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.  

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