Cavalcade of Risk #123: Exam Season

 

After the initial enthusiasm of the start of medical school fades away, as excitement for the distant future is replaced with the quotidian routine of classes, lab, and review sessions, the realization finally settles in: we’re, um, expected to know all of this?

Most students at medical schools across the country respond to this challenge in the same way, living their lives by a simple, two-word credo that serves to guide their acquisition of knowledge. While I can’t say I show the same fervent devotion to it that many others do, it’s indisputably a part of medical school culture, and is certainly a useful mindset to have when it comes time to study for exams. It is in celebration of that spirit that I present to you today:

Cavalcade of Risk #123:  High-Yield Edition

The Basics

Risks and probabilities are important aspects of clinical medicine. How well are medical schools teaching future doctors to process statistics and other research information from the clinical literature? What does it mean for the quality of future physicians? Jin Packard, a New York Medical College student blogging at Low-Yield Med, draws from his own experiences to argue that the level of training is “nothing shy of a disgrace.” I went one step further and called it a straight-up failure.

Darwin of Darwin’s Money brings us back to the basics, with a clear, concise explanation of how to compare sums of money across time (i.e. “present value” and “future value”). A dollar today is worth more than a dollar in 10 years. Darwin explains the “how” and “why.” Understanding this sort of calculation, and the sorts of assumptions embedded in it, is integral to understanding so much of finance, insurance, and economics. This is a great post to use to learn it, or for a quick refresher.

Health Insurance

Jeff Rose, blogging at Good Financial Cents, features a guest post summarizing the major changes to health-related Flexible Spending Accounts that took effect at the beginning of the New Year. The highlights are the need to get prescriptions for OTC drugs, restrictions on what kinds of stores can accept FSA debit cards, and higher penalties for breaking the rules. All in all, it’s become much more difficult to use FSA money to pay for over-the-counter medications and other health expenses.

Closing out an “ACO ‘orgy week’ of postings” (his words, not mine!) at the Disease Management Care Blog, Dr. Jaan Sidorov takes a look at a recent Medicare demo of these new-fangled, orgiastic Accountable Care Organizations. While, as he says, “ACOs are arguably the only good long term answer to controlling costs, reportedly by making doctors and hospitals play nice with each other and participate in downstream savings,” he wonders why “they, compared to managed care insurers, any less likely to withhold costly care.”

Louise, blogging at Colorado Health Insurance Insider, discusses the proposal by a Colorado legislator to remove the cap on tax-deductible contributions to Health Savings Accounts in the name of sensible health reform. She argues that while this would be a boon to higher-income families who could thus contribute more money to HSAs (and thus shelter more income from taxes), it would do nothing to expand access to health care for those at lower ends of the income scale.

There are consumer protections, and then there are consumer protections. I point out an unusual pair of health policy stories from the past week: on one hand, PPACA supporters warning Republicans not to mess with the new law’s “consumer protections”; on the other hand, healthcare lawyers pointing out that for the law’s vaunted ACOs to have a decent chance of success, many existing “consumer protections” in healthcare may have to be gutted. I ask what the juxtaposition of these two implies about the moral necessity of the healthcare regulatory apparatus as a whole.

Other Insurance

Ryan at CashMoneyLife provides a quick, easy-to-digest rundown on life and viatical settlements, with attention paid to the risks and benefits for both buyers and sellers of life insurance policies in these transaction. These settlements allow life insurance policyholders to “cash out” some fraction of the policy’s face value, and investors to (maybe) make a profit when the policy pays off. Ultimately, while acknowledging that they are not evil and have their roles to play in the insurance marketplace, he concludes that these certainly “aren’t right for the majority of people out there.”

Free Money Finance touts the merits of umbrella insurance policies: they’re relatively inexpensive for the coverage that you get; and that coverage can come in really handy when one lawsuit could be all it takes to exhaust the coverage that your home and auto policies provide. As he points out, “even if your assets are low, your future earnings are probably not,” and both are fair game in a lawsuit.

