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Why not increase this penalty?
The headline reads: "Health Insurer Must Pay $9 Million for Canceling Sick Woman's Policy."
The article has gory details about company employees being given cancelation quotas and bonuses, apparently regardless of whether the cancelations were merited under the terms of the initial policy.
If you think that health insurance policies are unjustly canceled fairly frequently (and yes I can believe this), surely this penalty should be much higher. The cancelers are rarely caught, so a simple application of law and economics suggests severity not leniency. For a large health insurance company a $9 million fine is peanuts.
As far as I can tell, credibly stiffer fines have not been tried. In other words, the government does a poor job at enforcing the health insurance contract.
You might hold a theory that the government judiciary will malfunction in such a way but a health care government bureaucracy would not make mistakes of comparable importance.
I do not hold such a theory. When it comes to health care reform, I would like to start with the enforcement of contracts based on rational and just penalties.
Posted by Tyler Cowen on February 26, 2008 at 06:38 AM in Medicine | Permalink
Comments
As I read this, all of the payment goes to the woman( minus lawyers etc of course).
Isn't this way of fining complicating 2 things? On the one hand compensating the victims, and on the other hand acting as deterrent? This can lead to a situation where the size of a fine is determined to be 'fair compensation', not to be effective deterrent.
Wouldn't fines be easier to set if one part is used as compensation, and another, potentially much higher, part is the deterrent and goes to the government, or some earmarked fund?
Posted by: greatzamfir at Feb 26, 2008 7:49:56 AM
The Rainmaker.
Posted by: shawn at Feb 26, 2008 8:26:15 AM
But the government judiciary just did fail at enforcing the contract.
How many instances of failure are needed to declare failure? Do we count each unjustified but non-litigated cancellation as a separate instance?
Posted by: Doug at Feb 26, 2008 8:48:03 AM
http://www.bettnet.com/blog/
One story down in the attached - on a man from Ontario and his healthcare nightmare:
Posted by: TomG at Feb 26, 2008 8:59:50 AM
We've had the current system in place for a couple of decades now. There are plenty of legal incentives to pursue such awards. But they haven't been pursued.
At what point do we decide the current system isn't working?
Or do we conclude that it is the best of all worlds because it might work sometime in the future?
Posted by: otey2 at Feb 26, 2008 9:23:26 AM
Let me get this straight. Tyler apparently is dissatisfied with the economics of tort law, and thus wants legislated penalties? What other bits of the Law and Economics movement does Tyler reject?
Posted by: flabbergasted at Feb 26, 2008 9:50:38 AM
It seems to me that the failure of the government to enforce contractual responsibilities of corporations to their customers is basically ubiquitous in our system, but is a bigger problem in insurance because the expenses that can be imposed on customers of, for instance, phone companies, are much smaller. The Law and Economics approach would work well if it accorded with the sense of justice held by most Americans, but in practice it feels like a lottery. Also, the court system is simply too noisy and imposes large risks on all businesses if that approach is adopted. In addition, such a cost encourages the vulnerable businesses to buy political influence in order to protect themselves, which contributes to the sort of corruption of the system that we have seen since the Gingrich revolution.
Posted by: michael vassar at Feb 26, 2008 10:40:55 AM
9 million sounds like a lot to me.
I think that extremities lead to all sorts of bad things.
People scheme to be in a position to get such payouts.
Guilty parties who could be morally swayed into penience might opt to cover up and fight back if they see a penalty that they think far exceeds the crime.
Sometimes we refuse to cooperate in legal or police proceedings because we thing that "justice" might bring a worse injustice.
Posted by: Daniel Klein at Feb 26, 2008 10:55:23 AM
Leave it to a libertarian to blame government for "free market" failure.
In libertopia, where government oversight/regulation of industry policy has no teeth, lawsuits will be the only recourse. Of course given the response of this post, I wonder what libertopia *really* looks like.
