Chapter 2 – The Demise of the Health Insurance Industry

This is Chapter 2 of my book-in-progress, “Open Wide And Say Moo! – The Good Citizen’s Guide to Right Thoughts And Right Actions Under Obamacare.” Comments are fervently sought; you can leave them here.

You can read my rationale for undertaking this project, and thus opening myself up to the possibility of public failure, humiliation, derision, disapprobation, and unwanted scrutiny, here.

And here is the up-to-date archive for all the chapters that have been posted so far.
Update – September 1, 2012

Open Wide and Say Moo! is now revised and published!


You can find it on Kindle here.


Now available in the audiobook version!





Chapter 2 – The Demise of the Health Insurance Industry

I fear that, in Chapter 1, I may have left you with the impression that our healthcare expenses have been piling up for the past 50 years, to the point where our entire culture is about to collapse under the weight, without anyone or any organization doing anything about it.

If so, I apologize, for nothing could be further from the truth. In fact, our healthcare expenses have been piling up for the past 50 years, to the point where our entire culture is about to collapse under the weight, in spite of the heroic efforts on the part of our health insurance companies, our doctors, and our government to stem those costs.

Indeed, their efforts have been little short of astounding. The health insurance industry has driven itself upon the shoals in a daring attempt to rescue our healthcare finances, and lies there today, foundering and needing rescue itself. Doctors have made what amounts to a suicide attack against the rising costs, essentially throwing away the very essence of their own profession in the attempt, and leaving for posterity a signed suicide note. And our government – well, our government of course has tremendous resources, and has spent or pledged the lifetime earnings of the next three or four generations of its citizens in what appears to be an entirely fruitless effort to bring healthcare costs under control. (Our leaders assure us they feel very badly about this, however.)

So it’s not for lack of trying. It’s that what they have all been trying – namely, covertly rationing our healthcare – not only does not and cannot work, but also intrisically makes things much, much worse.

This and the next chapter will demonstrate the sorry state to which such misguided efforts to control costs have reduced our healthcare system and its participants – and well before Obamacare ever came along.

A Bit On Covert Healthcare Rationing

I have been writing a blog for the past five years about the covert rationing of America’s healthcare, so there is plenty I could say about this. However, I will limit myself, with exquisite difficulty no doubt, to just saying what covert rationing is and why it’s a problem.

First, let’s be clear on the definition of healthcare rationing. To ration healthcare is to intentionally withhold at least some useful medical services from at least some of the people who would benefit from them.

To ration covertly is to do the above without admitting to it, and most often while indignantly denying it.

I will not go into an exhaustive argument here to “prove” we’re rationing our healthcare covertly, or that covert rationing intrisically wastes far more money than it can ever save. I have done that elsewhere. Instead, I will simply lay out a 3-point thesis which makes it intuitively obvious that covert rationing is what we’re doing, and that by doing it we’re compounding the underlying fiscal problem.

Point #1: Healthcare rationing is a fiscal imperative. Rationing is fundamentally unavoidable, and therefore, we are not avoiding it.

In any advanced society, where a centralized agency of one species or another creates a pool of money from which most of the society’s healthcare bills are to be paid, whether that pool of money is controlled by the government, or by private insurance companies, or by some combination of these, then even if that centralized agency is very large, very powerful, and very coercive, and even if that agency is able to borrow (say) trillions and trillions of dollars, there will always be limits on how much money can be placed into the pool. On the other hand, the amount of money that could conceivably be spent to purchase every bit of all the available, potentially useful healthcare for every individual in the population who might benefit from it is essentially limitless.

This limited supply, and limitless demand, means that somebody, somewhere, will not receive all the available healthcare that would be potentially useful to them. So rationing is occurring. Q.E.D.

Point #2: We’re Americans, and Americans don’t ration. So the unavoidable rationing must be, and is being, done covertly.

An endearing trait of Americans, endearing to us Americans at least, is our limitless optimism, our undying belief that anything good that we can imagine can, and will, and must actually be accomplished. This refusal to recognize limits is responsible for much of the creativity, inventiveness, and productivity that has come from our American culture. And it has led to much good in the world, resulting, for instance, in most of the remarkable advances in healthcare we’ve seen over the past half-century.

The American culture of no limits, however, can be carried to counterproductive extremes. And that is what has happened with regard to healthcare.

Our “no limits” attitude about healthcare is typically American. It goes like this:

In America we have, and will continue to have, the best healthcare in the world – the best doctors, the best hospitals, and the best technology. Since one cannot place a price on a human life, anything that can be done for a sick person must be done, as long as there is some small hope of even a tiny benefit. Every disease is potentially curable, and as a matter of policy we will strive to learn how to cure every disease that exists (and when we run out of diseases to cure, we’ll invent new ones). Indeed, death itself is merely a manifestation of insufficient technology.

In summary, where healthcare is concerned, there are, and can be, no limits.

