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What Vegas Can Teach Congress
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Even Mob-run casinos knew enough to give a high percentage of their take back to the players. Sally Denton on why health insurance is a bigger ripoff than the slots.
The nation’s health-insurance industry—long a behemoth if not an outright monopoly—is now an unabashed racket, surpassing even the trillion-dollar worldwide gambling industry. Among the many startling revelations in Bill Moyers’ recent blockbuster interviews with longtime Cigna executive Wendell Potter was the fact that insurance companies are conspiring to reduce their “payouts” on medical claims. This medical loss ratio is a “measure that tells investors or anyone else how much of a premium dollar is used by the insurance industry to actually pay medical claims,” Potter said in the July 10 televised interview.
Not even the old Mob that founded Las Vegas gambling would have deigned to be so greedy as the insurance companies now stacking the deck against a health-care overhaul.
As recently as the early 1990s, 95 cents out of every dollar paid to insurance companies in premiums was used to pay claims, according to Potter, who spent more than 20 years of his professional career as an industry insider. In 2008, that percentage had dropped to “just slightly above 80 percent.” As if that 20 percent profit were not staggering enough, the Senate Finance Committee last spring was considering a 76 percent average reimbursement rate until, after fierce lobbying by insurance giant UnitedHealth Group, it settled on what Business Week has called “a more friendly industry ratio” of 65 percent. Though the final percentage is still being debated, the possibility that 35 cents on every premium dollar might go toward corporate profits does not signal reform that favors the consumer.
Not even the old Mob that founded Las Vegas gambling would have deigned to be so greedy. While Potter is right that the medical loss ratio is “unique to the health-insurance industry,” it has a parallel in what is known in the gambling business as the payback percentage. And whether set by the Syndicate of the 1930s, ’40s, and ‘50s, or by what Nevada historian Michael Green calls “the three-piece suit Mob that has taken over” Vegas in contemporary times, anything less than 80 percent is considered cheating. In the gambling business, it is the kiss of death to get the reputation for being “a flat store,” as one old-time Nevadan called casinos that chisel. Nevada gaming authorities, eager to convince customers that the game is fair (in relative terms), set the payback ratio and even go so far as to require that the percentage be made public. Slot machines “must theoretically pay out a mathematically demonstrable percentage of all amounts wagered, which must not be less than 75 percent for each wager available for play on the device,” according to the regulations of the Nevada Gaming Control Board. (In New Jersey, the legal percentage is set at 83 percent.) Ironically, early gambling operators welcomed state regulation because it was crucial to their business to be perceived as running an honest game. “If one joint cheated, it made them all look bad,” Green said. “And they didn’t want to kill the goose that laid the golden egg.”
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GPatton
Yep, the banksters who run insurance companies (and the IBs) are worse than the mob. That's why the town hall meetings are so full of angry Americans. George Patton
hockeydog
This is a great article on many levels. First the comparison/contrast of the insurance industry with the casinos, and secondly by pointing out the tremendous resources being marshalled to fight the National Health Care debate.
In the first instance, it isn't just health insurance that has been turned from its original altruistic purposes into top-down gambling enterprises, but all of the insurance world.
The idea of underwriting to a profit involves picking and choosing individuals, or entities to insure, that are less likely to have a claim. If an insurer can issue policies only to those who will never suffer a loss, that insurer will be able to keep all of the money and not have to pay any of it back in the form of claims.
In the property-casualty business, we used to actually sit down with a map of a given city, and draw lines around areas where we would not issue policies. Since we used red ink pens to draw the lines the practice was called "red-ining". This practice was eventually outlawed, so we had to come up with other ways of defining bad risks, and then avoiding those risks.
In health insurance it is called "pre-existing conditions", in automobile insurance it is defined by the age of the driver, the zip code, the sex, the
driving record. In workers compensation it is defined by whether the industry is hazardous, and then the claims history of the business itself.
