Insurance, Reputation, and Kristallnacht

I would like to point out that health insurance companies don’t operate internationally, additionally they typically sell to a captured audience, I just don’t see this incentive working.

@matt

The point here is that insurance companies are typically concerned about their reputation. Whether they operate internationally or not is irrelevant. It had relevance in 1938 Germany because the foreign understanding of the Kristallnacht might have differed from the German one. Many Germans (with the help of propaganda) would have seen it as a patriotic gesture by insurance companies. Foreigners would have seen it as a sign that German companies cheated their customers.

Reputation does matter. Even if most people get health insurance through their employers, they almost always have multiple choices. And, those choices come up for renewal annually. An insurer with a bad reputation will not get renewals.

One example is not sufficient to support a principle. A ready counter-example is the Swiss life insurance companies who refused to pay out awards to heirs of insured Holocaust victims, but demanded to see death certificates – despite the fact that the Nazis did not issue death certificates when they murdered millions of Holocaust victims.

A parallel case is the Swiss banks who refused to pay out cash deposits to heirs of Holocaust victim depositors, but also demanded to see death certificates. Years later, they were forced by litigation to make some – but not all – payments.

Thank you Artturi for correcting my error. Of course the Swiss Insurance Companies and Banks had every right to rob Holocaust victims and their heirs. Who cares about right or wrong?

A key phrase is “clearcut obligations”. Does health insurance create clearcut obligations?

It appears that it is much more common for life insurers to do a blood test before writing a policy than for health insurers to do so. I’d say this is a clear symptom that competition has forced life insurers to be more cautious about rescinding policies than is the case for health insurers.

I tend to think this example is a bad analog. If we were talking about another international event like 9/11, this would make sense as an explanation for why a Saudi insurance company would have a strong incentive to pay their WTC disaster insurance despite whatever inclinations they might have.

But in the health insurance industry…
1. The claimants are sick people who don’t have the resources to pay their bills, much less do a publicity tour.
2. Each individual illness is not really newsworthy, it is commonplace and periodic.
3. The insurance companies have gigantic marketing, legal, and lobbying budgets, to deal with any individual cases that become problematic.

The only way your analogy applies is if the publicity scope and scale of the claims is larger than the company’s budget to suppress it.

You must have a good reputation first for this analogy to hold any merit. How can an insurance company worry about its reputation if it has none to begin with? We already have countless examples of insurance companies doing awful things to people that have damaged their reputation and as such, continue to do so.

I have to agree with many of the other comments here, you can’t point at something from 1940’s germany and apply it to 21st century United States without alot of evidence to back up your claim. Evidence which you have not provided.

Uh, Floccina…people buy insurance with higher deductibles because the premiums are lower. If you spend more in additional premiums than you think you’re likely to in regular medical expenses, why pay for the lower deductible? It’s your basic cost/benefit analysis, at the personal level.

As a person who’s had his insurance denied, I can assure you that reputation is not much of a motivating factor for these companies. Caplan’s a little bit off in his comparison.

It’s not clear to me that any concern health insurance companies might have for their reputation could have a significant positive impact on the “quality of the product” from the perspective of the insured:

(1) health insurance is an extremely concentrated market, limiting consumer ability to choose based upon reputation

(2) there are no reasonable sources of information for consumers to use. How can you find out how generous each company is for chemotherapy regimens, rehabilitation, or rescission?

(3) from the perspective of insurers, their clients are employers, not employees. Their reputation for quality of coverage or the politeness of the claims department doesn’t matter as much as their reputation for low costs and administrative services.

Very interesting story, but I’m not sure how relevant it is. The basic difference is that the insurers here are responding to a large event, the sort of thing where people know what is going on and are watching. The sort of thing that risks their reputation. With the exception of epidemics, (which are a vast, vast minority of health insurance claims), the events (illness) are personal, known only to the friends and family of those involved. It doesn’t make the news that my dad has cancer, and it doesn’t make the news that his health insurance is trying to deny his treatment because this round comes in pill form, and so unlike invasive surgeries or chemotherapy, is considered a perscription rather than cancer treatment. The obvious fact that this is treating his cancer, and he is well under the finnancial limits for that, will never make the news, and so never really threaten the companies reputation.

