Thursday, June 28, 2012

The Sadistic Nature of the Insurance Industry

According to the National Journal’s Influence Alley, health insurers in the US secretly spent huge amounts of money to defeat health care reform while pretending to support Obamacare. The industry gave $102.4 million over 15 months to the Chamber of Commerce for advertising designed to convince the public that the legislation should be defeated.  This is completely legal because there is no law that requires groups to publicly disclose where they are sending money or who they are receiving it from.  Up until now, this expenditure was unknown to the public because the insurance industry accounted for it on their books under the heading “advocacy”. 

At first blush, insurers’ attempting to influence public sentiment to oppose the bill would seem odd because health care reform essentially creates more customers for insurance companies overnight.  But according to Neera Tanden, who served as the senior advisor for health reform at the Department of Health and Human Services and was a member of the Obama White House health reform team, the industry’s distaste for reform revolved around a provision under the Affordable Care Act that requires companies to spend at least 80 percent of customers’ premium dollars on actual health care expenditures and that failure to do so would require them to refund the money back to customers. 

These two stipulations would essentially rein in escalating premium amounts by keeping them tied to the level of claims made by customers.  In other words, insurance companies would be bound to stick to their primary value proposition, which is to protect consumers.  By working to defeat the bill, companies are aiming to use customer premium amounts for purposes other than what they were originally set out to do.  This is not that dissimilar to the financial services industry that fought hard to overturn Glass Steagal so that they could use their revenue from customers’ deposits for investment purposes – purposes other than what the customer is expecting that money to be used for. 

I find this shocking discovery to be a fantastically accurately illumination of the underlying motivation of the insurance industry.  On the one hand, they market themselves as being the protectors of their customers in the case of emergencies yet do everything in their power to renege on that promise when an emergency does in fact take place.  Is it that simple?  Do we account for the industry’s schizoid behaviour around advocacy on Obamacare to their underlying culture of hypocrisy that has all but infected this industry? 

In my view, the insurance industry is one of the largest market failures in our economic society.  The underlying purpose of their efforts to eliminate the bill is to wipe out any accountability to their customers because it would mean that they could overcharge on premiums and at the same time do their best at reneging on a promise to fulfill insurance claims.  Sadly, this is the ultimate objective of business – maximize revenues and minimize costs.

But the provision in the Affordable Care Act would put a cap on the margins that insurance companies can make because 80% of their premium revenue has to be spent on claims.  As a consequence, Obamacare is seeking to fix this market failure.  The problem though is that influencing regulation is considered another strategy to appropriate value from society (in this case customers).  Value appropriation is a fundamental pillar of business strategy where the objective is to extract economic value that exists in society and to bring it into the firm for the benefit of shareholders.  The simplest example of this would be Wal-Mart, whose size has allowed them to successfully cut the margins of their suppliers (i.e. appropriate value) for the benefit of their own shareholders.  The insurance industry recognizes that Obamacare would cripple their ability to appropriate value because any excess margin they accumulate has to be given back to customers. 

What is more disturbing for me as a business professor is that I consider myself complicit in the sadistic act of the insurance industry.  I recently read an article on Online MBA that talked about 8 ways in which business schools are building in more responsible decisions in their graduates by altering business school curricula.  Many of these changes are a direct response to the financial crisis for which business schools carry much of the blame.  But what I find interesting about these eight changes and the many other initiatives I’ve seen at business schools is that the underlying paradigm of shareholder maximization and value appropriation remains unchanged.  Offering specializations in ethics and corporate social responsibility (CSR), adding more courses in this domain, aligning their mission statements with society’s interests, and deemphasizing profits as the primary function of business are insufficient in my view and ignorant of the elephant in the room.  

Fundamentally, what we teach as our core capstone course is to do precisely what the insurance industry is doing.  We teach them to appropriate and monopolize value, value that may originate from any sector of society.  These business school CSR initiatives represent fluffy disguises analogous to putting a nice coat of paint on a termite-infected house. Until business schools, their board of advisors, academic conference delegates, and the many other institutional pillars that support the existing business school paradigm look themselves in the mirror and recognize that they provide the platform through which this sort of behaviour is considered legitimate, they should be standing by the insurance industry in their attempts to defeat Obamacare.  

Sunday, June 10, 2012

Why do we ignore climate change?

The scientific community has reached a consensus that the build-up of heat-trapping emissions from burning fossil fuels and clearing forests is changing the climate, the result of which imposes significant risk to our well-being. Yet as conclusive as these studies are, we continue as a society to accelerate our emission levels putting us on a trajectory of temperature increases well in excess of the two degree celsius target established by the international community in the 2009 Copenhagen Accord. 

This shocking ambivalence persists in the backdrop of 2011 being a “real killer” when it comes to hot temperatures and a record number of extreme weather events including droughts, catastrophic floods, and forest fires, including the worst ever in Texas.  This alongside a recent study that showed how our current trajectory will lead to an unprecedented and permanent tipping point in the Earth’s ability to provide ecosystem services.

Why then, despite unequivocal conclusions, does society drag their feet in acting?  Several studies have looked at this question and through doing so they tend to distinguish between those people who deny that climate change is a reality from those people who accept human-induced climate change as reality, yet are inactive in response.   Let's look at each in turn.

Why do people deny climate change? 

