As mentioned in my response tweet, I have applied via the SingularityU website. However, I’m wondering if there is anything I can do to increase my chances of being admitted (eg, proactively supply rec letters from people in my network who can vouch for me being the right fit and a great add to this program). Thoughts on this, and can you give me any insights into the admission process and timing? Thanks!

The risk here is how much of the Apple Valuation is actually tied to Steve Jobs?

My one gripe with this post is the same as with all hopeful visionaries. They never, ever mention the foul corrupt monetary system. Central banking. All of the things mentioned need money. We don’t have any money. We have debt. All debts must be paid. 1 and 1 is 2. We are doomed until that one missing consideration is addressed.

Unless this writer is under the influence of payment or favors from the “system”, I’d love to see that addressed, then maybe I could get positive again.

Thanks.

The health insurance market is complicated. Certainly there are numerous external cost pressures on insurers from health care providers, from pharmaceutical manufacturers and from government in the forms of mandates and publicly financed health insurance, but the purpose of this paper is to assess health insurance from inside the industry. Since many politicians, economists and business leaders think the solution to upwardly-spiraling insurance costs is giving consumers more insurance choices— adding high deductible plans, limited-benefit plans, high co-payments plans, allow the purchase of insurance plans from other states, more consumer responsibility—perhaps it’s time to step back and ask a very simple question: is insurance the best way to finance health care? It is important to remember that two points: insurance isn’t the only way of financing health care and insurance companies don’t provide health care.

Insurance is always about financial risk. A person can avoid risk (you can’t have an auto accident if you don’t drive) or reduce risk (drive less), but if risk can’t be eliminated or reduced sufficiently, then another choice must be made. Either one accepts the inherent financial risk of an activity or transfers the risk. That’s where insurance contracts enter the equation. In exchange for consideration—money— risk can be transferred to an insurance company. The concept is beautiful, makes absolute sense in most cases and has been proven over time: insurance was used at least as far back as the Roman Empire.

When it comes to modern, comprehensive major medical insurance, there is a very fundamental problem. It has evolved into something that is no longer insurance! At least it doesn’t meet the definition of insurance when using a strict definition of the term. In the insurance industry, there are three criteria that make events insurable: law of large numbers, ascertainable risk and preventing adverse selection. An insured group must be sufficiently large that the number of and types of claims can be quantified. To have an ascertainable risk, an insurer needs to know the severity of covered risks so the anticipated total cost can be spread over the whole group in the form of an insurance premium. Finally, the insurer needs to prevent too many high-risk applicants from joining the insured group. Doing so would upset the actuarial numbers generated by the first two criteria. All three criteria must be met for maintaining a stabile insurance market and that is certainly not the case when it comes to health care.

Large Numbers:

Established national and international insurance carriers have the actuarial numbers and the claims data to satisfy this first requirement of insurance. Some small insurance companies, local health maintenance organizations and self-insured employers do not. And even if those firms are financially stabile now, what would happen in the event of a local health epidemic or major terrorist attack? Insurance can only work when risk is spread over a large group.

Risk:

For insurance to function properly—coverage provided in exchange for consideration paid– there must be ascertainable risk. That is, insurers having a reasonable certainty of how much claims will cost? In addition to knowing the actuarial probability that an event will happen based on the law of large numbers, one must also be able to ascertain the severity of an event. In auto insurance for example, physical damage to a $20,000 vehicle means that when an accident happens, repair cost is limited to the lesser of actual repair cost or a total loss– $20,000. An insurer’s claims database allows actuaries to price coverage based on the anticipated number of claims and the average repair cost. But no insurance company will write auto coverage that includes maintenance and replacement of parts that wear out, such as tires and brakes. There is no ascertainable risk because some parts wear out numerous times over the life of a vehicle! Maintenance is affected by the quality and age of a vehicle, the number of miles driven, the type of driver and even the condition of the roads on which the vehicle is driven. How can any insurer price coverage for an open-ended risk? It can’t be done! But that is precisely what health insurance companies are being asked to do: pay for the health maintenance of their customers.

Furthermore, for a risk to be ascertainable, an event must be sudden and/or accidental in nature. Let’s look back again to medical insurance coverage. Many years ago, prior to the advent of comprehensive major medical coverage, insurers sold hospital and surgical health insurance. Contracts paid a specific amount, i.e. $100 for each day of a hospital stay and specified amounts for services such as setting a broken arm. Based on a large group, actuaries could estimate the anticipated number of broken arms in any given year and since each claim was limited to the amount specified in the contract, there was an ascertainable risk for the insurer.