What it all boils down to is defining the profit center. Originally insurance,as a concept,was developed by the shipping industry in jolly old England. A bunch of ship owners got together and put some money into a pool. They agreed within their group that if any ship went down at sea, the pool would pay to make the owner whole.
This was the essence that separated the concept of insurance from that other concept of gambling, the casino. One was based on the altruistic motive of helping, while the other was based purely on greed.
Somewhere along the way, it became fashionable to look at "books of business" and underwrite those books to a profit. Then the definitions of those "books of business" became increasingly smaller. as the profit center concept was applied to ever smaller individual units. The redlining went from measuring profitability of neighborhoods to measuring the profitability of individuals.
This is really not that far removed from modern day casinos issuing in-house credit/debit cards so they can measure the gambling habits of their individual patrons.
Since insurance companies and investment banks are capital aggregators, or accumulators, their actions impact a great number of people. The reason the insurers were able to pay out 95 cents of every dollar of premium during the 1980s was the result of the tremendous gains that the money made while invested. The stock market was bubbling up and generating such great returns, that the insurers were able to make more through their investments, than they were paying out in claims.
Warren Buffett knew this game well, as did Hank Greenberg, of AIG. The difference between these two titans, is that Warren's companies enhanced their profitability through "underwriting", whereas AIG enhanced their profitability through the denial of claims. Both approaches resulted in the insurers being able to hold on to the capitall. The approaches differed mainly in the ethics.
Make no mistake about it, insurers are in business to make money, not to pay out claims. I don't know how we can get back to the basic altruism of the idea that was originally "insurance". But, until we do, we will continue having an industry that can afford to pay 1.5 million a day to protect their interests.
The casinos enhance their profits with little rules that forbid a person from using their brains - i.e. counting cards, while the health insurers enhance
their bottom lines through the concept of pre-existing conditions.
I, for one, do not fear being put on a waiting list, as the insurance industry would have us believe is the drawback to a "socialized medical insurance". At least a waiting list may exist. For those many millions of Americans who have no health insurance, there is no list! There is no waiting, there is only despair.
Maybe the solution is a simple one. Maybe we need a set of laws that can bring back the ideas of compassion and altruism in the quest for profit.
Genni2002
Nice article. Thanks!
The insurance companies should be slapped. Why can't the original blueprint be used again? "quasi-philanthropic" sounds very good to me!
mclaubr1
When will the President get a backbone and blast away on message. The insurance industry is based on claims denial. Their actuarial analyses determine whether you are "worth" the investment of certain care. Then, the internal decision of whether a denied cliam will end up in litigation or in the press is rendered. I worked in the inside and participated in these discussions. There are, indeed, death panels...in the private sector! The President needs that backbone and a strong message. He spends too much time on defense. The other team is running up the score and using up the time on the clock. If the game isn't over, then bring out the big guns and start playing hardball.
sestak
you might want to check into the payout ratio of state run gambling; ie lotteries..maybe 50%? before we totally villify the insurers, let's consider how the govt might do in their stead. Also, maybe we can think about health insurance across state lines??
mclaubr1
sestak, are you kidding? The health insurer I worked for "bought" a company in the USVI. They sent a bunch of staff to run it. Found it tol be a poor choice. Closed shop. Went to another state to avoid taxes. ALL of THIS with local subscriber dollars. It's the greed factor and the waste. Government may not be efficient, but this stuff will go on and on without a public option. Obama needs to get tough and fight back. Insurers are nothing more than money launderers.
Genni2002
sestak,
Are you comparing getting a $1 lottery ticket to cancer treatment? Hope not.
cbeenthere
They are state endorsed, not state run.
AlanD2
This is one way insurance companies reduce their medical loss ratio:
"An investigation by the House Subcommittee on Oversight and Investigations showed that health insurers WellPoint Inc., UnitedHealth Group and Assurant Inc. canceled the coverage of more than 20,000 people, allowing the companies to avoid paying more than $300 million in medical claims over a five-year period."