We can see the problem right away. While we have inherent spending limitations that unavoidably require healthcare rationing, we find that there can be no limits, and therefore, no rationing. Indeed, there can be no discussion of rationing, except to bitterly condemn the very idea. Any political leader or policymaker who would seriously suggest the idea of healthcare rationing would run squarely into this deeply ingrained culture of no limits, and would immediately become toast.

So, these two basic imperatives shaping our healthcare system – the unavoidable need to ration that will always accompany publicly-funded healthcare, and the culture of no limits – are, in their essence, completely incompatible with one another. Given our deep-seated need to simultaneously cling to both of these incompatible imperatives, our only option is to do the unavoidable rationing in a way that allows us to deny that rationing is occurring; in a way that allows us to ration while declaring that there are no limits. We can ration secretly. We can ration deceptively. We can ration covertly.

And (QED) that is what we are doing.

Point #3: Covert healthcare rationing is inherently and extravagantly destructive, not only to patients and their doctors, and not only to the healthcare system, but also to our national budget, and to our basic American social contract.

While there are plenty of problems with the American healthcare system, the truly intractable ones are intractable largely because of our need to ration covertly. As long as the need to ration healthcare covertly exists, these problems will persist.

By its very nature covert healthcare rationing is a deeply ironic construction. The whole purpose of rationing is to reduce spending on healthcare, and to control costs. But covert rationing (ironically) always increases expenditures. If we could ration healthcare openly, then it is possible that we could arrange, or at least try to arrange, the rationing in such a way as to optimize the efficiency, effectiveness and equity within our healthcare system.

But rationing covertly fundamentally means rationing in whatever way you can get away with. So, in order to hide the rationing, it is imperative to obfuscate, misdirect, complicate, juke, jive, shimmy and shake and do whatever else you must to to convince everyone – often including yourself – that whatever it is you’re doing, it’s not rationing. That is, you’ve got to create an environment of complexity and opacity in which you can get away with it.

As a direct result of this simple truth, simplicity, transparency and efficiency are lethal to a system based on covert rationing, and thus, are systematically rooted out. Covert rationing absolutely requires opaque processes and procedures, superfluous complexity, bizarre incentives, Byzantine regulations which are arbitrarily enforced or ignored in various times and places, astoundingly wasteful transactions, and the diversion of healthcare dollars to a complex host of non-healthcare ends, such as commissions, study groups and panels, various czars of this and that, ever-expanding layers of government bureaucracies, and the establishment of other massive bureaucracies within the healthcare system whose purpose is to defend against or manipulate those aggressive government bureaucracies. Covert rationing, by its very nature, demands and creates waste within our healthcare system, and therefore costs us far more money than it can ever save us.

So, while the fiscal mess in which we find our healthcare system is destined to screw all of us, by attempting to fix it with covert rationing we’re converting a simple screwing into a gang rape.

It will be instructive to have a look at how this has all worked out.

A Recent History of American Healthcare (continued)

It did not take long after the institution of Medicare and Medicaid in 1965 for astute economists and politicians to realize that, perhaps, we had just stepped off a financial cliff.

Smart people became alarmed about healthcare spending as early as 1970, when we were spending a “mere” 7% of our GDP on healthcare (a little more than a third of the proportion we’re spending now). And indeed, in 1972 Richard Nixon, demonstrating in yet another way that not all Progressives are Democrats, planned to propose in his second term a universal healthcare system. (So perhaps if those Progressives who today are so desperate for one hadn’t made such a big deal about Watergate, they would have had their heart’s desire 40 years ago.)

After Nixon was deposed, Gerald Ford got distracted trying to “Whip Inflation Now;” Jimmy Carter busied himself actually whipping inflation to heights not seen since the Weimar Republic; Ronald Regan dedicated himself to spending the Soviet Union into oblivion; and George Bush 41 beat up Sadam Hussein and raised taxes while trying not to move his lips. You know, stuff happened.

And the next thing you know it was 1992 and healthcare spending had nearly doubled as a proportion of the GDP since the time of Nixon.

Subsequently, the Clintons took up healthcare reform as their signature issue. Bill turned the effort over to Hillary because (as he explained it) she was smarter than he was, but some say possibly also as a reward for her amazing loyalty in the face of, well, you know.

In any case, at the beginning of the Clintons’ effort to reform healthcare, they had the goodwill and support of most Americans, of doctors, the media, and most importantly, the American health insurance industry. Hillary appeared to start off well, making a successful appearance before Congress, and, with great fanfare, convening numerous expert panels and other groups to gather their ideas, suggestions, and recommendations on healthcare reform, as if she intended to take them into account. Optimism was high.

But Hillary is a true Progressive, and so she already knew how to reform healthcare. Having made a great show of democratizing the process, she then retreated behind closed doors with a few hand-selected advisors, and soon emerged with a 1300 page bill of her own devising – Hillarycare.

