Wednesday, February 24, 2010

Is Reich Dishonest or Uninformed?

Robert Reich's opinion piece in today's NYTimes is either intellectually dishonest or plain ill-informed. This does not detract from the lack of analysis.

The intellectually dishonest part refers to his argument that health insurers that are raising rates are earning super-profits:
This can’t be the whole story, because big health insurers are making boatloads of money. America’s five largest health insurers made a total profit of $12.2 billion last year; that was 56 percent higher than in 2008, according to a report from Health Care for America Now.
Surely, Reich knows that health insurance is not all that profitable a business. As noted opponent of the health insurance industry Tim Noah argued in Slate:
But the profits weren't across the board; Aetna saw an 8 percent decline. The huge combined increase was driven mostly by Cigna, whose 356 percent increase appears to be unrelated to its core health insurance business. As for declining private coverage: Health insurers argue (not implausibly) that it's largely driven by the tendency of young, healthy people to drop nongroup health insurance in tough economic times.
Or as Princeton economist Uwe Reinhardt argued in the NYTimes, looking at WellPoint's income statement:

As a percentage of total assets of $48,403.2 million deployed by the company (measured at the reported book value on the firm’s balance sheet), WellPoint’s profits in 2008 amounted to 5.14 percent in 2008 and 6.42 percent in 2007.

As a percentage of the equity shareholders had in WellPoint (also measured at the book values reported by accountants), WellPoint’s profits in were 11.62 percent in 2008 and 14.55 percent in 2007.

Relative to other industries, these are not particularly high numbers, nor are they particularly low.

So Reich clearly knows that health insurers profits vary and that they are not that high. But he must argue that they are so he can argue for removing their anti-trust exemption:
Anthem’s parent is WellPoint, one of the largest publicly traded health insurers in America, which runs Blue Cross and Blue Shield plans in 14 states and Unicare plans in several others. WellPoint, through Anthem, is the largest for-profit health insurer here in California, as it is in Maine, where it controls 78 percent of the market. In Missouri, WellPoint owns 68 percent of the market; in its home state, Indiana, 60 percent. With 35 million customers, WellPoint counts one out of every nine Americans as a member of one of its plans.
No discussion of course of the restriction against competing across state lines. So we have an industry with not very high profits, regulated by state insurance regulators, and Reich believes that competition will drive down rates!! Who would enter the market under the conditions he argues for?

If profits are high one might expect removing entry barriers to reduce prices. But the antitrust exemption is not the entry barrier, it is state regulation that is the entry barrier. The antitrust exemption is what allows insurers to share demographic information. But given that profits are not that high, insurance rates must be high because of the cost of health care, not the insurers. Certainly Reich must understand that.

So is he intellectually dishonest or uninformed? You decide.