premium is based on the benefit package it offers and the epidemiology.

      Once the benefits and epidemiology are specified it really doesn’t matter whether it is a private or government insurer, it is all about size. The issue is always: Are the benefits being provided and are claims for benefits that are not covered not being provided?

      That is actually pretty simple to monitor in both private and governmental insurers – you randomly audit claims files for conformance with the written policies. You seem to be suggesting that a government insurer will always pay benefits that ought not be paid while a private insurer will always get it right. That simply isn’t true. Private insurers deny legitimate claims all the time. Government insurers do this as well but far less often than private insurers.

      In fact I think you actually go much further, implicitly assuming that private insurers are able to avoid paying benefits that the government insurer will be stuck paying. That is unaacceptable once you have specified the benefits package and epidemiology. If the insurer, private or government, is not providing the benefits presumed in the insurance premium it ought not receive the premiums that go to insurers who do provide those benefits.

      So, if your private sector insurer is achieving their supremacy over the government insurer by cutting benefits back by 20% their premiums ought to be about 20% lower than the governmental insurer that is providing the agreed on benefits. In short, the private insurer should only receive a premium that is actuarially “fair” for the risks it is assuming.

      You also suggest:

      “If we were to follow your advice and vest all power within one large insurer that insures the whole population, what guarantee do we have that the next generation of management in this large insurer does not fail to realize this distinction and comes up with the noble idea to use the surplus funds to reimburse other products that doctors recommend (e.g. milk and diapers for babies, fruit for the obese) or lobby for (because they are financially affiliated with a new medical product)?”

      Well, you perform appropriate oversight to avoid any Saul Steinbergs operating in the governmental insurance hierarchy. But more to the point – there is absolutely no reason not to change the focus over time. The issue is whether there is an open dialogue about what is changing, why it is changing, what the consequences are going to be, and who will benefit/be harmed.

      In the ideal for a governmental insurer this would occur in an open arena of political discourse. In the ideal for a private insurer this would occur in a closed board meeting with no outside oversight. Which one is actually more likely to produce a result that will prove harmful to the beneficiaries and is more likely to benefit the decision-makers over the policyholders?

      You can argue that over time free markets will correct for abusiveness – driving bad practices out and rewarding good practices. The problem is that the data suggests quite the opposite: Free markets allow for more abuse and the time span for correction is often decades, or centuries, when what is needed is instantaneous correction to avoid failures such as Reliance and AIG.

      Both governments and private companies fail – if you only acknowledge the failures of government and give a pass to millions of failed companies you are not using the same standards for both sectors. Pick a single, defensible standard and apply that standard to both private and governmental entities and you will probably see little difference in performance when you incorporate every entity rather than “cherry picking” successes from the private sector and “rotten apple picking” failures from the government sector.

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