Under hospital-surgical contracts, if provider billing exceeded coverage limits, the patient paid the difference. This was a partial or limited transfer of risk from the insured to the insurance carrier. With the advent of comprehensive health insurance in the latter half of the twentieth century, the financial risk to the patient/insured was reduced dramatically but the risk to the insurance company became practically unknown. While physicians may point nostalgically to the 1950s and ‘60s as a simpler time in the medical profession, can anyone imagine returning to the limited treatment regimens of that era? Think of the massive changes in medical technology since then: targeted medications, numerous imaging devices, surgical techniques and organ transplantation. And life expectancy has risen dramatically! People who suffered heart attacks, strokes and cancers in the past often died quickly but are now surviving those events. That’s the good news! The survivors also require ongoing medical care: expensive, open-ended claims from the insurer’s perspective. But just as medical providers wouldn’t think of going back to the limited-treatment options of medical care from a half century ago, it is also unthinkable that people would be willing or able to take on the financial risk of limited-benefit insurance contracts. Even with today’s widespread comprehensive medical insurance, almost one half of all personal bankruptcies are triggered by unpaid medical expenses.

Ascertainable risk gives insurers confidence that scheduled premium will cover anticipated claims and operating expenses with a little money left over for shareholder profit. Unfortunately, from the insurer’s perspective, there is very little confidence in the numbers generated in the health care field. In fact, insurers are always playing catch-up since technology and treatment options are changing so rapidly. The issue was highlighted in a Wall Street Journal article (September 2008: Pricing Strategy Leaves Wellpoint in a Bind) wherein the insurer disclosed that large rate increases were necessary because consolidation of their old claims-processing systems was “making it more difficult to track how quickly medical costs were rising.” This resulted in “pricing insurance plans too low heading into 2008.” Actuaries can make educated guesses about future health claims, using historical trends and computer modeling, but that is not equal to ascertainable risk.

Adverse Selection:

Adverse selection is allowing too many people who don’t meet the underwriting criteria to become customers. Actuaries set selection criteria for each type of insurance coverage being offered by a company. Underwriters assess applications for potential risk and approve coverage for those meeting the predetermined criteria. In auto insurance for example, a company might limit the number of drivers under the age of 25 or the number of drivers having more than one moving violation in the past three years. This can be done by setting substantially higher premiums for those specified individuals or by rejecting those applicants outright. Either way, most of the potentially unprofitable applicants will go elsewhere for their insurance needs. From the insurer’s standpoint, this provides stability to a book of business.

In addition to self-preservation, insurers have a vital interest in preventing adverse selection in order to protect existing policyholders from extreme rate increases. It makes perfect sense: allowing people to buy health insurance after they’ve been diagnosed with serious, debilitating diseases would send claims skyrocketing and result in higher premiums for everyone already in the group. And of course, those healthy enough to move to other insurers and the lower premiums they offer to healthy applicants would leave even a greater percentage of high-claim policyholders in the group. The rates would rise even faster. Adverse selection can destroy an insurance company, but of course that rarely happens. They see the death-spiral approaching and send notices to their policyholders that coverage is no longer being offered in the state: self-preservation

Adverse selection can also happen when actuarial assumptions are wrong. For example, underwriters should have limited the number of drivers under the age of 30, not 25! In health care, the high cost of treating some diabetics may mean that all diabetics should have been excluded from membership in the group. Loose underwriting means excessive claims which leads to rapidly-rising premiums for everyone in the group. Or in a worst-case scenario, adverse selection causes a company to take drastic measures: cancel coverage or go out of business. In either event its customers are again at risk, even though they paid their premiums.

The Market:

So if modern health care insurance doesn’t meet the criteria for a stabile insurance market—large numbers, ascertainable risk and preventing adverse selection– why are insurance companies selling health insurance? Isn’t health care simply maintenance on the human body? Actually, many major insurance companies have exited the business: Prudential Insurance Company of America, for example. The major players in the health insurance field now call themselves managed-care companies. And while there are still companies selling limited-benefit contracts—modern versions of the old hospital-surgical policy—and niche products like cancer insurance, comprehensive major medical and managed-care products (PPO, HMO) predominate. But if healthcare insurance fails the most basic tenets of insurance, how are these companies surviving?

Consolidation in the industry has left a few mega-insurers in control of the managed-care market. A few names that come to mind are United Healthcare, Wellpoint and Aetna. Increased size means that risk is certainly spread over a larger group of customers. And computer databases, with the accompanying analytical potential, certainly help when it comes to estimating claims and setting rates. But this ability to mine data doesn’t make a risk ascertainable; the number of broken arms and the cost of treating those events can be reasonably quantified, but knowing how many diabetics are in a certain population doesn’t help an actuary very much. Diabetes is neither sudden nor accidental, nor is there an end-point other than death. The disease is chronic and often leads to other medical complications. How can insurers quantify the potential claim that will be paid out over the time a diabetic person is insured?