Hank Stern of InsureBlog fame dissects some finance/insurance “wisdom” posted at an AOL personal finance website. He wasn’t too impressed with their list of “Seven Insurance Policies That Aren’t Worth The Money,” finding that there wasn’t much “profound wisdom to be had.” It’s worth remembering the need to keep your wits about you when reading financial advice on the Internet… or anywhere else, for that matter.

The Digerati Life makes the case that consumers should generally avoid buying the type of insurance that they’re most often offered: extended warranty programs. They’re often costly, and may duplicate coverage provided by your credit card. The proposed alternative is to save the money that would have been spent on these warranties as a personal “warranty fund” of sorts.

Non-insurance risk management

While prognostications about financial markets are dime-a-dozen, some of them still make for interesting reads. This interview with a Canadian asset manager, conducted by Arjun Rudra and posted at InvestingThesis, is one of them. The discussion touches upon prospects for gold, the likelihood that QE2 will succeed, interest rates, emerging markets, and the Canadian dollar (with a bearish outlook on most of these).

Circumcision has been shown to dramatically reduce the risk of males contracting HIV from heterosexual sex. The government of Swaziland has begun a mass circumcision campaign in the hopes of reducing HIV incidence. Jason Shafrin, the Healthcare Economist, discusses why such an effort might actually increase HIV incidence: moral hazard.

At some point afterI grow up and become a doctor, I will be sued. When that happens, I want a defence like the one described (with illustrations) by David Williams at the Health Business Blog. A patient died shortly after an operation to replace a stenosed bicusoid aortic valve. The plaintiff argued that the operation was performed improperly, and that the replacement valve chosen was of an incorrect size. The defence argued the opposite, supported by the visual aids that David has posted, and obtained a verdict in their favour.

Julie Ferguson of Workers Comp Insider sends along a wreck of a video (literally) accompanied by advice for truck operators looking to avoid mismatches between the height of their vehicle and the clearance of that rapidly-approaching underpass. Along with the usual advice to plan your route and heed signage about clearance, it’s also recommended to check in advance with local/state departments of transportation for information about low underpasses… a source of information that many people (myself included) might not think of.

Content, NOS

It was a pleasure and an honour to host this edition of the Cavalcade of Risk! Now that you’re done with the best risk-related blog posts of the past fortnight, I’d like to invite you to poke around the rest of The Notwithstanding Blog, home to tales from medical school, health policy analysis, critiques of the academic medical zeitgeist, and the occasional bonus Canadiana. I think you’ll like what you see!

***

The next edition of Cavalcade of Risk will be hosted by Dr. Sidorov on February 9th.

Around the Mediverse: August 18, 2010

What with this whole commencement of medical school, it’s been a while since the last edition.  So I bring you slightly more than usual

Fun tidbits, health-related and otherwise, from around the ‘tubes:

• Worthwhile Canadian Initiative reminds us that counterintuitive though it may be, there is an optimal amount of forgetting.  Dr. Bob Centor suggests that proposed performance payment for physicians forgets the role of patient preferences in steering therapy.  Sticking with patient preferences, two posts at KevinMD argue that the long-term viability and feasibility of the PCMH care model should be determined by patient desires.  That is, if the PCMH model is workable to begin with… an arguable proposition.  Of course, if recent trends with retail clinics are any indicator… well, it could indicate many things.  You be the judge.

• Beware economists bearing dynamic stochastic general equilibrium macroeconometric models!  Beware surrogate endpoints in clinical research!  Beware constitutional challenges to the PPACA!  Beware Robin Hood… libertarian rebel?  Beware overly alarmist bullet points!

• End-of-life spending has gotten some attention.  The DMCB and Health Affairs alike aren’t convinced that reducing this spending will be easy, or that the savings are in fact possible to realize, at least as conventionally measure.  Relatedly, a guest poster at KevinMD points out that in medicine, sometimes “more is more.”  Not all potential cost-savings are “free lunches.”

• The Happy Hospitalist argues that data on physician reporting on impaired colleagues shows that the profession’s ethical standards are quite high.  Dr. Wes points out the ethical shortcomings of conducting large-scale policy experiments without any concept of research subject welfare as found in clinical research.  Arguably least ethical of this bullet point is Congressional exemption of the SEC from most FOIA requests.

