Archive for August, 2009

Are Insurance Companies the Enemy?

Friday, August 21st, 2009

Here’s an excellent Caroline Baum column about the Obama administration’s blame game regarding why the public is resisting health insurance “reform.”  I want to focus on one point she makes that is a crucial concept of basic economics.

The administration’s and Congress’ latest tactic has been to demonize insurance companies.  Health care reform suddenly became health insurance reform.  This is a clever strategy.  Although most of us are very satisfied with our health care, it’s easy to get people to trash insurance companies.  After all, they get rich by taking in premiums, but denying us care for frivolous reasons whenever possible.  But there’s a problem with this commonly held belief.  It doesn’t match the facts.

My pat response to people complaining about some company or another that “exploits” us is simple:  buy their stock.  If they’re really earning the “obscene” profits you believe, this will be reflected in earnings growth and higher share prices.  Looking at the long term charts of insurance companies, it’s hard to make the argument that they are money making machines. And if their executives were keeping all the money via inflated pay packages, believe me you would have heard about it by now.

Baum quotes compensation expert Graef Crystal, who studied five major insurers for evidence of “gouging.”  According to Baum, “’There’s no case here for undue enrichment of shareholders’ or over-compensating CEOs, Crystal finds.”  The study actually found below market execcutive pay and shareholder returns.

I understand why politicians ignore the facts.  It makes it easier to demonize insurance companies.  But next time a friend goes on a rant about greedy insurance companies (or oil companies), simply respond “Why don’t you just buy their stock?  If they’ve got such a great scam going you’re sure to be rewarded with fantastic profits!”

Is Health Care Debacle a Cleverly Executed Plan?

Wednesday, August 12th, 2009

My initial reaction to the Democrats’ way-over-the-top trillion dollar plus health care monstrosity was glee.  I was confident the American public, overwhelmingly happy with their personal health care,  would soundly reject this hideous government intrusion and its obscene price tag.  Most of us understand that you don’t assume massive new liabilities at a time when you’re struggling financially.  This is a time for belt tightening, both for people and governments.

It’s true Americans are no longer the rugged individualists of a bygone era.  Many enjoy forcing strangers to pay our bills.  But the Democrats seemed to forget the first rule of the Fabian socialists:  gradualness.  Don’t try to go from Adam Smith to Karl Marx overnight.  Win your little battles, and over time you can accomplish dramatic change.  The public is the proverbial frog in the pot of cold water, slowly heating over the fire.  The capitalists have won the war without even dirtying our uniforms.  Or have we?

Call me paranoid, but I’m beginning to worry the Democrats might have something else up their sleeves.  In “Influence: The Psychology of Persuasion,” psychologist Robert Cialdini discusses the contrast principle.  This principle affects the way we view things presented one after the other.  Cialdini uses the example of a man entering a trendy clothing store looking for a suit and a sweater.  The customer might balk at paying $175 for a sweater.  But if  he’s already committed to buying a $900 suit, he’s much less likely to object to the price of the sweater.  The salesman knows this, and will always show him the suits first.

Another example of the contrast principal in action was G. Gordon Liddy pitching his Watergate plans to members of Nixon’s administration.  Initially he presented a wide-ranging scheme that left his audience with gaping mouths.  At the next meeting the group agreed to let him go ahead with a significantly scaled-down plan, which is the one he eventually used.  The only person to object to the latter plan was a gentleman who missed the first meeting.  He was aghast.  The contrast principal was not in effect, since he didn’t hear the first plan.  The rest of the group was relieved they halted the first plan, and figured they’d throw Liddy a bone.

It’s clear (at least to me) that there’s no way the current House health care plan will become  law at this time.  Public opposition seems to grow every day.  Blue dog Dems from conservative districts have no intention of losing their seats after one term.  So are Democrats using the contrast principal?  Do  they understand they’ll never get this plan enacted?  Perhaps they just intend to pass a few pieces of legislation that dramatically increase government interference in medicine, but don’t yet result in a takeover.  Opponents will breathe a sigh of relief, thinking they’ve won a great victory.  I hope I’m being paranoid…but it’s not paranoia if everyone is against you.