Insurers must protect themselves in many ways since risk in the health care field is not readily ascertainable. They can of course charge very high premiums—in case claims are higher than estimated—but are somewhat constrained by competition in the marketplace. If premiums become too high, healthy customers take their business to other insurers. This leads to the other problem, adverse selection, already discussed above. The insurer is left with too many high-risk customers. But since all insurers raise their premiums based to some extent on the medical inflation rate, is there any incentive from an insurer’s perspective to control expenses? As long as increasing costs from health care providers can be passed on to consumers in the form of premium increases, the potential for ever-increasing insurer profit is also in place. Historically, this has meant that health care has become an ever-increasing percentage of the overall economy in America and is now approaching 17% of GDP. But government mandates along with price/cost control measures threaten to reduce revenues. Where would that leave health insurance companies? Again the question: is insurance the best way to finance health care?

Underwriting standards can also be tightened, weeding out as many applicants with pre-existing conditions as possible. This is critical in dealing with the issue of adverse selection, but from a societal viewpoint, what happens to those who don’t qualify for insurance protection? And then there are those within the insured group that will develop serious medical conditions: great medical care needs means high claims. Capping lifetime benefits, i.e. a $2,000,000 maximum benefit, is another way insurers protect themselves from unlimited risk. Again, what happens to those who can’t qualify for insurance coverage? If the goal is universal major medical insurance coverage, is there a role for private, for-profit insurers? As already discussed, mandates requiring that insurers accept all applicants forces the issue of adverse selection. And this would also make calculations of ascertainable risk even more dubious.

Both issues are anathema to a stabile insurance marketplace. In fact, the more important question should be: will health insurance companies be able to survive? We’ve looked at some ways companies are trying to meet insurance criteria: law of large numbers, ascertainable risk and preventing adverse selection? And to reiterate, for-profit insurance companies have an obligation to protect themselves from excessive claims. It is a matter of self-preservation and a responsibility to the investors who have money at risk. The primary reason for any business is to make a profit; investors could simply put their money in a bank and draw interest, or stuff money under a mattress and preserve principle—ditto buying gold coins—but feel they can earn a better return investing in a business that provides a necessary service. And in this pursuit, insurance companies have been a great benefit to society, providing an avenue for every facet of society to transfer risk, make products and services available and at the same time provide a fair return on investment for investors. But even not-for-profit insurers—some of the Blue Cross Blue Shield companies still fall under this category—have the responsibility of self-preservation, to their employees, health care providers and most importantly, to their customers: policyholders who paid premiums and depend on the companies to pay for the health services they need.

To recap, comprehensive major medical and managed-care insurance products in most cases meet the first criteria: large numbers. As for the second item, ascertainable risk, insurance companies can try to limit their payouts by, for example, negotiating fees that providers can charge for their services. But the fact remains that while one person presenting at an emergency room with chest pains will be diagnosed with stress and sent home, another may require angioplasty and a third, bypass graft surgery. The payout: anywhere from a few hundred dollars to a few hundred thousand dollars. And finally, there is the issue of adverse selection. Insurance companies do very well at preventing adverse selection, by rejecting applicants due to past medical history or waiving coverage for specific, pre-existing conditions. Only healthy, or reasonably healthy, people are allowed to buy health insurance on the open market.

And therein lays the impediment to the free market solving the need for universal coverage. To the many free-market adherents who want to keep government out of health care: too late! Government is involved, mainly because private, for-profit insurance companies cannot and will not cover everyone. Within the constraints of the criteria described above, insurers want only the profitable segment: the young, the healthy, the affluent and the working members of society. The elderly, the seriously ill, the poor and the unemployed are either covered by a myriad of public health plans or fall through the cracks into the abyss called the “uninsured.” As a result of this schizophrenic health care market evolution, approximately 1/3 of the American population is covered under one of the public health plans. This group also consumes almost ½ of all health care expenditures, as insurance industry lobbyists will quickly point out. But from the perspective of a prudent person, doesn’t it seem hypocritical of insurance marketers to point to surging claims in government run health insurance programs which insure the very persons that insurers don’t want to cover because their claims risk is too high?