Many were horrified by what was in that bill, which in fact gave the government full control of our healthcare system. Not the least among the newly-horrified were executives of the health insurance industry, who to that moment had been major supporters. They realized that if any law passed that was remotely like Hillarycare, their industry would soon become infeasible if not illegal. And so, acting with the alacrity of people who are in imminent mortal danger, the insurers quickly introduced the American people to Harry and Louise, a typical middle class couple who were depicted, in print ads and on TV, discovering numerous appalling provisions of the Clinton plan.

The rest was history.

The collapse of the Clintons’ reform plan caused a sudden deflation in Americans’ expectations, but the fiscal crisis remained. In fact, the one thing the Hillarycare effort had indeed accomplished was to create a general awareness among the public that the healthcare system was in dire financial straits, and that business as usual was not an option. And nobody (except for the doctors, wallowing as usual in wishful thinking) believed things could simply go back to the way they were before.

Into the breach stepped the very health insurance industry that had just torpedoed Hillarycare. And they had a plan.

“Citizens!” they said, “We have just dodged a bullet. Thanks to us, the frightening socialist reforms of the Clintons have been soundly defeated. But where does this leave us? We stand now between Scylla and Charybdis, between the specter of nationalized healthcare on one hand, and continued, wasteful, traditional fee-for-service medicine on the other. And we cannot countenance either.

“But wait! Here is a third way, a painless way, based on the sound principles of managed care, open markets, and free enterprise. Let us in the health insurance industry, successful businessmen all, wielding the tools of efficiency and sound business practices, step in and save the day. We will apply our proven tools and methods of efficiency to American healthcare, through our new vehicle for medical excellence – our for-profit HMOs. And we will demonstrate to the world the wonders that modern, free-market management principles can bring to American healthcare.”

And not having any other viable choice that any of us could see, we Americans gave the go-ahead.

The Brief But Remarkable Era of For-Profit HMOs

By this time, HMOs had been around, here and there, for 20 years. They were inventions of pipe-smoking, elbow-patched academics and other well-meaning naifs, who envisioned user-friendly, non-profit organizations which, by inculcating their clientele to the benefits of good health habits, disease-prevention lifestyles, and regular check-ups would – you know – maintain the health of its members. Until the collapse of the Clinton health reforms, HMOs were widely regarded with some bemusement, as the typical sort of ineffectual but benign social engineering experiment you generally get from cloistered academics, or as an eccentric aunt puttering about the attic of the healthcare homestead.

The for-profit HMOs which the health insurance industry introduced to America after the fall of Hillarycare were a different species altogether. If you asked the CEO of one of the old-fashioned HMOs what the mission was, she would say something like, “Why, it’s to maintain the good health of our clients, of course.” Not so for the new-style HMOs. Their mission (quite explicitly, since this is the message they used to sell all of us on the idea of turning American healthcare over to them) was to apply the modern management techniques of American business to make American healthcare efficient at last. And how does one assure that such modern business techniques will be fully and enthusiastically applied? By doing what every business must do to be successful – by focusing like a laser beam on profitability.

So if you asked a 1990s, new-style HMO executive what was his mission, he would reply, “Why, it’s to take this wasteful, inefficient puppy and turn it around into a profit-generating machine. Of course, as a spin-off you will get more efficient healthcare and the like. But the mission – and indeed the measure of our success, the evidence that we’re making healthcare more efficient – is our profitability.”

And with the mantra, “Profits = Efficiency” emblazoned on their standards, and with “Deus Lo Volt!” on their lips, the new-style HMOs went forth in the crusade to save American healthcare.

However, just as the real Crusaders became distracted on their way to the Holy Land by the opportunity to sack and pillage Constatinople, so did the HMOs become distracted by an unprecedented opportunity to sack every city, town and village in the land. Because it was the prospect of profits which would at last make American healthcare efficient, HMO executives argued, it only made sense for all the non-profit hospitals in America to be turned over to them. This way, the HMOs could incorporate those old, creaky, inefficient institutions into their new, machine-like, ultra-efficient, healthcare paradigm. When the city fathers and state commissioners of America seemed interested, the CEO would add, “We’ll even pay you for them.”

During the next six or seven years, virtually every non-profit healthcare organization in America – hospitals that had been owned and operated for decades by cities, counties, states, or religious organizations – were acquired by for-profit institutions. The way these transfers worked was: a) the hospital’s board of trustees (many of whom later wound up with well-paying jobs with the acquiring HMO) would approve the transfer; b) the state insurance commissioner or state attorney general would determine the intrinsic value of the hospital; c) the HMO would reimburse the appropriate entity with the assessed amount of money, often by establishing a charitable foundation.

