Design or Incompetence, Part Two

Last week I wrote a post about how banks entice customers with promotions and then fail to keep up their end of the bargain, forcing customers to waste their time just getting the bank to do what it promised to do in the first place. As I wrote, then, the problem is by no means limited to the financial sector.

David Lazarus of the Los Angeles Times has a horror story about Aetna, the large health insurance company. The basic facts are:

  1. Aetna increased a customer’s monthly premium by $32 as of August.
  2. On September 30, Aetna sent her a letter saying her premium had gone up. (This is the letter supplied to the Los Angeles Times by Aetna, which I think is pretty clear proof there was no earlier letter.)
  3. Beginning in October, the customer began paying the higher premium.
  4. In November, Aetna rejected payment for a doctor’s bill.
  5. The customer contacted Aetna, who said she had missed payment for October–which wasn’t true (she had paid the higher premium for October).
  6. When the customer appealed, Aetna wouldn’t let her simply pay the extra $64 (the difference for August and September), and insisted on rescinding her policy.

The customer in question is a cancer survivor who needs regular medication and checkups–hence the kind of customer that health insurance companies want to drop if at all possible.

When the LA Times intervened, Aetna agreed to reinstate her policy.

But what’s the penalty for Aetna? Zilch. What incentive does Aetna have to stop screwing its customers? None.

According to Alan Greenspan, the market can solve this problem: customers would leave Aetna because of its shoddy customer service. But most customers get their insurance through group plans and hence have little or no choice of their insurer, and the corporate HR departments for the most part select those plans based on price, since they are getting completely squeezed by rising health insurance premiums. There simply isn’t very much competition in insurance plans, which are sold on the state level. And the customer in this case was on COBRA, meaning she had absolutely no ability to switch (and would probably have had to pay a huge premium for insurance in the individual market because of her preexisting condition).

As far as I know, the health care reform bill wouldn’t actually solve this specific problem, since the general problem of companies screwing up their billing processes and then blaming their errors on the customer goes far beyond health insurance. (I think the simple solution is that companies should have increased liability for their own errors–some large multiple of the amount in question.) With reform, though, at least the customer could have gotten a new plan at a reasonable price (because of the prohibition on medical underwriting).

Thanks to Ted K. for passing this on (via email, in this case).

By James Kwak

46 thoughts on “Design or Incompetence, Part Two

  1. My last reading of the bill, IIRC, said that Recissions could still occur in cases of “fraud”, or if premiums were not paid, which is when I stopped caring about the HCR bill because of these issues.

    Kabuki theater people.

    Speaking of COBRA, a little mouse told me that monthly premiums for Cobra are going from $400 to $1500 March 1st. anyone know if there is any truth to this?

  2. My sister said to me over Christmas: You’d think the Americans would have the decency and common sense to adopt universal health care.

    My cousin said to me: I don’t mind paying taxes to fund our (Canadian) healthcare system. I’d prefer to pay lesses taxes. But I don’t mind because I know everyone here will be taken care of. “Here” meaning everyone at Christmas dinner including the children and our parent’s generation.

  3. All economic transactions basically involve an element of trust by the parties involved. No where is that more true than insurance.

    This kind of abuse on the part Aetna is widespread in the American economy, and is essentially an example of a rat-like management tendency to “eat the seed corn”, of trust.

    Issues of ethics and fraud are ignored, in a quest for short to medium term profitability, at the expense of customers and long term business viability.

    Detroit ate it’s seed corn in terms of trust in the reliability of vehicles, compared to Japanese autos.

    Somebody needs to get Chinese and Japanese insurers to come into the american market, and sell insurance based on the failings and unreliability of American “products”.

    If analogy and history tell us anything, at some time in the years ahead, American insurance companies will become just as financially disabled and unable to operate as Detroit has become. All that’s needed is competition.

  4. Hasn’t anyone seen/read “The Rainmaker?”

    Insurance companies quite possibly run the most corrupt racket of any other type of firm, even banks. The onus should be on the insurance company to prove why a procedure/medication isn’t covered, as opposed to the current state where the onus is on the patient/customer, and what a huge onus that is, as anyone who’s ever tried to overturn an insurance co’s decision can attest.

