We have nothing to fear from insurance companies -- nothing is more precious to them than their reputation!

by Ken

I should probably have saved this for a "Comedy Tonight" post, under the heading "You Can't Make This Stuff Up."

What I really wanted to write about was some kinks built into our political system that make real reform a chancy proposition. One of the texts for that piece was to have been Paul Krugman's NYT column yesterday, "Rewarding Bad Actors," about the mayhem wrought by "many financial-industry high-fliers" who have settled comfortably into the niche of getting rich "through activites that [are] worthless if not destructive from a social point of view." He concluded:

"Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer."

But I got sidetracked checking the good doctor's blog, "The Conscience of a Liberal," which has this entry from earlier today:

August 4, 2009, 11:35 AM
Insurers only pull your coverage when it hurts

Via Yves Smith, an important piece on “rescissions”: cases in which insurance companies retroactively cancel your health coverage.

The industry would have you believe that it’s a minor issue, because only a small fraction of the insured experience rescissions in any given year. But as the post points out, a small fraction of the insured experience a large share of medical expenses — and you can bet that rescissions are concentrated on the people with big medical bills. So half a percent, if that’s really true, is a large fraction of people who really need coverage.

I’d add that rescissions must be concentrated in the individual insurance market, since group coverage is, by law, not contingent on medical history. And the individual market is a small fraction of the total; again, this must mean that the phenomenon of insurers pulling your coverage when you get sick must be quite important indeed.

Of course, there’s also an alternative universe in which insurance companies would never, never treat their clients badly, because that would hurt their reputations.

Now the subject of health-insurance rescissions is incredibly important, since it seems to have become the health insurers' go-to game anytime they can get away with it. But the real fun is that "parallel universe," which turns out to have been conjured up by a right-wing economist named Bryan Caplan, who's an associate professor at George Mason University and a professional thinker for the ship-of-fools Cato Institute. I mention these affiliations because the ridicule that Professor Bryan has hereby earned should be shared as freely as possible with the folks who provide him with a living.

What our Bryan did was to write a blogpost a week ago in which he argued that we have no reason to distrust insurance companies because they are finnicky about their reputations, and would never do anything to taint them. His conclusion:

Am I saying that health insurance companies never play dirty tricks on their customers?  Of course not.  It's a big world, lots of bad stuff happens.  What I'm saying, rather, is that reputation works well even in industries where firms have big, lumpy liabilities.  There are plenty of examples.  What reason is there to think that health insurance isn't one of them?

Then yesterday he followed up with what he apparently considers proof. As someone whose knowledge and understanding of history apparently hover at the "empty" end of the gauge, he actually dredges up the response of German insurance companies after the 1938 orgy of anti-Jewish violence in Germany known as "Kristallnacht." Even though, he argues, the insurance companies could easily have been relieved of their obligations to pay claims, which indeed the German government was quite prepared to do, they insisted on paying claims out of concern for their international reputation.

"If we now refuse to honor clearcut obligations, imposed upon us through lawful contract, it would be a black spot on the shield of honor of the German insurance," said an insurance executive named Hilgard at an official conclave that included such Nazi luminaries as Hermann Goering and Reinhard Heydrich. Of course as even our Bryan notices, Herr Hilgard had no concern whatsoever about whether any money actually reached the people to whom it was owed. He was perfecly content with Goering's suggestion that it all be confiscated as soon as it was paid out.

Of course it's beyond Bryan's historical awareness that German companies attempting to do international business in 1938 (with, in addition, their peculiarly German sensibilities) were presented with an, er, special set of circumstances. No, our Bryan has it all figured out:

The German insurance companies hardly come out looking like heroes. As long as they preserved their reputation, they couldn't care less about the fate of their Jewish customers. But this example still makes my point well: If even insurers in Nazi Germany insisted on living up to the letter of their Kristallnacht obligations, insurance companies' reputational motive must be strong indeed.

Of course being a right-wing academic, and especially a right-wing think-tankster, means your delicate tootsies never have to come in contact with reality.

Hmm, a "parallel universe" indeed.

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