For reasons I cannot fathom, the state officials seemed congenitally unable to estimate, even within an order of magnitude or two, the true intrinsic value of the transferred asset. Only the hospital’s value as a charity was considered, and not its potential as a business. They failed to consider the market value of trademarks, name recognition, decades of community goodwill, provider contracts, or subscriber lists. There were no competitive bidding processes; no formal valuations. So the new HMOs acquired thousands of major, publicly-held community assets, all across America, for pennies on the dollar.

If state officials were inefficient in this process, the markets were not. And the HMOs found that each time they acquired a formerly non-profit institution, the market would immediately reward them with a nice boost in their market valuations. HMOs suddenly became hot investment vehicles, and investors jumped in with their dollars. HMO executives were very, very happy.

This asset-acquisition phase of the for-profit HMOs was largely responsible for the great financial success these organizations enjoyed in the 1990s. And the hugely important story of the massive transfer of public assets to private companies went largely unreported.

Once they had gobbled up all the public hospitals, the for-profit HMOs immediately entered into a prolonged period of negotiated mergers with one another, thus consolidating the industry into a few massive players. This interval also produced large boosts in their market valuations, and it sustained the facade of corporate success for a few more years.

And that pretty much covers the glory years of the modern HMO. For a decade or so these companies were extremely successful, and performed very nicely for their shareholders. But their success, such as it was, had relatively little to do with their ability to make American healthcare more efficient. Rather, like those holy warriors who fought in the Fourth Crusade, their profits came mainly from sacking Constantinople, the city of their supposed allies and co-religionists.

To be sure, HMOs did work as hard as they could at improving healthcare efficiency during this period of time. They did this mainly by instituting efficiencies of scale. When you are managing several hospitals, or several scores of hospitals, you can streamline and consolidate your processes and procedures in some very big ways – with more pointed negotiations with vendors, for instance, or by computerizing and standardizing billing and ordering, or limiting drug formularies. You can also conduct fancy efficiency studies to show that, really, you could probably get away with an 8:1 nursing ratio instead of a 4:1 ratio. (By “get away with,” apparently, the efficiency experts meant that while the “downside” of such cutbacks might be suspected or even perceived by people on the ground, it was unlikely that it could ever be accurately measured – or therefore, proven – by a few local troublemakers.)

So the efficiencies of mega-corporate bigness were broadly applied, and as a result, during the latter half of the 1990s we saw less healthcare inflation than during any 5-year period over the previous 30 years. But the thing about applying this kind of cost-cutting measure – the kind that is applied on a global basis to the whole system – is that it is a one-time event. That is, the savings are realized right away, and as a result you successfully establish a new and lower spending baseline. But because (as we saw in the last chapter) the rate of growth in healthcare spending is not caused by the inefficiencies you’ve just eliminated, the increase in healthcare spending will thereafter simply resume and continue apace (albeit from a lower baseline).

This is just what happened. By the turn of the century, healthcare inflation was headed back up into the double digits.

And so, if they had not realized it before, by the early 2000s it finally occurred to the HMO executives that, at long last, if they were going to remain profitable they were going to have to figure out how to cut healthcare costs by doing what they’d always told everyone they were so good at doing, but which they had never yet accomplished – actually managing the medical care of sick people.

This is when the panic began setting in.

Their panic was not inappropriate. For the HMOs had not been sitting on their hands when it came to making actual patient care less expensive. In fact, they had already tried everything they knew how to try – and it had not worked.

The business model of the HMO, simply put, is to gather the health insurance premiums from its subscribers, use that money to efficiently manage their healthcare, and keep whatever is left.

Therefore, to the HMO executive (the steely-eyed business executive we had all deputized to control our healthcare costs), the biggest risk to the business is: sick people.

Sick people are a huge problem. They are not subject to the usual “efficiencies” you can apply to most businesses. Simply streamlining business processes (admission and discharge procedures, consolidating laboratories, computerizing records and the like) does not work with sick people. You could implement these sorts of efficiencies all day long, and sick people will still be sick, and each one of them could blow through tens of thousands of your dollars each and every day.

Sick people, unlike the widgets which businesses typically process and manipulate to make their money, are not all alike. Each of them has a different constellation of medical problems, different needs, and different responses to testing and therapy. A medical service that makes Patient A recover in two days puts Patient B in the ICU for three weeks. Patients who recover enough to go home, but then stop taking their medications (or cannot afford to take them), or immediately resume an all-pizza-diet, will bounce right back in your hospital, and recommence consuming even more of your resources.

There can only be one answer to this problem. What you need to do is something you learned on your very first day of MBA school (where basically all you did was get your seat assignment, and eye-up the rest of the class to decide which ones you think you can work with and which ones you’ll need to sabotage in order to smooth out the curve). Namely, eliminate unnecessary expenditures. Which means: you need to avoid the sick.

Find ways to keep the sick (or potentially sick) from enrolling in your HMO. For sick people who manage to make it through the obstacle course you are going to set up for them, you will need to find ways to make things so unpleasant for them that they’ll go elsewhere. For the really sick who won’t (or more likely, can’t) leave, you’ll need to find ways to just toss them out.