• Pretty pictures!  Congressional Republicans give us charts explaining new government agencies created by the PPACA and the criteria for obtaining small business health insurance tax relief under the act.  The Denver Post posts some extraordinary colour photos from the Depression era.  Of course, sometimes making use of pretty pictures (and text) will cause one to run afoul of the federal government, as with the ADA actions taken against universities piloting Kindle usage among their students.

• Let’s talk unintended consequences of government actions.  Start by guessing which Senator takes exception to certain provisions of the PPACA?  Hint:  his name rhymes with “Hairy Reed.”  Elsewhere, the recession has forced two entrepreneurs to decamp to Canada because of the arcana of the E-2 visa.  What happened to new bond issues after the passage of the Dodd-Frank financial reform bill?  Would “disaster” be hyperbolic?  Becker and Posner ponder the effects of the administration’s pro-union attitude on business uncertainty and the recovery.  Megan McArdle discusses the optimal level of regulatory enforcement, whereas another blogger discusses the “tyranny of big ideas” in the context of regulatory change and improving human welfare.

• On lighter notes, we have a farmer who reminds the world that old-school farming isn’t all it’s cracked up to be, and a brief history of Tibetan Buddhism that is markedly different from the sort of thing you’d probably expect.

• Rounding out this week’s edition…  Medical schools, broadly speaking, do three things.  They educate physicians, produce research, and care for patients.  As someone just starting medical school, it’s nice to read things like this post from Dr. Centor arguing that the primary mission of medical schools should in fact be medical education.
  

A “SAFE” approach for medical school debt?

The WSJ Health Blog discusses an approach to medical student debt recently outlined in the American Journal of Obstetrics and Gynecology – the “Strategic Alternative for Funding Education.” Its proponents have apparently learned the first rule of American legislative politics, which is to make sure your proposal has a warm and fuzzy sounding acronym for a title.

The SAFE approach is simple, at first glance.  Medical schools would cease to charge tuition and fees up front.  Instead, graduates of public medical schools would pay 5% of their gross income, on a post-tax basis, per year for ten years after residency/fellowship completion; graduates of private medical schools would pay 10%.  Doctors who suspend their practice during that time would see their payment obligations suspended, and those who cut their hours to below 60% of “normal” would get an extra year added for each year of part-time status.  The fourth year of medical school, which receives mixed opinions from those who have actually been through it, could be eliminated if schools so choose.

SAFE’s proponents argue that this approach will remove some of the financial disadvantage of lower-paying specialties (particularly primary care fields), such that interested students will be more likely to pursue those fields.  It will also give medical schools an incentive to limit tuition increases to the rate of increase of average physician compensation, instead of the well-above inflation increases we see today.  Medical schools would be able to free up funding currently used for financial aid and scholarships, and financial assistance would become a less prominent point of differentiation between schools competing for prospective applicants and students.

The authors of the AJOG article on SAFE provide one set of numbers that’s used to drive some of the math behind the proposal.  While these assumptions and the details they propose are certainly debatable (the estimated debt loads seem awfully low, and the estimated salary seems awfully high), that seems a bit premature at the moment.  There are a few points about the big picture of the proposal, however, that merit a closer look.

The first is that this proposal might actually do something about upwardly spiralling medical school tuition.  As Reason magazine (to pick only one organization) is fond of pointing out (see here, here and here for examples), there is arguably something of a bubble in higher education.  Much as a non-trivial reason for escalating medical care expenditures and prices in the 20th century was the moral hazard and demand price inelasticity brought on by increases in health insurance coverage, so too (so the argument goes) does federal support for higher education through subsidized student loans distort incentives, and allow universities to increase their “sticker price” more and more, knowing that needy students will be eligible for government support.  Whether this support is on net a good or bad thing is debatable; that it greatly contributes to rapid increases in post-secondary tuition is not.