  5. I vote for design in this case. From the LATimes story …

    “As for whether Owens’ trouble represents a systemic problem, [Aetna spokeswoman] Coplin said Aetna did the best it could. The payment process is automated, she said, making it impossible for the company to contact customers personally in the event of a missed or insufficient payment.”

    Credit card payments, car loan payments, college loan payments and most others are automated. In each case the lender will “contact customers personally in the event of a missed or insufficient payment.” Aetna could and would do the same if they were interested in retaining the business.

  6. First, I completely agree with your statement of the problem: what is the penalty for Aetna? Zilch. I have bemoaned the lack of leverage from the individual to the large institution since I was in college.

    What recourse did I have when the administrative office screwed up on my financial aid or registration paperwork?

    They had late fees if I screwed up – what about when they had me on hold for an hour and then accidentally hung up after I finally connected?

    Having said that, I work for a large health plan in California, and let me assure you, there is a lot of competition in health insurance. Your blanket statement that insurance is ‘sold on the state level’ is a vast oversimplification at best, and completely wrong at worst.

    While it is true that an increasing number of people do not have choice – many still do. Much more likely if you work at a large company than a small one. I prefer a choice marketplace, and so do most people, and I’m concerned at its shrinking, but it’s not correct to say it’s gone. Please don’t obfuscate to make your point (which is a good, good point).

    Love your column, thanks for the hard work.

    P.S. I support health care reform, and Aetna has no excuse for this incident, and should never have rescinded the policy if the facts are as you laid them out.

  7. I routinely get claims denied by both my medical and dental insurance companies. They have always ended up paying after I appeal but usually the delay is long and sometime multiple appeals are required. Since this additional processing costs them their experience must be that often enough the policy holder just gives up to make the behavior worth while. As you note the policies are through a big company retirement program so there is no way I can take my business elsewhere.

  8. One of the big challenges in controlling health care costs is in limiting tests/treatments that aren’t worthwhile. Breast cancer screening is a good example.

    Unfortunately, the data to build upon resides hidden in our hand-written medical records. It’s digital memory resides, mostly, in the records of insurance companies; it’s the information that feed their actuarial calculations. And we have know way of knowing how it’s weighted to balance for outcomes vs. cost.

    Not honoring the spirit of their contract with customers is one side of the coin. Not revealing the calculations behind their payment rejections and denying coverage is another, more sticky problem.

    I’m quite sure most of the major insurers won’t be offering their data bases for mining to help determine good policy any time soon.

  9. Quote from the LA Times article — “As for whether Owens’ trouble represents a systemic problem, Coplin said Aetna did the best it could.”

    Lame, very lame. Aetna is dealing with life / death matters and this is how they handle things? And if that is the best they could do, that is very sad.

  10. This is why I’m concerned that Insurance companies aren’t screaming in pain at current health care bills. The free market can not correct the simple economics of tossing sick folks over the rail. It is in their interest to push a sick individual to a different company. Given the current state of things it is also in the best economic interest for employers to push out sick folks. Not a happy world.

    Insurance companies compete for healthy individuals. They do not compete for sick individuals. We either accept this, allow huge penalties for unfair recision, or regulate a different option.

  11. “Your blanket statement that insurance is ’sold on the state level’ is a vast oversimplification at best, and completely wrong at worst.”

    Curious. I thought the republican health care plan was to 1) Reduce medical lawsuits and 2) The ability to sell insurance over state lines, “opening the marketplace”.

    What, exactly, about the phrase “insurance being sold on the state level” is wrong?

  12. Great article James. Reinforces Canadians universal health care coverage. America,you missed the opportunity when Congress was bought by the Insurance lobby and $.

  13. If you work at a large company, your choice is likely to be among three lousy plans with differences at the detail level that make choosing the correct one an onerous task – and one that involves a lot of assumptions and guesswork, frex, the trade off between deductible size and monthly premium cost.

    And then your Ins Co. can, and will, still screw you over.

    I’m not sure what your point is.


  14. I don’t have a problem with dental, but other insurance payments have been slow-walked my entire adult life – 40+ years. The time value of money over-rides whatever expenses they accrue for extra time consumed by their minimum wage telephone crew. Your time spent on hold is more valuable than theirs making you wait.


