Wednesday, February 28, 2007

Profit Motive

Bonddad on daily kos explains the perverse results that the profit motive provides in the health insurance market: put simply, insurance co's make money by collecting premiums and earning money on the float, not by paying claims. It may well be economically more feasible to deny coverage than to provide treatment.

That's a stretch.

While it is true that denying claims does protect profits but if claim denial is abusive then revenues AND profits are depressed.

When you take into account the present legal environment, the incentives are actually far worse than they appear in his article, as the Supreme Court through ERISA preemption (which protects HMOs from state law liability for negligence) and its recent punitive damage awards cases provide large incentives to cheat. I would commend those interested to read about the insurer's practices in STATE FARM MUT. AUTOMOBILE INS. CO.V. CAMPBELL (01-1289) 538 U.S. 408, in particular the manner in which State Farm not only created a conscious policy to deny coverage to its automobile insureds, but punished those employees that refused to engage in the company practices.

While there is a world of difference in casualty insurance and health insurance, the point is not totally lost. The author is suggesting that (in this case) State Farm purposely and maliciously denied claims based solely on a mathematical calculation.

What is overlooked is that State Farm also recently announced they would no longer write or renew certain lines of coverage in Mississippi due to litigation.

This runs counter to the authors argument that it is more profitable to deny claims than it is to pay them.

The insurer may collect premiums for coverage it has no intention of honoring. If less than 10% contest these decisions, it's a no-brainer; the corporations interest is in denial. If the coverage is even remotely fuzzy, then it denies. To protect itself from really bad facts, all it has to do is pay some of those claims. It's still better off, despite not having honored its obligations.

Refusing to honor its' obligations.

Interesting choice of words.

The fact is, claims are routinely denied for being extra-contractual. In other words, the claim is not a covered item according to the policy language. When the courts intervene and apply a broader standard than is allowed by the contract, a contract whereby BOTH parties agreed, then the risk to the carrier becomes incalculable.

This is like going into a gas station, pre-paying for $10 worth of gas but continuing to pump until your tank is full and then driving off. Gas stations would not be able to stay in business very long if this became a habit and courts decided that the owner of the car was ENTITLED to a full tank, regardless of what their contractual agreement covered.


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