That’s a plus.  What strikes me as the major drawback of this scheme, possibly even a dealbreaking drawback, is that the 5/10% figures are not caps on what physicians would pay, but rather constant percentages.  Effectively, this increases the marginal and average “tax” rates on these physicians by that percentage; it’s not a tax in that it doesn’t go to the government, but it affects the incentives to earn all the same.  With most US physicians probably sitting in the 33-35% marginal tax brackets as it is (not even including state and local income taxes, payroll taxes, the new Medicare surcharge on high-earners, etc.), a 5-10% increase pushes the marginal rate dangerously close to a level that, psychologically and financially, greatly diminishes the incentive to work/earn more.  Throw in state/local/payroll/other taxes as mentioned above, and you’re probably over the 50% threshold in most cases.

If we assume that society wants more physicians working more hours (seeing more patients, etc.), then setting up such a system is probably not conducive to fulfilling that objective.  Already we see commentary from older physicians about how the “millenials” are far more worried about work-life balance issues, and are generally not willing to work the hours that their predecessors did. Non-financial workplace issues are a large part of primary care’s unpopularity with medical students.  The SAFE proposal may well see more students going into primary care, but limiting their workload so as to avoid these non-monetary hassles as much as possible.

I’ve heard of some law schools establishing similar schemes for students going into low-paying public service jobs.  In those cases, the annual debt service payment was limited to a certain percentage of income up to a certain amount.  These deals are usually only offered to those students not expected to make as much as their colleagues.

SAFE doesn’t have a “stop-loss,” which leads to distorted incentives as described earlier.  Applying it to all students means that the high earners are, in effect, subsidizing the low earners.  The authors of the article acknowledge this explicitly, saying

Those students who are financially successful in lucrative specialties will return more financial support to their medical school, whereas those in primary care specialties, public health professions, or charity work will pay less[…]

The ethics of such a redistributionist scheme are beyond the scope of this blog post, though I have no strong opinions either way.  I see nothing wrong with having higher earners pay higher amounts in tuition or “post-tuition” (or whatever one would call SAFE payments).  However, if society wants more primary care physicians, it seems odd that specialist physicians should be the ones to pay for them via de facto educational subsidies, as opposed to government or society at large.

In sum, while the SAFE system might be a boon to medical students entering primary care fields, and even medical students more generally, it seems to suffer from a few drawbacks that make it highly suboptimal from a public policy and fairness perspective.  That said, its proponents should be congratulated for bringing a new approach to the problem of medical student debt.  What is particularly praiseworthy is the fact that this proposal would likely force medical schools to quickly and decisively stop higher-than-inflation tuition increases instead of resorting to the tired tactic of throwing more money at the problem, thereby exacerbating the moral hazard problem even further.  If major systemic action is taken on this issue in the near future, I hope that this aspect of the SAFE system makes it into the policy mix.

Around the Mediverse: May 7, 2010

Fun tidbits, health-related and otherwise, from around the ‘tubes:

• This past week saw lots of discussion of primary care, its role, and its future.  Dinosaur talks about the different skills needed for diagnosis vs. treatment, and ill-care vs. well-care in the context of NPs and PAs filling the primary care void that medical students are shying away from.  A guest post at KevinMD talks about how concierge care can be a boon for internists and their patients alike.  Dr. Rob discusses the long-term relationships that primary care physicians can forge with their patients, and how that affects both the physician and patient.  The Placebo Journal Blog explains why it doesn’t buy into the idea of e-mail communication between physician and patient… at least not in this legal environment. Dr. Bob Centor posted 4 pieces touching on the theme of primary care revitalization in the context of internal medicine.  He argues that policy wonks misunderstand the causes of practice variation, and even the nature of primary care itself.  He explains how being “out of flow” can be damaging to physician morale, and implicitly to physician supply.  Finally, he proposes a change in the nature of internal medicine practice to one more closely resembling that found here in Canada:  that of a consultant.

• I like the idea of “concierge” medicine, even though there are many vocal opponents of the concept.  I reject their argument that it is necessarily something that will limit itself to the richest and best-off in society.  I present to you PartnerMD and Qliance.  Much more has been written on Qliance here, here, and here.

