The Evil of Denying Claims

A common argument against the current state of American health care is that the evil insurance companies make their obscene profits by denying claims. I don’t intend to tackle the question of the moral right of companies to make profits, or to defend the current state of American health care, but I do want to address the moral and economic issues of health care companies denying claims.

One of the important implications of the law of supply and demand is that when the price of something drops, demand increases, and if the price is zero, people will probably demand more than there is supply of the thing. If the thing is plentiful, like air, there isn’t much problem. For for everything else, a price of zero usually means lines, shortages or rationing. Imagine anytime a company like Starbucks or McDonalds gives it’s products away: the offer generates a crowd, and all the free stuff is gone before you get there, so you don’t get any.

A second important economic principle is that “people think on the margins.” This means that most economic decisions are based on the price of one more thing, not the price of the things you already have. If you have already had an ice cream cone, you probably won’t want to pay $2 for another one. But if the price is free, you will probably take it. You decision is based on the fact that the next cone is free, not that the average price for both cones is$1.

When most people get health insurance, they pay a fixed price up front, or have their employers pay  that cost, and the cost of any of the procedures after that is small. The real cost of going to the doctor one more time may be $200 per visit, but with health insurance, that marginal cost is$20. The same thing is true for most other procedures.  This means that regardless of what the  average cost of a procedure is to a person, the marginal cost is very low relative to the actual cost.

So, we have a low marginal cost, and that means that people are going to demand more of it. If going to the doctor for a cold cost me $200, I would only go if I am really sick. But for$20, I’ll go just to find out what I’ve got. Thus the low marginal cost results in a higher demand. Since people naturally want to stay healthy, they will demand to get more health care than they have actually paid for. Since the health care company cannot rely on price to regulate demand, they have to rely on an administrative procedure, which takes the form of denying claims. If they didn’t deny any claims, everyone would spend more than they paid, and the insurance company have cost overruns, possibly going broke. The NHS may already be in this situation. That’s not a criticism of the NHS, just a sign of the natural desire for everyone to get more (service) and pay less (taxes).

If the US had a single-payer system like the NHS, the marginal cost of health care would drop even more; it would be marginally free to everyone, so the demand would increase even more. A single payer health care system would have to deny even more claims than the system we have now. That alternate system could be an improvement over the system we have now, but we should expect that the number of claims it will have to deny would actually increase.

So, the general act of denying claims is not an evil; it is a necessary component of any system where the marginal cost of care is less than the actual cost.  What is evil is when a health care provider denies a claim that they have agreed to pay as part of the contract with the insured. This case, however is a matter of contract law, and if it were widespread, it would be handled very effectively through class-action lawsuits.

( Image from Solid Threads. Please visit them so they don’t sue me for stealing their image. )