Makes you feel all warm and fuzzy, doesn't it?
mclaubr1
AlanD2, you hit the nail on the head. Why isn't the WH broadcasting this? A good defense is a strong offense. Let Fox News have to respond and defend these facts.
Cymatic
Fox News respond to facts!?! Bwahahaha.
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doupip
I'm in favor of two things: More effective health care at a lower cost, and accurate reporting. When it is reported that a medical loss ratio of 80% equals a 20% profit, the writer is either being deliberately misleading or just plain ignorant. All companies (even non-profits) have overhead costs. It's not hard to imagine that in health care and therefore in health insurance that overhead costs are substantial.
That being said, 20%-35% seems to leave a lot of room for improved coverage and/or lower premiums. There are many ways to attack the issue, but predetermined expense ratios (whether they be 95% or 65%) is the wrong way to go. Looking at corporate profits is a small part of the picture - how about looking at what factors are driving the costs, that is where the bigger gains can be made.
I am in an industry where we typically mark-up cost by 15-20%. However, after overhead and taxes we are *thrilled* if we make a profit of 3-4%. Anyone wanting to lower what we charge can do so best by helping to lower our costs, which are about 97% of our bill, rather than the profits which average about 3%
It's easy to point the finger at greedy insurance companies, and I'm sure that is part of the problem. But, we are all best served, as health care customers, and as tax-payers, if we take the time to investigate and address the root causes of health care costs. Some half-assed bill that is passed only to serve as a feather in the hat of the party in power, serves no one but the politicians.
jomama
Good point - but health insurance 'op costs' i.e. not profit are still fat and buttery. When you have a big budget, you find ways to spend - and they do. 20% to op costs and profit is far too much. They need to bring it down to less than half of that.
jomama
The 20% is 'gross profit' and that is technically correct.
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piktor
The relevant question about healthcare: Is it a business or a service?
Another question: Healthcare should be provided by the medical profession or by greedy business people answering to their stock investors?
UnitedHealth CEO Stephen J. Hemsley (joined the company in 2006)
2007 Compensation: $13.2 million
2008 Compensation (Forbes): $3,241,042
Total Value of Unexercised Stock Options (Forbes): $744,232,068
2009 Options Exercise: $127,001,281
Value of Wayzata, Minnesota Home (Hennepin County Assessor): $6,640,000
http://tinyurl.com/r62ljo
http://tinyurl.com/mavwex
Cymatic
Thanks for those facts.
Many people seem confused about what health insurance companies actually do. They don't actually do ANY health care. They are just the middlemen between you and your doctor. For Republicans (so called financial conservatives) to not be upset about 1/3 of their money getting flushed even before it gets to the hospital... kind of amazing.
confused
Even if the health insurance is run as a " non profit". They still rip us off, just use a different method.
Farmer-Dave
There's no love lost between me and the healthcare insurers, BUT please rethink your principles of business accounting.
Just because only 80% of premiums goes to paying claims that DOES NOT mean 20% goes to profit. Did you forget about overhead? The insurers have to pay salaries to thousands of bureaucrats to process (and deny) claims. They have advertising, promotional and sales costs as well.
As President Obama points out, many of these costs (as well as the profit margin) would be avoided by a public health insurance plan.
jbuzz1
Exactly...the author's inability to grasp this basic concept makes the rest of the article pretty much useless. Doesn't the DB have editors to parse out obvious oversights such as this one?
jomama
The 20% is 'gross profit', relax.
elkeno
I'm not an accountant but this is OBVIOUS. The author needs to find the fraction of total premiums paid actually go to profits. Another interesting fraction would be the fraction of total premiums paid that go to salary and benefits of the top 10 (or 20, or 50) earners in the company.
Cymatic
Farmer and jbuzz - Come on now! How can any business go from 5% overhead to up to 35% overhead? They are making record profits. Maybe you are the ones who don't understand. Medicare operates at less than 4% overhead... that should tell you the whole story.
briansays
And Fredo is running Sanate Finance
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