  15. I think Scott Free has it right. My 2 -year -old suffered a head injury last may, kaiser was notified and approved us taking him to the emergency room. Six months later, kaiser sticks us with a $1500 bill saying our policy only covers half of ambulatory care. When emailed the section of VA law that says that emergency room care must be provided 100% by insurer, kaiser backs down. I concluded that they purposefully gave us bad information in hopes that they could sucker us into paying a bill that they were by law required to pay. If I file a false claim, i can be prosecuted. They make a false claim, nothing.

  16. BTW, this is all definitely by design. If it were incompetance, then sometimes AETA would lose as a result of its actions. But I suspect that somehow their feigned incompetence always comes out in their favor is a sure sign of a designed play.

  17. When A. Lewis refers to competition, they are writing from California.
    In most of the 40-45 smallest states, there is virtually no competition. Usually 2-3 companies have colluded to divide the market, so they barely meet the letter of the law. In many of these states, if you live in the western part of a state, you have the choice of one company or driving 3+ hrs east to a doctor/hospital that accepts the other insurance.

  18. The academic way of proving what anyone with common sense already knows, is to create a study of a large randomly selected group, insured by a number of companies.
    Then, follow all their claims over a several year period, and determine how many insurance company “mistakes” cost the customer money, and how many saved the customer money.

  19. “What, exactly, about the phrase “insurance being sold on the state level” is wrong?”

    Exactly nothing, but possibly many things – it’s not quite clear what he meant by this.

    The possible interpretation that insurance companies sell a single policy to all repicients in a whole state, at about the same price, for example, would be wrong.

    Sometimes a contract is written with a large, statewide employer that is like that – but that is just one employer. There are big companies, small companies, unions and trusts, individuals, and the Medicare population – all are negotiated with differently.

    Some of the people covered by these plans have choice – or influence on the decision-makers for their group, others don’t. Some of them have a range of choices they might call good – others have 2 lousy choices.

    My comment was attempting to be constructive criticism – I strongly agree with James’s main point, and think the vagueness in a few of his late statements undermines them. There is plenty of evidence to support his argument – an oversimplification of the current level of competition and choice in the existing marketplace is not one of them.

    And Anne, below, is correct – the amount of choice (and ‘real’ competition) varies dramatically by state and city. Most markets do have one or two very large carriers in monopoly or near monopoly. That’s not good.

    I’m saying it’s complicated. I’m not defending Aetna or any other insurance company.

  20. I don’t think the multiple needs to be that high.

    If it was well known that companies must pay the individual double the difference and all court/legal costs then that would act as i) an incentive to report problems; and ii) a disincentive to deliberately cheat.

  21. I would probably argue, just to take the contrarian view, that it’s not conscious, long-term planning of this design. It’s not quite that evil.

    It’s more like businesses starting out without their own customer-protecting policies, not being regulated enough to force them to have one, and having monetary incentives to end up with a system where you have to fight off bad bills and fight to get valid claims paid.

    If the market is not free enough for people to just drop the company, they get away with this stuff. That reinforces for them that it was good for them money-wise.

    That’s why we need more regulation for industries like healthcare – the ‘free’ market leads to accumulation of power, and then abuse of it. The consumer, though they hold a little pot of money, has stunningly little power – especially when it comes to non-discretionary spending like on your health.

    If we could all ‘choose’ not purchase healthcare because it wasn’t a good value – I guarantee providers & pharma would drop their prices rather than go hungry. But we can’t. The healthcare market isn’t set up anything close to that way.

  22. And the follow-up I wanted to make to Bob is that sometimes Aetna DOES lose. When insurance companies get bad press, and hurt people, word gets around, and for the people who do have choice, some of them do in fact switch to another company.

    I’m not saying it’s all fine. Not even close – I’m just saying from my viewpoint inside an insurance company that we, and as far as I can tell our competitors, are trying really hard to ‘win’ on customer service, quality, and price. If there wasn’t any choice left, we wouldn’t bother trying at all. Maybe we’re doing a spectacularly bad job of it, but I don’t think it’s helpful for you to envision all the employees at these insurance companies as evil folks who laugh at bad customer service stories.

    We usually are members of our own company’s plan, and we don’t get special treatment in billing and claims (though we probably know who to call to fix things), so we want those departments to do a good job, too.

