Can Aetna Heal Itself?

The Hartford Courant
April 22, 2001
by Diane Levick

"The danger in Aetna jacking up rates higher than those of competitors is that the company could be left with high-risk business, benefits consultants and analysts say. Employers with high claims that couldn't get lower rates elsewhere would stay with Aetna, while lower-risk employers would jump ship, sending Aetna into a downward spiral."

Todd B. Richter, a senior research analyst at Banc of America Securities:

"It's like flushing a toilet bowl. Once you hit the lever, there's nothing you can do to stop the water from going out the bottom of the toilet."

"This company needs to be dramatically reduced in size. Buried in there are probably 7 to 8 million lives of quality (profitable) business."

Comment: As long as we leave Wall Street in charge, we will see application of health policy principles that improve business models at the cost of policy that improves equitable utilization of our resources. Issues such as adverse selection would no longer be a problem if we had a publicly administered, universal risk pool.

Response of Sam Baker to Uwe Reinhardt's response to Pollner and Wooten:

Don --

Uwe Reinhardt's reply to Pollner and Wooten has been circulating, more so than Pollner and Wooten's original critique, so thanks for sending that out. It's taken a little while for me to work through Reinhardt's documents. They are very worthwhile, especially the critiques of mainstream economists and their attitudes toward the free market. I like Reinhardt's dissection of how economists trash proposals for incremental reform.

I would fault his economic analysis on one point, however: Reinhardt continues to ignore the administrative cost issue. Himmelstein and
Woolhandler have been writing about this for -- what, 15 years? Mainstream economists simply refuse to believe that a government-run system can be more efficient than an market-based system. They don't even think about it. Reinhardt is able to step out of the box on some issues, but not this one.

The blindness to administrative cost helps mainstream economists in their critique of incremental reform. As Reinhardt puts it so well, incremental reform is typically based on identifying a group of people who seem particularly needy. Reinhardt calls members of this group "OC's" for Objects of Compassion. The OC's might be children in working poor families, or they might be uninsured people aged 55-65, or whatever. Someone proposes a modest program to help the OC's. An economist then demonstrates that such a program would pull in many people who are not in the OC group, because they already have private insurance. Reinhardt calls attracting people (and their employers) from private insurance to public insurance "crowding in." Crowding in adds to the total cost of the program. If you divide this expanded total cost by the number of people in the original OC group, you get an astronomical figure. This huge average cost per OC discredits the program. Here is where Reinhardt stops. My answer is that attracting
people out of private insurance and into public insurance is a good thing, because it reduces the administrative cost. The more crowding in we have, the lower is the total social cost of providing health insurance to the public. Medicare, for example, spends about 2% of its cost on administration. Private insurance plans are considered highly efficient if they spend 10% on administration and profit. Shifting people from private insurance to Medicare should save about 8% of cost. This doesn't include any consequent savings to providers.

I would fault Reinhardt's political analysis, too. By attributing our anti-reform bias ultimately to the American people, he gets to a point where everyone is to blame, and therefore no one. The public relations industry thrives on the principle that public opinion can be shaped. The AMA (more so in the past) and the insurance industry, with help from the for-profit hospitals, can spend what it takes on public relations and on gifts to politicians.

-- Sam Baker
Associate Professor
Department of Health Administration
Norman J. Arnold School of Public Health
University of South Carolina
800 Sumter St.
Columbia, SC 29208

Uwe Reinhardt responds to Sam Baker:

Thank you, Professor Baker, for your thoughtful dissection of my views on the problem of the uninsured.

Although I did not on this occasion address the issue of administrative costs, I have on many other occasions. In this regard I cite a McKinsey Global Institute study (1996) which showed that, after all proper adjustments have been made, Germans in 1990 spent $390 more per capita on health care proper than did Americans (allegedly without superior outcomes). The McKinsey team, aided by Nobel Laureate Ken Arrow no less, took this to mean that Germans are sloppy in their use of health care resources and needed McKinsey to help them out. Shown also in the study, but very much de-emphasized, was the finding that Americans spent $360 more per capita on "administration" and another $259 per capita more on "other," which probably includes administration as well. In other words, Americans seem to blow on administration every penny and more that they squeeze out of their doctors and nurses by way of allegedly superior clinical productivity. I lectured on this study to a German audience, with the German Minister of Health 3 feet away from me, and implored him to disregard McKinsey, for the sake of my mother, who sat right next to him. In short, I do not disagree with you on this point.

As to my political theory, I think I do disagree. After the demise of the Clinton plan, I wrote a rather harsh piece in Health Affairs entitled: "Gazing at Bread and Circus Games." In it I took to task the intellectually lazy and politically lethargic American plebs--too lazy to read, too lazy to vote, just energetic enough to whine incessantly--pretty much deserving the mess they got in health care.

True, the moneyed interest groups do have much sway over the Congress, and always will. But it would help if the poor did vote and support politicians willing to fight for them. They don't. I am angry about them as I write, so I had better stop.

Best regards,

Uwe R.