Further, there is another important distinction between this kind of personal trauma and the sort used as an example above. When the event makes the news, an important part of that news will be the companies involved. One reads the news looking for information. However, when personal events occur, and friends and family are told, it is the suffering of the loved one, not the knowledge that a particular insurance company is awful, that people pay attention to. Nevermind the problems in getting a sufficiently randomized, statistically significant sample from your friends tragedies, in order to actually know what insurance is good – you probably have no idea who your friends are insured with. Somebody tells you about the tragedies of their life, and you don’t say, hey, so I can avoid them, who provides your insurance?

Krugman has some comments, and links to some good stuff:

http://krugman.blogs.nytimes.com/2009/08/04/insurers-only-pull-your-coverage-when-it-hurts/

Dezakin said it correctly.

P/C insurance and healthcare are two entirely different beasts. The story regards German p/c insurers. Reputation is important in p/c insurance because it is essentially odds-making. It is not certain, nor even particularly likely, that your house will burn down. However, if it does burn down you would like to be reasonably certain your insurance will pay.

Healthcare is not insurance, it is a payment scheme. The large majority of healthcare costs come towards the end of life. Anyone who has kept up with the writing of Bryan’s colleague Arnold should understand this. You are all going to get sick or injured and die someday. It is inevitable. When you pay a premium to a health “insurer” you are not “insuring” against anything. You are merely pre-paying for something that is going to happen in the future. Only in a small minority of cases does the equation work out differently. Thus, yes, health “insurers” do not have the same degree of reputational risk as do p/c insurers. The health “insurer” ensures that you pay approximately the full cost of your healthcare – you just pay it over time not all at once. Since the “insurer” already has your money, there is little risk that it will be unable to pay claims – only the same risk (of fraud) that you run in any economic transaction. Comparatively, with a P/C insurer there is a not insignificant risk that if your entire neighborhood is destroyed by an earthquake, the insurer will be unable to pay. Thus a P/C insurers reputation for reliability is often very important. This is why P/C insurers have ratings (the reliability of the ratings agencies I’ll for someone else to address, perhaps.)

Again. “Health insurance” does not exist in the world today. Bryan’s story is about P/C insurers. They are entirely separate industries.

That the analogy is not related has been dealt with; besides the Jews were the targeted scapegoats – as a group. Most Germans would have approved of non–payment. But the insurance industry brought in a significant portion of Germany’s foreign income. Thus reputation was very important; clients had a world of choices if they lost trust in German insurance industry.

In the health insurance industry there a few choices for employers; most states have just two major companies operating in their states, and most employers just offer a choice of policies from one company with different coverage choices.

The industry wide practice of rescission is a major problem in the individual policy market. It cannot occur in employers group insurance which is not individually risk rated. (However in small groups when one person develops a catastrophic health care need – say most cancers – the insurance companies very frequently sets the group rates extremely high for the next year and make it clear that there will be no lower price – unless the ill person leaves their employment. So they are frequently forced out.) If the employer tries to change insurers they find high rates everywhere. This information is available through the MIB, the medical information bureau which collects all information from all sources.

All member firms can access this information on individuals before writing policies. Most don’t get the available information before writing a policy because most people don’t have an unforeseen health care disaster and are easy income. For those that do, a quick investigation ensues because rescission is a handy tool. Many firms have done this so egregiously that in California they have documented this and assessed large fines against a number of large firms. Yet three execs when called on the carpet at a House hearing, when asked if they would stop except in cases of intentional fraud, said no, they would not stop. So much for caring about reputation.

As to the silly idea that insurance is just prepayment for the big end of life expenses, and that catastrophically expensive medical needs are rare, he needs to learn something about life and healthcare. I guess he has never heard of Medicare which covers virtually everyone from 65 on. The private insurance industry has very little to do with end of life expenses. Those expenses can’t be the reasons for paying each month.

Insurance corporations don’t worry about their reputation among employees or individuals purchasers; (almost) everyone has to buy coverage from one or another of a fairly small group. They do worry about their reputation with Wall Street for profitability and earnings growth. Since management and directors are each holders of large amounts of shares or options, their personal wealth depends on their reputations with Wall Street.

Every payment out on behalf of an insured is a “medical loss” and subtracts from their bottom line. And that hurts their only reputation that matters to them.