You may be surprised to learn that only a small minority of people actually all-out denies that climate change is real and/or caused by human action.  Even in the US, a country known for being skeptical of climate science, only 10-20% of the population is in denial. This denial persists despite some of the worst skeptics coming out to admit that the leading scientists are in fact correct including Richard Muller at UC Berkeley who originally set out to debunk climate change mantra but then after an objective analysis conceded in a wall Street Journal article that “GlobalWarming is Real”

Misleading Media:  The media unfortunately does a very poor job at educating the public on the facts of climate change and instead has played an important role in spreading doubt by giving the false impression that climate science is one side of an equally valid set of arguments. David Johnson at Huffington Post remarked on this pathetic reality and blasted the integrity of the journalistic profession for perpetuating this very ambiguity in their efforts to be objective.  I recently attacked Margaret Wente and Canada's Globe & Mail for spreading such doubt through outdated scientific knowledge and opinions of highly unqualified individuals. 

Related to this is the fact that the deniers, according to Dr. Leiserowitz, Director of the Yale Project on Climate Change Communication, oftentimes drown out the broader conversation about the subject, making themselves seem more numerous than they are in reality.  These individuals have borrowed from the tobacco industry’s playbook of the 1980s/1990s of dis-information where the objective is not necessarily to deny climate change but to raise enough doubt so that you can “blunt the urge for calls for political reform”.  As a consequence, the 70-80% of the public who are neither strong believers or strong skeptics are highly swayed by this megaphone. 

Political Affiliation:  The second reason has to do with political ideologies.  Of those who reject climate change outright, 76% were conservatives.  The conservative mantra tends to associate action on climate change with a breach of fundamental human liberties presumably because such action will impose unnecessary regulation that will choke the very foundations upon which freedom flourishes.  As a consequence, right wing conservatives have lumped climate change among other topics that carry “liberal views” such as pro-choice, same-sex marriage and gun-control. 

(Allow me to digress: This is a very simplistic argument because on the one hand it overlooks the fact that a lack of regulation to curb human impacts on the climate is a recipe for a loss of freedom as more and more individuals struggle to rely on the basic necessities that enable such freedoms.  On the other hand it overlooks how a lack of regulation represents a platform through which those actors most complicit in causing climate change are in fact appropriating the very freedoms that we value.)  

Culture of Denial: Australian intellectual Clive Hamilton argues that denial is not necessarily due to a deficit of information as much as it is due to culture. Hamilton demonstrates that society has a history of denial and delusion in the face of substantial threat because people have a tendency to ignore knowledge that unsettles the mind.  As Hamilton explained, “so earnestly did the British public wish for peace that they were prepared to suspend their grasp of reality in return for a comforting delusion” that a world war would never happen.  The desire to disbelieve deepens as the scale of the threat grows, until a point is reached when the facts can be resisted no longer.  Unfortunately with climate change, unlike war, this ‘point’ is largely hidden from daily view.” 

Why do we not act? 

Now what about those who concede that climate change is a reality and that humans are the primary cause yet still do very little in response?  The American PsychologicalAssociation commissioned a task force to look at the Interface BetweenPsychology and Global Climate Change to identify the factors that prevent people from taking immediate action.  Many of these same factors were identified in other sources.  I summarize a selected few here: 

Climate Change Isn’t an Evil Tyrant:  The first reason has to do with the fact that climate change doesn’t represent an easily digestible evil character to which we can all rally against.  We worry more about anthrax (with an annual death toll of virtually zero) than influenza (with an annual death toll of half-million people).  Because climate change isn’t intentional, it does not capture out attention. So it’s a shame that climate change isn’t trying to intentional kill us! 

Climate Change is beyond our Noses:  Some argue that the economic recession has pushed climate change down on the priority list in light of more urgent economic needs.  It costs money to do some of the right green things. But more importantly, like all animals, we are more prone to respond to clear and present danger.  Our brains evolved that way.   Despite the fact that our intellectual prowess has enabled us to predict dangers before they actually happen, our brains haven’t developed the natural biological instinct to do something about it.

Climate Change is Inconvenient.  Old habits die hard.  There is a massive institutionalized system of social norms and practices that make it very difficult to change behaviour. How many times have you forgotten shopping bags or your reusable coffee mug?  Our way of life for the last several decades  (past two generations) has spawned behaviour that presumed that we had unlimited resources.  Look around you – everything you purchase is slated for the landfill.  It is seemingly impossible to do something without living in a clay hut, peeing in a hole in the ground that acts as compost for your garden, or walking several kilometers to the nearest congregation of box stores.  When you go into the grocery store or a home improvement store, the procedures for domesticating our lifestyles is based on an unsustainable system albeit with small yet humorous products that help us to be less unsustainable, perhaps out of guilt. 
Climate Change is an Underestimated Risk.  Finally, we tend to underestimate the risk associated with climate change to the point where we presume that our human ingenuity will come to the rescue.  This very naive perspective is common among neo-liberal observers who claim that the market can and will resolve the problem.  When I hear this rhetoric, i can't help but think of one of Albert Einstein's favourite quotations where he says (if I may paraphrase) that one cannot resolve a problem by using the same approach that initially caused it.  
All in all, the task for social scientists is huge.  The non-social scientists have done their job just as they had done in the 1960s proving unequivocally that tobacco was a cause of cancer.  But it wasn't until the 1990s that we finally began to take action at the societal level.  Let's hope we don't take so long this time around!