The health care dilemma: everyone feels entitled to health care when they fall ill, but not everyone can qualify for underwritten insurance contracts. Or if they can qualify for coverage, they might not be able to afford the premiums. The push for universal health coverage and universal access to health care creates a situation that forces adverse selection upon insurers and threatens to set a collision course between the need for health care on the one hand and the need for insurance company profit on the other.

Now, the question often asked is: does a person have a right to health care? While the question is important in itself, it has nothing to do with the question at hand. Is private, for-profit insurance the best way to finance health care? If the goal is universal coverage, the question has already been answered. No! Private, for-profit insurers cannot cover everyone and stay in business. Government subsidies paid to private insurers is a possibility but considering the public’s aversion to having tax dollars filling insurance company coffers, is this really an option? Politicians won’t support cost-plus contracts to defense contractors; why would they set up guaranteed-profit contracts with insurers? But health care is a societal issue and since private insurers can’t solve the problem of universal health insurance, it falls to the public sector to come up with a solution. Some diseases are communicable; there is a cost to society! And family members of the ill stay home from work or school to care for the infirm; there is a cost to society! Some conditions, i.e. hypertension, can be readily treated but left untreated can lead to stroke and paralysis. There is a cost to society! If the answer is yes, then members of a society need to ask the question: how do we provide it? And if the answer is no, that practitioners and providers have the freedom to offer services to paying customers and that people in need of medical care have the freedom to seek services they can afford, then society must accept that some people will become ill and die. But to say that those suffering and dying from untreated diseases and illnesses don’t cost society is completely false.

Private health insurance is one way to finance our health care. It just isn’t a very good way to fund care because of the criteria already stated. Providing government subsidies to help individuals buy coverage is laudable—we fortunately have social values that say broken human bodies should be treated differently than broken auto bodies—but are subsidies the most efficient use of public dollars? Choice of insurance carriers, even with public funding, does not equate with choice or access to health care services. An affordable, high deductible plan to a low-income person with no savings offers no gateway to medical care for that person; if there isn’t money to cover an office visit, possible lab work and prescription medication, care will not be sought unless the medical need is perceived as life-threatening. So while government subsidies may be a boon to insurance companies in the short term, they don’t address the long term needs of society. Consider this: cost-plus contracts with defense contractors always seem to lead to cost over-runs. People remember $1000 toilet seats and $600 hammers! Can American taxpayers afford cost-plus contracts with insurance companies?

What is in the best interest of the insurance company, its owners and stakeholders, is to charge as much premium as possible and to minimize claim payouts. The patient’s best interest: prompt and competent treatment. The needs of the patient/insured and the needs of the insurance company are at cross-purposes. And since insurance contracts aren’t really insurance at all but rather maintenance contracts, why are they still seen as the solution to America’s health care needs? Powerful marketing and lobbying campaigns reinforce the status quo but do nothing to either control costs or improve health outcomes. Is insurance the best way to finance health care? The answer is a resounding no! The current system is untenable: insurers cover only the young, healthy, wealthy and working Americans, leaving the elderly, ill and poor either on government rolls or uninsured. But any mandate forcing insurers to accept all applicants is equally untenable. A single payer system like Medicare may be the best solution in the long run: a publicly-financed, not-for-profit major medical program that assumes most of the risk. Just like Medicare now available to those over age 65, it wouldn’t be free, it wouldn’t be socialized medicine and it could include profitable opportunities for insurance companies to sell supplemental insurance contracts that actually make sense.

Note: The author was a 17-year veteran of the insurance industry. For the past ten years he has been a member of Missourians for Single Payer Health Care, a non-profit organizations focused on health care reform.

I was browsing through your website and exploring your thoughts on Creativity and Innovation. I felt that you have some wonderful ideas on Innovation that are both interesting and insightful.

I am an Innovation Research Assistant at The DeSai Group- a consulting firm that focuses on the domains of Strategy-Driven Innovation™, Leadership, Learning and Execution capabilities for continuous growth and optimal business results.

I would like to take the liberty to welcome you to our “Community of Friends” at the DeSai Group. We look forward to inviting you in on-going research and collaborative conversations. At the moment, we are piloting an Organizational Readiness Assessment on Innovation. We would be grateful if you are willing to take this 45-question inventory to help us through the final stages of validation. I would be happy to send you the results and go over them if you wish. Please be assured that all of your data and results will be strictly confidential. Here is the link to the assessment: http://www.desai.com/irsurvey/survey/default.asp

Thanks in advance for your time and I look forward to hearing back from you.

Best Regards,

Yauhan Mehta
Innovation Research Assistant
ymehta@desai.com / (860)-233-0011 x818
The DeSai Group: http://www.desai.com
Blog & Downloads: http://www.strategydriveninnovation.com