• I used to be a fan of “more regulation” until I realized that the costs of compliance are very real, especially for small businesses (say, small independent medical practices).  Coyote points out that the new healthcare bill imposes a whopper of a new tax filing requirement on all businesses… one whose passage is a scary commentary on the state of the legislative process.  Relatedly, the Volokh Conspiracy tells us that provisions in the new financial reform bill could screw up medical practices that allow their patients to pay on installment.  All of a sudden, Dr. Rich’s conspiratorial rhetoric becomes the tiniest bit more believable.  Payment plans are a great way to make out-of-pocket payments accessible.  Get rid of those…

• The Volokh Conspiracy had a series of eloquent posts on Harvard Law School’s Emailgate, all to be found here.

• Also in the Harvard Square area, two of my favourite economists take on the question of “price gouging” in the context of the recent water main break in Boston.  Relatedly, two bloggers at Volokh Conspiracy address recent research that suggests that people who lean left are more likely to be uninformed about economics.

• Economists like to say that their field is a science.  There’s some legitimate disagreement on that point.  There really shouldn’t be any such debate about the nature of such things as homeopathy and the anti-vaccine movement.  It’s unfortunate that there still is.  Megan McArdle discusses homeopathic WMDs in the first link, and Science-Based Medicine answers all of your anti-vaccine loaded questions in the second.

• There’s been a lot of anger directed at Wall Street recently.  Someone there decided to direct a little bit back to the rest of us.  Enjoy!

• Maggie Mahar at Health Beat Blog argues that our society is suffering from “cancerphobia” and an accompanying “epidemic of diagnosis.”  If I weren’t already persuaded of these points, this would have convinced me.

• There’s always a lot of talk about Medicare and Medicaid, but this past week brought us talk from CMS.  Health Affairs conducted a roundtable discussion with past heads of CMS.  The transcript is fascinating; the conversation touches on political and funding dynamics within the agency and department, the mechanics of anti-fraud activities, the implementation of reform, how physicians were ignored, and how Don Berwick will fit within the agency.  From the CMS of the present, we get the Chief Actuary’s report on the PPACA, summarized by John Goodman.  It really does not look pretty.

• Science-Based Medicine discusses “Big Pharma,” and explains the FDA regulations that require drugs to “belong” to a disease… something that I didn’t previously know.

• InsureBlog discusses the travails of a health insurer offering a so-called 100% HSA/HDHP.  I have to wonder, from an economics point of view, whether people will be more judicious in their spending even though the money originally came from someone else (i.e. their HSA was topped up for them).  Endowment effects and whatnot.  If that is the case, and if the insurer can get the premium right to reflect the relative injudiciousness relative to “true” out-of-pocket spending, then this model could be a very real alternative to the current mainstream of first-dollar medical coverage.

• What are economics bloggers worried about?  Mark Perry lets us know.

• Hospitals tend to be big fans of pain charts, and making sure that pain is not overtreated.  Not everyone feels the same way about childbirth.  Amy Tuteur argues that the latter group are in fact demeaning the women they purport to want to empower.

• Finally, a tale of a near-mugging in Warsaw, and the compassionate and hilariously profanity-laced response of the local police.  Language most definitely not work-safe, and not family-friendly.

Around the Mediverse: April 28, 2010

Fun tidbits, health-related and otherwise, from around the ‘tubes:

• Remember that big fuss over companies restating their earnings to reflect changes in tax treatment of various Medicare Part D subsidies?  Remember how Henry Waxman was about to hold hearings in which he could grill the responsible CEOs for daring to suggest that the PPACA might not be all unicorns and rainbows?  Well, it turns out that they were right and he was wrong.  Who would have thought?

• This week a new fuss, one with a great deal more legitimacy in my eyes, was kicked up by Arizona’s new illegal alien legislation.  Free Exchange took on the question of whether open immigration is compatible with a welfare state / social safety net, a topic that gets a good deal of discussion among libertarians who tend to favour the former and oppose the latter.  Two Canadian bands almost came to Twitter-blows on the subject… sort of… in what is one of those stories that would only happen in Canada, and only be reported in the Toronto Star.  On the flip side, there was also discussion of the effects of how the idiosyncratic way in which the US defines tax residency encourages some to renounce citizenship.  I can personally attest to the arcane maze into which US tax residency determination can degenerate with very little effort.  Not fun.