Posted by: meter at Feb 26, 2008 11:01:37 AM
Tyler -- you have a pretty dismal view of insurance companies and I wonder what informs it. Your reading of this story seems like that of a liberal activist. I am sorry for the women, but according to the story she failed to disclose a heart condition when applying for health insurance. It was perfectly appropriate for the company to cancel her contract. The fault here lies with the women.
You may say, well they could have just charged her a higher premium, but of course that provides no incentive for people not to lie in the future. Many insurance practices that seem overly harsh are often responses to consumer fraud (or other matters). This seems like one of them. You frequently comment on insurers not paying their bills, but you ignore that many people commit insurance fraud and sometimes, perhaps often, the failure to pay is based on the concern that there is fraud of some kind. Insurers are unpopular because of stories like this one, but the fault here lied with the the insured.
Posted by: Mike Rappaport at Feb 26, 2008 11:39:08 AM
@mike rappaport
and what relevance does the fact that she had a heart condition have to with the fact that she was being treated for breast cancer? None. The insurance company was looking for any out to avoid paying. Had she failed to disclose a previous cancer, then I would agree with your position.
Posted by: mw at Feb 26, 2008 12:02:13 PM
flabbergasted: If the probability of being caught for some fraud is very low, and the payoff is very high, then you need a large penalty for the cases you do catch, in order to effectively deter the fraud. What about this is inconsistent with law and economics?
I think it's hard to read the problems of US health insurance companies, hospitals, etc., as supporting either a pro-free-market or a pro-regulation stance. The industry is heavily regulated, yet still does stuff like this, pretty commonly. The industry is operating in at least some sense as a free market, and it's jam packed with perverse incentives and nasty ways to dump costs and profit by mistreating patients.
I can make a simple proposal, though. If there is really a widespread policy of systematic fraud being carried out by the insurance company, surely that can involve criminal penalties, too. And if it were shown that a patient had died partly because of being unjustly denied coverage, wouldn't that involve a manslaughter charge?
Posted by: albatross at Feb 26, 2008 12:06:09 PM
This was an arbitration, the government judiciary was not involved. The arbitrator was hired by the defendent. So please apologize for all the insults hurled at the judiciary.
If you want to change these awards, which are almost entirely handled in arbitration, change the contract or get your congressman to change the law.
Posted by: guy in the veal calf office at Feb 26, 2008 12:18:43 PM
@mw:
The relevance is that the contract between the insured and the insurer was invalid from the start due to her fraudulent application. It's true that the only reason they investigated her health history is to avoid paying for the cancer, but that does not excuse her dishonesty. Major illnesses with high-dollar treatments will always be investigated, it's a necessary evil to prevent fraud. The article demonizes HealthNet for the money they've saved with rescissions, but how many of those rescissions were due to similar situations where an insured lied about health history? Their practice of setting rescission quotas and paying bonuses is troubling and they probably shouldn't have those kind of perverse incentives, but the idea that an insurer should not be able to cancel your coverage if you lie is just silly, regardless of whether your actual claims are due to the omitted health problem.
It's easy to tug at heartstrings because it's someone's health, but would you have the same level of disdain if a property insurer retroactively canceled someone's homeowner's insurance for not disclosing they lived in a floodplain, even if they only found out after the person submitted a claim for fire or some other unrelated incident? Fraud is fraud, the circumstances surrounding the discovery don't change that.
Posted by: ab at Feb 26, 2008 12:24:07 PM
A simple idea to address pre-existing conditions would be for insurance companies to charge a higher premium and require a "vesting" period like some companies with their 401(k) match before being fully covered.
Why don't we buy maximum dollar values of coverage? Maybe outlays beyond a certain cap would have to be paid back. Well, we sort of already do some of these things, but they aren't explicit. Insurance companies don't care about your pre-existing conditions, they care about getting shafted out of cash. It would be nice if I could purchase X dollars of coverage and could buy Y more dollars each year.
I think you have to think about insurance as how you'd want it to work if 10 members of your family or friends formed a co-op and self-insured. In fact, insurance companies exist because we refuse to do this!
Posted by: andrew at Feb 26, 2008 12:51:42 PM
andrew: Even ten friends and family aren't enough to adequately pool risk in health insurance. Would you be able to put $30,000 towards your nephew's cancer treatment in a hurry?