    Now if the management of the insurance company is paying lobbyists in D.C. to fight off health reform, because they think it’ll lower their profit margins, then yes, call ‘evil’.

  23. As far as I know, the health care reform bill wouldn’t actually solve this specific problem, since the general problem of companies screwing up their billing processes and then blaming their errors on the customer goes far beyond health insurance.

    Yeah. Exactly the kind of thing I’ve been saying from the start.

    How anyone could possibly think this bill would actually deliver on even the microscopic things its “progressive” supporters claim is an utter mystery.

  24. Hospitals do something like this too. My son had a surgery that was paid at contracted level by Anthem, which apparently wasn’t enough for the hospital to be happy. They tried to bill us for the balance (it’s called “Balance Billing”), which according to Anthem’s contract with the hospital is not allowed. To note, this was like a couple of thousand dollars, not like $30 bucks.

    When I called the hospital they went on and on about how it was my responsibility and how the onus was on me and basically made it sound like it could be a big problem if I didn’t take care of it and that it “couldn’t possibly be paid at as low as what Anthem paid”. Fortunately I knew a good contact at Anthem who told them to go shove it – they were violating their contract and yes, that was the contracted rate.

    I really feel sorry for the people who don’t know their rights and/or have the chutzpah to keep pushing. To this day I am 100% sure based on the conversations I had that the hospital in question was trying to get money they damn well knew they weren’t owed. It was really evil.

  25. Insurance companies have enough data to analyze and really game this type of fraudulent reneging of coverage.

    People in certain zip codes, with certain credit scores, of a certain age, with certain types of debilitating or fatal diseases, with or without family members, etc., etc… – you get the idea.

    And the lawsuit rectification approach ignores factors like the insured not getting needed treatment while it could do them some good, and the effect of emotional stress on already ill people.

    If the court system would be effective at all, I think it would have to be through a criminal fraud and physical injury/manslaughter appraoch with executives and their donkeys receiving 5, 10, 20 year prison sentences.

  26. This sort of stuff is common. I am on COBRA and I receive claim rejections all the time. Usually, it is a stupid reason like they have no record of my spouse being on my coverage. The claim is rejected. I eventually get a bill from the provider. I ignore the bill and eventually it usually gets paid. If it does not get paid, I file a claim letter with the insurance company.

    I am sure the insurance companies do this in the hopes the bill will be paid by the insured and they do not have to bother with it. They are taking advantage of most people not wanting to deal with conflict. They will simply pay the bill to avoid the conflict.

    Most of these rejected claims are small, but I bet they add up to a tidy sum when taken in the aggregate.

  27. The onus is always on the party who suffers the greatest consequence of the transaction failure. Hint: It’s usually individuals and small businesses.

  28. this is a great point. People that have the knee jerk reaction to paying for ‘them’ never seem to consider that ‘those people’ could just as easily be them some day due to simple bad luck. I just don’t fathom the mindset of ‘receiving and maintaining employer provided healthcare coverage is an incentive to work harder’ – how can people be satisfied with a society that has this built into it as a premise?

  29. This is P. T. Barnum/W. C. Fields capitalism at it’s very best:

    “There’s always another customer.”

    “Never give a sucker an even break.”

    Furthermore, this is the type of unfettered capitalism that Republicans/Tea Partiers/Conservatives support with all their hearts and souls.

  30. Ha ha, another American health care success story. Never fails to crack me up! Enjoy your health care “reform” fellow citizens!

  31. Yes, that was a vague statement. What it’s based on is my experience in the business world, but bear in mind I was never the person selecting health plans. It did seem like we essentially had to select different plans on a state-by-state basis rather than a national basis. So it seemed to me that the competition for customers occurs on the state level–so even if no one has a huge market share nationally, it’s the state market shares that matter. Krugman also linked to a study showing extremely high levels of concentration on the state level. I could be wrong about this.

  32. COBRA extensions last for 18 months. Monthly COBRA premiums are normally 102% of the actual cost to your former company of those premiums. The 2009 recovery act COBRA 65% subsidy was good for 9 months for workers laid off after March 2009. Apparently this was just extended another 6 months for a total of 15 months in a bill passed just before Christmas and only now are affected individuals being notified by their former employers’ HR departments. Workers earning more than $125K (single) or $250K (joint) in 2009 prior to layoff may have to pay taxes on the subsidized amount.
    Most low- or no-deductible group plans run about $1200-$1500/month, but under the recovery act COBRA subsidy you paid only $450-$600/month.