• Going back to the subject of Congressional hearings, two bloggers at the Economist explain why Goldman Sachs and the financial services industry generally aren’t as evil as people seem to want them to be.

• There’s been a lot of talk about reforming physician pay and medical organization, but not a lot of emphasis on new and innovative models of health insurance provision.  (As I discuss in this post, the PPACA will probably do more to ossify the present state of health insurance than anything else)  That’s why this post from the Health Business Blog, highlighting a value-based, market-oriented, real insurance offering in Fresno, CA is so heartening.

• WhiteCoat brings us the story of a case in which a physician was sued, and settled, for malpractice.  It sounds pretty vanilla until you read that the physician was out of the country at the time the alleged malpractice was committed by a supervisee midwife who failed to contact the physician covering for the one who got sued.  Malpractice affects physician behaviour through fear more than it does through changing actual risk.  With stories like these, is it any wonder that the fear is still there?  Also on the subject of lawsuits is this post by Amy Tuteur that suggests liability concerns as a major driver of increases in C-section rates.

• There’s been some interesting discussion on the question of bartering with physicians.  I can’t say that I endorse the idea wholeheartedly, but it has its place in a free market to the extent that it’s accepted.  For two takes on this issue, see this post at Movin’ Meat, along with the first comment, and this comment at the WSJ Health Blog.

• Apropos to today’s earlier post on the importance of “business” to physicians’ roles in medical practice come articles explaining common myths about entrepreneurship, myths about capitalism more generally, and how the tale of the Lorax can be interpreted as a message about the importance of clearly defined and enforceable property rights.

• Video of Margaret Thatcher’s last Question Time as Prime Minister.  Epic.  Also epic is Macbeth’s decision to seek the advice of a physician concerning the whole Macduff prophecy thing.

• Scott Greenfield at Simple Justice is probably my favourite lawyer I’ve never met.  Two of his posts from this past month, taken together, explain the reasons for my own discomfort with the way the victims’ rights movement is playing out in the US and Canada.

• Ed Glaeser takes on the real-life consequences of preservationism gone mad in New York City.

• Jason Shafrin at Healthcare Economist has made some pretty pie charts detailing the breakdown of Medicare and Medicaid expenditures on categories such as physicians, hospitals, drugs, etc.  While I knew intuitively that physicians constitute a small piece of the pie, it was still surprising to see it represented visually.  It also suggests a way to win over skeptics of various payment reforms:  if, as it seems, much of the cost of certain types of physician care is incurred downstream (as opposed to fees paid to the physician), then payment reform that seeks to lower overall costs by changing incentives should also be able to guarantee higher income for those types of physicians.  Call it gainsharing, maybe?

• Bringing “Around the Mediverse” to a close for the week is this post from the Health Business Blog that features a HIT company that thinks that technology should be adapted to the physician’s workflow, not the other way around.  It saddens me that it’s refreshing to see this from someone in the HIT field.

You’ll also notice that A Cartoon Guide to Becoming a Doctor has been added to my blogroll and to the links on the sidebar.  If you’re looking for more visual stimulation from your medblog collection, that’s a fantastic place to get it!

Insurers own fast food stock. Should we care?

No, we really shouldn’t, recently published misinformed scholarship notwithstanding.

The WSJ Health Blog brings to our attention a gem of a “study” performed by researchers at the Harvard Medical School-affiliated Cambridge Health Alliance.

The article opens with the supposition that “[l]ife and health insurance firms profess to support health and wellness,” then reminds us of the various evils of fast food and of the various efforts at the municipal level to rein in fast food firms.  We learn that certain large insurers hold shares in certain fast food firms.  The article closes with the claim that insurers should “be held to a higher standard of corporate responsibility,” and thus their only ethical options regarding fast food shareholdings are to 1) divest, or 2) become activist investors and push for “practices consistent with widely accepted public health principles,” possibly even “turn[ing] over their proxy votes to an independent nonprofit organization.”

Is this such a widespread problem?  Is this a problem at all?  How did they get to this conclusion?