Personally I would go further than Tyler: corporations will try to get away with violating their contracts and various other shenanigans as long as the price they pay is not too great. Monetary fines don't make much difference - they hit the shareholders not the corporate officers in the end. What we need is more corporate officers going to jail if and when they break the law. That will align incentives very effectively. Albatross's suggestion of manslaughter charges from death by spreadsheet strike me as very appropriate.
As for cancelling because of a pre-existing condition: this should be priced in, not cause for cancellation. Other countries (I'm thinking of Switzerland where basic private health insurance is compulsory) manage to ensure coverage without people being disadvantaged. Every other industrialised country has solved this problem better than the US has. I wasn't going to dignify Mike Rappaport's comment with a response, but it's that kind of misanthropy and willingness to blame the victim that seems to mire the US in health policy swamp it finds itself in.
Posted by: dug at Feb 26, 2008 2:23:49 PM
For a large health insurance company a $9 million fine is peanuts.
So what? Surely the question is what is the benefit to the company of breaking its contract divided by the probability of its being caught.
Why would you penalise big companies more than small ones (for the same crime)?
Posted by: ad at Feb 26, 2008 3:30:13 PM
Tyler,
I think you are missing several key points here. First, this was an arbitrator, not a judge. While there is dispute over the willingness of arbitrators to side with consumers, my own view is that consumers generally do not fare well in arbitration. Hence the decision to award $9 million in damages in arbitration has quite a significant signaling effect, if nothing else. Second, the award in damages was for punitive damages. An arbitrator awarding $9 million in punitive damages in favor of a consumer against an insurer is a very big deal, indeed, at least if you know anything about arbitration (IMO). Third, the language in the opinion is particularly acerbic and is worth noting. Fourth, this decision again causes me to ask why anyone ever believed that health insurers were likely to act in ways that qualify as a just allocation of resources.
(this is a slightly edited version of my comments here:
http://www.concurringopinions.com/archives/2008/02/discriminating.html)
Posted by: Daniel S. Goldberg at Feb 26, 2008 4:06:18 PM
I worry about the inflation to insurance premiums.
Posted by: caveat bettor at Feb 26, 2008 4:54:46 PM
Libertarian innumeracy proceeds apace: still not a single reference to 'actuary' in the context of health insurance, and why certain classes of people might find it difficult to purchase insurance at any price. [note]
I am looking forward to the day when Tyler Cowen learns enough about the insurance business to be able to write the word 'actuary' in a post on health insurance.
[note] Parsing Tyler's post carefully you'll note that he talks about 'contract'; the significant thing is that the insurer tried to cancel after the fact. Yet this is how they operate, in every aspect.
Posted by: Russell L. Carter at Feb 27, 2008 1:05:12 AM
@ Russell Carter
What possible relevance does the role of actuaries have in Tyler's post?
The post has nothing to do with how insurance companies decide who to cover but rather makes the simple argument that the government could better enforce contracts by increasing penalties on insurance companies for unjustly cancelling policies.
Posted by: Jeff Holmes at Feb 27, 2008 6:25:10 AM
Don't want to put words in Russell Carter's mouth, but it does seem to me that increasing penalties of this kind might change where on the actuarial tables insurance companies choose to decline to cover in the first place, charge higher rates etc.
Not sure what I think about the undisclosed heart business... more info about what was not disclosed may be relevant.
Posted by: Jim Hu at Feb 27, 2008 11:25:41 AM
In keeping with the spirit of Cowen's position I propose the following:
1) The government impose penalties on healthcare companies that illegaly break their contract with their clients.
2) This fine be large enough to deter the behaviour.
3) The patient receive a reasonable portion of the fine but the rest be directed towards medicare/aid.
4) The government pursues cases even where the client has died. (very ill patients are the least able to aggressively defend themselves)
This assumes that you agree that their is a problem with companies looking for ways to illegaly cancel expensive(to them) policies.
Posted by: mpowell at Feb 27, 2008 1:38:26 PM