And so, naturally, this is what HMOs did.

They made their best insurance products available to employers only, on the theory that people who have jobs are less likely to have serious, chronic illnesses or severe disabilities, or addictions. The inferior, “individual” insurance products (when HMOs could not avoid them altogether) were pre-loaded with onerous pre-existing condition clauses, so that only healthy young people were likely to be eligible. When HMOs held “open enrollment” drives for Medicare patients, they were invariably located on the second or third floor of buildings without elevators, often in affluent suburbs or at country clubs, and in any case in places that were at least two bus transfers away from “undesirable” neighborhoods. Such methods came to be known as “skimming” or cherry-picking, and were aimed at avoiding the sickest 10% of the population that accounts for 75% of all healthcare spending.

Sometimes, despite increasingly sophisticated cherrypicking techniques, a sick person would still get through the door. Or more likely, a formerly healthy subscriber, by virtue of a newly-acquired illness, would transform – werewolf-like -  into a voracious, healthcare-consuming monster. Techniques were developed for these, as well. In fact, the academic managed care literature (and yes, there is such a thing) paid particular attention to this issue – that is, how to frustrate undesirable patients sufficiently to entice them to go elsewhere. One interesting article titled “Demarketing of healthcare services,” appeared in the Journal of Healthcare Marketing in 1994. It said, among other things:

Decreasing accessibility to services . . . can be accomplished by “managing” the information distributed to patients regarding services available and how to access them. For example, an organization might excessively promote less-costly preventive procedures . . . and repress information about other elective and/or expensive services. In addition, providers can strategically locate and number specific services to make them easy (e.g., primary care) or difficult (e.g., specialists) to utilize. Furthermore, lag periods . . . also serve as containment strategies. Lags may be affected by the need for referrals, limited number of contracted specialists, restricted or inconvenient appointment availability, and increased office-visit waiting periods.

I would like you to notice a couple of things about this excerpt. First, of course, it nicely demonstrates that driving patients away was not an unintended consequence of HMO inefficiencies. The inefficiencies were manufactured specifically to achieve that end. But second, please observe that this is probably the most straightforward statement about covert healthcare rationing you’re ever likely to see from the people who are actually doing it. It graphically demonstrates that much of the inefficiency in our healthcare system is not accidental. It is carefully engineered for a very specific purpose. It is, in fact, an investment, aimed at improving the bottom line.

Here’s another example. In the late 1990s, the famous Jim Clark, the first Internet genius, the man who had founded both Silicon Graphics and Netscape, decided to launch a new venture which he called WebMD. While today WebMD is muddling along as a reasonably successful information portal, it was originally conceived by Clark as a powerhouse that would revolutionize healthcare in America. He wanted WebMd to become a platform for seamlessly interconnecting all the players in the healthcare system – doctors, patients and insurers – to improve communication, streamline transactions, reduce medical errors, and otherwise create efficiencies that would benefit American healthcare (and at the same time build shareholder value for WebMD). When he finally had built up the infrastructure for doing all this, at enormous cost, he went to the health insurers with his first can’t-miss proposition, the very can’t-miss proposition that had enticed his investors to put up the money for WebMd in the first place. Namely, he offered (in exchange for a tiny transaction fee) to process the HMOs’ medical claims for 70 cents per transaction (as compared to the $7.00 per transaction it currently cost them), and furthermore, to complete the transactions in a matter of minutes instead of a matter of months. Much to Clark’s amazement, there were no takers. None. And his dream died on the spot.

Astute readers will see the problem right away. HMOs, of course, have no interest whatsoever in streamlining their transactions. Quite the opposite. HMOs only make money if they do not have to pay out claims. And if they do have to pay claims, the longer they can hold on to the money before they actually pay it out, the longer they can keep it invested. And so, claims processing procedures have been carefully engineered into the most inefficient, Byzantine, and frustrating endeavors the devious human mind can conceive of. Unless a doctor’s practice hires a cadre of “claims specialists,” who spend all their time in an elaborate dance with the “claims specialists” employed by the HMOs, they would never collect any money at all. As it is, it is so expensive to chase smaller claims that many doctors simply don’t send in bills for them – which means the HMOs get to keep that money. Which means that doctors are reluctant to offer the medical services for which only a small bill is generated.

Are you starting to see how covert rationing works?

The End Game For HMOs

By the middle of the last decade, the health insurance industry realized it had run out its string. It saw no pathway forward to continued profitability.