Well…

Researchers, “sensing [a] potential disconnect” between insurers “responsibility to share- or policyholders to maximize returns” on the one hand, and “their health-promoting mission” on the other, decided to look at the value of major insurers’ investments in:  Jack-in-the-Box; McDonald’s; Burger King; Yum! Brands (mainly Taco Bell, Pizza Hut, and KFC); and Wendy’s/Arby’s.  Of these five firms, McDonald’s is a component of both the DJIA and the S&P 500 indices; Yum! Brands is a component of the S&P 500. The study examined the holdings of eleven major insurers who, on aggregate, write life, health, and long-term disability policies in Canada, the US, and the UK.^[1]

The results are, in my view, pretty vanilla.  The researchers looked at the state of the world on June 11, 2009.  Between them, these eleven insurers had positions worth $1.88 billion in the five fast food firms, of which $1.18 billion was McDonald’s holdings and $0.404 billion was in Yum!  Brands shares.  The current (April 15, 2010) market capitalization of these five companies combined is approximately $101.24 billion; McDonald’s alone has a market cap of $74.41 billion.  The article states that, at the time, these eleven insurers together owned shares worth 2.2% of the combined value of the five fast food companies.

(There are some mildly interesting factoids to be gathered by looking at individual insurers: some have large fast food stakes, some have minuscule stakes; some have holdings across all five fast food firms, some only hold shares in one; the three two insurers who write health insurance in the US hold stakes that are minimal relative to the others’; no information is given as to the size of any firm’s total investment portfolio)

The authors suggest three reasons why insurers whose alleged “mission” is to promote health would invest even a dime in these Evil fast food firms.  Firstly, the return on investment in these companies might exceed the “potential financial liability associated with their policyholders consuming fast food.”  Alternately, insurers might simply be “unaware of the social impact of their investments.”  And lastly, the authors suggest that the claims and underwriting sides of large insurers just might not be aware of what their colleagues on the investment side are up to.  Holding the shares is just not an option.  After all, “”[t]hey’re profiting directly off the people who eat fast food, and if that leads to obesity or cardiovascular disease, they’ll charge you more for premiums if you have some of those conditions,” says Boyd. “They’re making money in either case.””

Even assuming the objections raised by the insurers about the data’s accuracy are incorrect, let’s see if the researchers’ normative conclusions are justified.

Any insurer’s first priority will be to its shareholders; a legally enforceable fiduciary duty exists between a firm’s management and its owners.  Its next priority (or first priority in the case of a non-profit insurer) should be to its policyholders.  Specifically, an insurer should uphold its end of any policies that it has written, and should take steps to remain solvent so long as it has policies outstanding.

Nowhere is there an obligation — legal, moral, or otherwise — for life or health insurers to promote health and wellness either among their policyholders or in the community at large.  It’s possible that some insurers, particularly health insurers, might find it cost-effective to do so, but it is not within the scope of their obligation to policyholders.  A study author claims that insurance ownership of fast food stock amounts to ‘double-dipping.’  Insurers exist to insure against risk (sounds so simple, doesn’t it?).  Faced with a riskier prospective policyholder applying for an underwritten product, they will increase the premium to reflect the expected increase in claims paid out to that policy’s beneficiary.  To the extent that underwriting differentials are actuarially fair, it doesn’t matter to an insurance company how many Big Macs their policyholders choose to eat, so long as their policies are priced appropriately.  If anything, owning fast food shares could be seen as a (vastly inefficient) hedge against unexpectedly increased policyholder obesity from fast food consumption.  It’s most certainly not a way to directly profit off of their own customers.

Why would any insurer hold shares of anything in the first place?  I can think of two main reasons.  The first is unique to life insurance.  With universal life insurance or segregated funds, life insurers hold shares on behalf of policyholders.  Policyholders may choose to invest the cash value in a number of ways, including in fast food securities.  The WSJ blog post quotes a Prudential executive as pointing out that much of their shareholdings could be attributed to these policies and funds.  I can think of no policy or ethical reason to prohibit these investors/policyholders from investing in fast food shares, nor do the authors venture one.