  33. Well now we are left to the whims of the market. Health care will now be a growth industry for insurance companies and a wall for whaling for it’s customers. When there is no choice in our so-called free market economy we all suffer. The poor welfare mother learned the economics of our society far better than the rest of us. She found that if she cannot afford to pay for a babysitter and transportation why go to work. The same goes for the uninsured, if you can’t afford to pay insurance why not forgo it. Soon we will have groups of uninsured in large pockets of the country looking for a hand out of medical care or dental care. In some parts of the US that hard fact already exists. So where will they go? Our politicians are unwilling or unable to pass descent health care for its citizens so they’ll do what always happens when people get hard on their luck. They start to practice medicine on their own. Pride will make some re-think going to the emergency room because of enforced morality by the majority. No the health care bill didn’t cover all contingencies, no bill ever does. The point was to make it better over time, for us all and to do that there has to be a starting point.

  34. The strange thing to me is why the Republicans with their attachment to private free market enterprise would not stomp all over these companies with spiked boots. If you want free enterprise to succeed you do away with the bad actors and the insurance industry, especially the health insurance companies, are some of the most morally diseased companies in the U.S. Yet meaningful regulation does not exist. I guess there really has been a coup.

  35. The insurance companies’ best friends, like Republican Senator Tom Coburn of Oklahoma, don’t even deny that it’s the state monopolies that are a huge part of the problem. Frankly I was surprised anyone would even debate that.

  36. The way to eliminate the problem in reform is to institute either, (a) a system like the Netherlands (where all companies must accept all applicants and the government determines what premiums may be charged and under what condictions, and all claims must be paid, or (b) a system like Canada, where insurance companies can’t do business because it is a single payer system, so insurance fraud and games can’t happen. And, by the way, a recent poll of doctors who are members of the AMA voted 60% in favor of Single Payer, and Obama said he favored it, but a change that drastic would be too disruptive to the system. And, each of these systems covers 100% of the citizens, and costs less than half of what we pay per capita while not coverning about 20% of the pupulace. Gee, why not. Someone please tell me. Oh, yeah, that’s right, there would be rationing. I suppose we prefer the current rationing of care to what would happen in such a system.

    But, the Plutocrats in Washington won’t take the HC oligarchy apart, so we get what we get and it’s a shame for everyone.

  37. “As far as I know, the health care reform bill wouldn’t actually solve this specific problem…”

    Duh. James, if the profit incentive structure is based on health care denial, what outcome do you expect? If regulation enforcement budget and regulation “reform” are gated by profit-financed “donations”, what outcome do you expect?

  38. “(I think the simple solution is that companies should have increased liability for their own errors–some large multiple of the amount in question.)”

    CUTPA! (Conn. Unfair Trade Practices Act) … many other states have similar consumer-protections statutes … provides a shot at treble damages … which would really only sting in a class action … the trick would be to define a big enough class of plaintiffs.

    just sayin’

  39. The health insurance industry would have to retool and we would have to get used to not getting our check books out when we leave the Doctors office. Oh, and I guess we would all be paying about a 2.2 percent increase in payroll taxes. But we would all get large wage increases. It would be a wash and in the end we would all be insured without worrying about Cobra or even what state we were in when we needed a doctor. All this and cost will be headed downhill for the first time in US history.

  40. I can confirm that your suspicions are correct. In fact, there is a common saying that most people in IT learn: “put your best people on accounts receivable and your worst on accounts payable”. It has nothing to do with malice; it’s just common sense. Anyone who would do the inverse is an idiot, and you should assume that your customers and competitors are not idiots, either.

  41. Private health insurance must go. It is a basic principle of insurance to expand the pool to reduce the influence one the pool of catastrophic costs of any individual in the pool. Let the country self insure with a single payer system. Expand Medicare to cover everyone from birth to death. Improve Medicare to eliminate copays, deductibles, and caps. Improve it to cover drugs within a system of original Medicare.You are with a health care system where you get a card and go to any hospital, doctor, dentist, nursing home, and pharmacist–AND YOU NEVER SEE A BILL AND YOU NEVER GO BANKRUPT.

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