The insurers had tried every sneaky and underhanded idea they could think of for reducing costs – cherry-picking the healthy patients, treating chronically ill patients like pariahs so they would go away, making access to specialty care as inconvenient as possible, forcing doctors to sign “gag clauses” to prevent them from telling their patients about certain treatment options (more on this shortly), browbeating primary care physicians into zombie-like compliance with handed-down care directives, refusing to cover expensive-but-effective medical services, and canceling the policies of tens of thousands of patients after they got sick, based on trumped-up technicalities. Indeed, they had tried everything short of dispatching teams of Ninjas in the dark of night to slaughter their most expensive subscribers in their beds. And still, their costs – essentially, the money they could not avoid spending on people who needed healthcare services – increased relentlessly.

All these efforts were to little avail. The cost of providing healthcare continued to skyrocket, entirely unabated. Finally, when all else failed, the insurers began instituting huge and unsustainable annual increases in premiums, to the point of driving their customers out of the market.

This latter move, of course, was an open acknowledgment that the industry had entered its death spiral. In fact, it was an SOS, a cry for help. It was the health insurance industry wailing, “No mas!”

The Health Insurance Industry And Obamacare

By 2009, when President Obama began his push for healthcare reform, the insurance companies knew they had no prospect of long-term profitability. Their business model was no longer viable, and, while telling soothing stories to avoid shareholder panic, they were urgently casting about for an exit strategy.

A drowning man will cling to any piece of flotsam that comes his way. What the insurance industry found floating by was Obamacare.

In return for its support in the healthcare reform battle, President Obama offered the insurance industry the graceful exit strategy it so desperately needed. Under Obamacare, for at least a few years the insurers hope to get One Last Windfall – namely, profits from the influx of previously-uninsured Americans whose premiums will be paid, or at least subsidized, by taxpayers. Here, the insurers are relying on the likelihood that the inflow of new premiums will, for a year or two at least, greatly outweigh the outflow of money they will have to spend caring for these new subscribers. Obviously, they will use every trick in their well-worn book to stave off expenditures for these new subscribers for as long as they can, but if they actually knew how to avoid paying healthcare costs indefinitely, they wouldn’t have sought a government bail-out. In any case, an inflow of new subscribers will be a very temporary source of profit for insurers. Hence, at best it is One Last Windfall.

What happens to the insurers after they exhaust this last windfall is still up in the air. Obamacare may, of course, eventually transition to a single-payer system, an outcome which many Conservatives desperately fear, and many Progressives fervently desire. Should this happen, there may very well be some final compensatory buy-out (or a buy-off) for the insurance companies – a truly-last windfall.

But more likely, the insurance companies under Obamacare will continue to exist essentially as public utilities. That is, they will exist as companies chartered by the government, which administer healthcare under the direction of the government, with the products they may offer, the prices they may charge, the profits they may keep, and the losses they may incur, determined solely by the government. It’s not glorious, but it’s a living.

And it’s a far better exit strategy than anything the insurance companies could devise for themselves.

So, when the time came, the insurance industry did whatever it needed to do to make sure President Obama’s reforms became law. Their assistance consisted of four simple steps:

1) Do not actively oppose Obamacare. In stark contrast to its behavior during the Clintons’ effort to reform healthcare, this time the insurance industry never employed its vast public relations resources to stifle healthcare reform. While they resurrected the original Harry and Louise, this time, like the insurance industry itself, they were older, wiser, sadder, and fully in support of the proposed reforms.

2) Submit quietly to demonization. A key strategy of proponents of Obamacare was to remind Americans repeatedly that the for-profit health insurance industry is fundamentally evil. This strategy was based on the time-honored precept that it is easier to get the unwashed masses to cooperate through hatred than through reason, and so, to gain their cooperation, one must give them something to hate. Obviously, this strategy meant that the health insurance industry had to accept its role as the bad guys in the reform debates without complaint, and without engaging in any serious self-defense. They did so.

3) Offer subdued public support to Obamacare. The AHIP (America’s Health Insurance Plans) issued public statements every so often that cautiously supported President Obama’s healthcare reforms. But its support had to remain subdued and tepid, since Satan can’t be seen leading the hymns. It was just enough public support to signal opponents of Obamacare not to expect much help this time from this quarter.

4) Whenever necessary, rise up and demonstrate to the world just how evil you really are.  At the end of the day, this was the most important role the insurance industry played in advancing Obamacare. It was certainly their most active role.

It was not a difficult role to fill. Since 1994 the health insurers had engaged in the sorts of truly evil, inhumane, and reprehensible practices that are naturally engendered by covert healthcare rationing, and that harmed or killed many of their subscribers. The only difficult part was choosing which reprehensible behaviors to feature, and when to do it.

In at least two key moments during the fight over healthcare reform – June, 2009 and February, 2010 – when the proponents of reform felt their momentum lagging, the insurance industry intervened with gratuitous evil behaviors whose chief function was to remind Americans just how unremittingly wicked and inhumane they really are. In the second case, at least arguably, the insurance industry turned the reform effort from apparent defeat to almost certain victory. Indeed, it is not too much of an exaggeration to assert that, in the end, the health insurance industry saved Obamacare.