The second is common to most insurers:  they need someplace to invest their float (the money collected from premiums that do not yet need to be paid in claims).  Profits from the float can be good for consumers:  insurers can use float profit to offset underwriting losses, and even to maintain looser-than-otherwise underwriting standards or lower-than-otherwise premiums.  A vanilla investment strategy might include buying shares of major companies that form part of the Dow Jones Industrial Average or S&P 500 Index… such as McDonald’s or Yum! Brands.  I see nothing sinister about it.

Even if insurers were to divest their and their client’s holdings of fast food companies, what effect would it have?  Someone else would own the shares and derive profits from them.  Instead of profits from those shares being used to reduce the need for premium increases or tighter underwriting standards, they would accrue to someone else.  Assuming these shares were held in the first place as part of a profit-maximizing investment strategy on the part of the insurers, this divestment would not serve their policyholders.  It’s also hard to see how it serves the larger community in any meaningful way.  Buying or holding shares in the secondary market sends no money to the company whose shares are being bought.

In short, this study is much ado about squat.

Life and health insurers have obligations first to their shareholders, then to their policyholders, neither of whom would benefit at all if insurers were to divest from fast food firms.  The larger community would receive no benefit from divestment either.  Aside from the symbolic value (which would be close to nothing, given the tiny amounts of these companies actually owned by insurers), divestment would do absolutely nothing for the cause of public health.

The larger community, I should add, I include in this analysis only because the authors do.  The role of private insurance in managing risk is one that is poorly understood generally, barely acknowledged in the recent health insurance reform conversation, and one that I hope to return to at the Notwithstanding Blog.  Generally, however, it does not include improving the health or well-being of the underlying community for its own sake.^[2]

Physicians’ organizations spent most of their (limited) political capital during the recent reform conversation arguing for more money for themselves (a goal that I largely agree with), and arguing that ‘more be done for the patients,’ without, in most cases, displaying a serious understanding of the issues involved in the latter.  If physicians are to be taken more seriously on these topics in the future, it would behoove them to avoid the pitfalls of understanding that plague this study.

Update (15 minutes later):

I decided to look for information about these investments relative to the insurers’ portfolios.  I looked at Manulife and MetLife 2009 Q4 investment fact sheets; it’s unclear how much, if any, of these portfolios are client-directed.  Interestingly, MetLife doesn’t seem to offer health insurance, as the study authors claim.

Manulife had an investment portfolio worth C$187.5 billion, including C$9.38 billion in stocks, including $0.1461 billion in shares of McDonald’s and Yum! Brands.

MetLife had an investment portfolio worth $309.3 billion, including $8.66 billion in corporate equity, including $0.0020 billion in holdings of Wendy’s/Arby’s.

I see no reason to believe that the inferences drawn here are inapplicable to the other nine insurance companies in the study.

What this quick number-running tells us is that not only are these insurers’ holdings of fast food shares insignificant in terms of the fast food companies’ market capitalizations, but also in terms of their own portfolios (these two insurers have portfolios an order of magnitude larger than McDonald’s market cap).

Given that there really isn’t anything to be gained from divestiture, this only reinforces the conclusion that this study’s authors are trying to make a capital crime of a traffic violation.

***

Study citation:  “Life and Health Insurance Industry Investments in Fast Food.” Mohan et al. Am J Public Health.2010; 0: AJPH.2009.178020v1

Disclosure:  two of the eleven insurance companies studied are Manulife Insurance and SunLife Insurance, which in turn are two of the top 10 holdings of an ETF of whose shares I own a small number.  I hope this satisfies the FTC.

^[1] – The authors’ argument is strongest for companies who write health insurance in the United States.  Of the 11 insurance companies evaluated, only three two did so.  Most of the insurers in question are life insurers, which leads me to think this whole hullaballoo is based on a giant red herring.  Private health insurance doesn’t generally cover the “bread and butter” health expenses of Canadians or Britons, and life insurance is a whole other matter entirely, so the authors’ arguments, weak as they are, are barely applicable to their own dataset. Back to text

^[2] – One could argue that someone in the insurance sector should be looking out for the community at large .  That may be the case, but it’s not a job to be stuck on private, for-profit insurance, whose existence is a given here. Back to text