June, 2009: Say Hello To My Little Friend

The debate over Obamacare entered a new phase in May and June of 2009. It was during those months that the opposition to healthcare reform found its voice, and it began to seem as if perhaps the Obama steamroller could really be slowed, if not stopped. People were even beginning to say that many Democrats in Congress, after getting an earful from their constituents when they held their summer town hall meetings, would abandon any idea of supporting President Obama’s healthcare reforms.

Supporters of Obamacare decided it was time to invoke the demons. So in mid-June, the House Subcommittee on Oversight and Investigations called three health insurers to testify on the practice of rescission, and to face not only indignant Congresspersons, but also some of the people who had been personally harmed by their practices.

“Rescission” is when an insurance company voids subscriber’s health insurance when they get sick (after happily accepting premiums from that subscriber, often for many years). Under some circumstances, rescission might be justifiable. It is legal and proper to cancel a policy if the subscriber is found to have purposely lied on the insurance application about a prior illness that is material to the current illness.

But health insurance companies for years have actively and aggressively practiced rescission on subscribers whose insurance applications contained inadvertent and non-material inaccuracies. Furthermore, the health insurance industry does not merely engage in occasional unfair rescission practices; it has industrialized the process (which, after all, is what they’ve always told us they would do to reduce costs). It employs health insurance detectives whose job is to comb the prior medical records of subscribers who are newly diagnosed with certain, expensive medical conditions, looking for even trivial discrepancies on insurance applications, which they can inflate to “fraudulent” omissions, thus voiding the policy. These health insurance detectives are paid by commission, according to how much money their efforts can save the company. Many of them find it a very lucrative career.

So, at the cost of perpetrating a bit of inhumanity, rescission can save insurance companies a lot of money.

Consider some of the individuals who testified in Congress along with the insurance companies on that day:

- A nurse in Texas had her insurance canceled after she was diagnosed with breast cancer because she had failed to reveal that, years before, she had consulted a dermatologist about acne.
- A man (whose surviving sister had to testify) had his insurance canceled before he could begin expensive cancer therapy, because he had not revealed (and indeed he had not known) that a prior CT scan had showed gallstones and an aneurysm – conditions unrelated to his cancer.
- A woman had her insurance canceled – and due to the rescission could not find replacement insurance – because she failed to reveal that, at one time, she had been on medication for irregular menstruation.

During the hearing, the three health insurance executives were caused to listen, on camera, to these and other mind-bending stories describing some of the inexcusable pain, suffering and death their unfair rescission practices had caused, and then were forced to listen to withering commentary by stunned Republicans and Democrats on the Subcommittee, whose own investigation had found that the three companies on the docket had retrospectively canceled the policies of 20,000 sick subscribers over the past 5 years.

After these heart-rending testimonies and the blistering attacks from extremely angry congresspersons, the executives were challenged by Chairman Stupak (D-Michigan) to now commit to discontinuing the practice of rescission unless intentional fraud could be shown.

All three replied, in turn, “No.”

Such a reply, in such a setting, almost defies belief. The only possible explanation, in fact, is that the insurance industry was stepping up to the plate, and embracing its assigned role as the Evil One in the great healthcare debate.

Even the most stone-hearted insurance executive can see that canceling the health insurance of a newly-diagnosed cancer patient, because she’d forgotten she had required acne medicine before the prom 20 years ago, is just a bit unfair. But how did these three executives react? They did not attempt to deny such reprehensible behavior, or to explain it, or to defend it. They were simply defiant about it.

One is put in mind of Tony “Scarface” Montana, bereft of friends, family, allies and bodyguards (albeit because of his own actions), hopelessly surrounded by an army of heavily-armed assassins, screaming, “Say hello to my little friend!” then launching defiantly into a wild, bloody and spectacular suicide.

One cannot for a moment believe that Richard A. Collins, chief executive of UnitedHealth’s Golden Rule Insurance Co., Don Hamm, chief executive of Assurant Health, and Brian Sassi, president of consumer business for WellPoint Inc., would have been stupid enough to publicly defy Congress over such an indefensible practice, if doing so was against their own long-term interests. Appearances to the contrary notwithstanding, they were not auditioning for a remake of Scarface.

This is not how an industry behaves which wants to court the goodwill of Congress at a critical juncture in its life cycle. This is not the strategy of an industry that wants Congress to defy its own party’s President and defeat healthcare reform, or that is begging Congress to give them another chance to figure out how to bring healthcare costs into check. This is not the behavior of any industry that wants to elicit any sort of favorable action from Congress. Indeed, these executives would have seemed more sympathetic and deserving if they had proposed instead to place live puppies on a spit and roast them over an open fire during half-time at the Super Bowl.

There is only one explanation for their astounding public defiance on this matter. Which is, it must have suited their long-term interests.

Recall that at the time of this remarkable hearing, there was growing skepticism about President Obama’s healthcare reform efforts, not only on the part of Republicans, but also on the part of a critical minority of Democrats in Congress. And for the first time since the election, there was some question about whether his reform plan would succeed in gaining sufficient support.

In this light the stark, defiant, public “no” uttered by the three insurance executives makes sense. “Look at us,” they were saying, “See how evil we are! We are utterly devoid of human decency, ethical constraints, or a sense of fair play. If we behave this defiantly when we are in the position of mere supplicants to your eminences, just think how we will behave if you fail to rein us in with new reforms! Abandon all hope, those of you who rely on us for your healthcare, and behold the congressional dogs that placed us in this position of power over your very lives!”

Given the headwinds the healthcare reform effort was to face during the next nine months, it is difficult to say with any certainty how much good the insurance industry did in June, 2009, when it took such an extraordinary step to remind Americans just how incredibly evil it is. But when the time came to help boost the President’s reform efforts, nobody can deny that the insurance industry stepped up and did its duty.

February, 2010: Raising Obamacare From The Dead

Things looked especially bleak for healthcare reform in early February of 2010. The incredible, Constitution-defying, machinations Congress had employed in its desperate attempt to pass healthcare reform had disgusted a majority of Americans, and momentum was clearly shifting to the opponents of Obamacare. And when Republican Scott Brown incredibly won the Senate seat in Massachusetts, robbing the Democrats of their crucial, filibuster-blocking 60th vote, many thought healthcare reform was dead.

But then out of nowhere, in early February, Wellpoint’s California subsidiary, Anthem Blue Cross, announced it was raising its already-astronomical health insurance premiums by as much as 39%, a move that promised to greatly increase the number of Californians who are uninsured.

The demoralized Democrats in the administration greedily capitalized on this new opportunity.

Secretary of HHS Kathleen Sebelius immediately fired off a very public letter to the company, demanding that they justify this unconscionable rate increase. And Wellpoint, lustily assuming its assigned role as villain, was delighted to reply, equally publicly.

We’re in a recession, Wellpoint brazenly asserted, and in a recession, like it or not, people exercise their prerogative to drop their health insurance. The only people who don’t drop their health insurance are the sick people, or those who are likely to become sick, which means that our cost per subscriber goes way up. So naturally, we have to increase premiums. By a lot. It’s just business. That’s just the nature of our current, unreformed healthcare system. So choke on it.

Wellpoint was also kind enough to mention (for anyone dense enough to have missed the point) that the need for higher insurance premiums would be nicely mitigated if everybody was mandated by the government to purchase health insurance.

Wellpoint’s anounced premium increase immediately triggered great volumes of delighted outrage by thankful Democrats, who desperately needed a large dose of “evil insurance company” at just that time. Wellpoint’s action reignited the proponents of healthcare reform, who were inspired to remind all Americans that this is what would happen to everyone if healthcare reform failed, and the greedy insurance companies had their way.

Stunned Republicans, seeing their impending victory over Obamacare evaporating before their eyes, could only issue a few lame and uncomfortable attempts to diminish the significance of Wellpoint’s unfortunate action. But to little avail. The momentum had shifted. At least arguably, it was Wellpoint’s decision to announce an unconscionable rate increase at this extremely critical juncture that put healthcare reform back on the road to adoption.

From a pure business standpoint, there was no good reason for Wellpoint to stir the soup at that moment. Wellpoint at the time was the most financially sound private health insurance company. While its California subsidiary did lose money in 2009, overall the company performed quite well, and reported a very nice profit growth for the year. And with several of its competitors in trouble, Wellpoint stood to do comparatively well for the foreseeable future.

Furthermore, it has since been learned that Wellpoint’s math was bad. An independent actuary working for the California Department of Insurance reported on May 5, 2010 that the company had made “numerous errors” in calculating is rate increases, and further, that Wellpoint could cut its rate hikes substantially, and still meet its required 70% medical-loss ratio threshold. So, uh, oops.

It stands to reason that if Wellpoint really wanted healthcare reform to go away, they would have first checked their math before announcing seismic rate increases, and then, if such astounding rate increases were really needed, they would have waited a few months – while Obamacare died – before announcing their rate hike.

The last thing they would have done is to throw the reformers a critical lifeline just as they were going under for the last time.

In any case Wellpoint’s action, especially at that moment, seems entirely gratuitous. Wellpoint could only have chosen to do its demon dance, at such an inopportune moment, in order to revive Obamacare during its darkest hour.

And that’s precisely what happened.

What This Means

What this means to those of us who would like for Obamacare to go away ought to be quite obvious. Simply nullifying or repealing Obamacare simply will not do. The insurance industry simply will not tolerate it. If we decide we need to get rid of Obamacare, to shed ourselves of the spectre of government-controlled healthcare (and far worse, government-controlled covert rationing), we’ll need to have another solution in hand.