A Radical Idea: What if We Restructured the Insurance Industry for the Public Good?
The following was contributed by Reid Zeising, CEO & founder of Gain.
Health insurance and third-party liability insurance are public goods, yet the insurance industry is structured on a for-profit model, which focuses on increased profits and shareholder returns, often over the needs and welfare of policyholders and claimants. Today’s largest insurers, especially third-party liability carriers, reap over $100 billion in annual profits, [1] while premiums and costs are on the rise for those depending on the policies that they issue for their financial protection. The insurance industry has a moral responsibility and a duty as a corporate citizen to prioritize its policyholders and claimants. By transitioning to a public utility model, the industry can refocus its priorities without jeopardizing liability carrier’s needs to cover operating costs and pay shareholder returns. By thinking like – and actually being – a public utility, insurers can fulfill their duties as a provider of an essential public good without imperiling their own financial health.
Transitioning to a Public Utility Model
The insurance industry predominantly operates on a for-profit model, emphasizing profit maximization[2] and shareholder returns.[3] This model, however, often neglects the welfare of policyholders and claimants.[4] It also does not reflect the reality that health insurance and third-party liability insurance are public goods. A public good is a benefit or service that should be available to all citizens and that ultimately contributes to the wellbeing of society as a whole.[5] One proven and effective model for delivering public goods is the public utility company, which is privately owned by investors, but committed to the provision of public good. A public utility company oversees essential services, ensuring their accessibility, reliability, and affordability.[6] By restructuring third-party liability carriers along these lines, we can elevate the role of insurance carriers from profit-centric entities to institutions focused on consumer welfare.[7] Similar to utilities, carriers could receive a fixed, reasonable return,[8] enabling investments in increased technology and efficiencies and sustainability while preventing the accumulation of excessive profits at the expense of policyholders.
Benefits of the Public Utility Model
Enhanced Payouts: Transforming the current model would necessitate that carriers pay out all remaining premiums to claimants, after covering operational costs, guaranteed returns and dividends. This fundamental change would translate to increased payouts for claimants, alleviating their financial burden and ensuring adequate compensation. This contrasts with the present situation, where substantial portions of premiums are often reserved for investments and increased profit margins, limiting the resources allocated to claimants. The Affordable Care Act sought to cap profits by mandating that health insurance companies could spend no more than 20 percent of revenue from premiums on administrative costs, marketing, and profits. However, insurers have skirted these rules by increasing overall costs and raising premiums, boosting revenues.[9] Therefore, further reform, along the lines proposed here, is needed.
Industry Shift to Public Good: By orienting the industry towards the welfare of policyholders and the larger community, we can establish a new standard of corporate responsibility within insurance carriers. This alteration fosters a climate where the pursuit of public good[10] becomes inherent, eclipsing the erstwhile emphasis on profit maximization. Under this paradigm, carriers become stewards of societal welfare and financial responsibility, ensuring equitable distribution of resources and safeguarding policyholder interests.[11]
Policyholder Centric: In this reimagined model, policyholders would be the primary beneficiaries, receiving enhanced protections and services. This framework mandates a focus on policyholder needs and aspirations, catalyzing the development of consumer-centric policies and practices. Additionally, the compulsory dividend payouts would ensure that policyholders receive tangible, financial benefits, contributing to economic stability and welfare.
A More Equitable Economy: The proposed transition has profound economic implications, marking a departure from purely capitalistic orientations to a more balanced, equitable economic structure. The substantial increase in payouts would stimulate consumer spending and economic activity, while the emphasis on public good would promote social cohesion and mutual responsibility. Moreover, this shift would mitigate the socioeconomic disparities[12] emanating from the current profit-driven model, fostering a more inclusive and equitable economic environment.
Redefining the Insurance Industry
The transformation of the insurance industry -- particularly third-party liability carriers – into a public utility model is a radical yet necessary step towards creating an equitable and consumer-oriented industry. By guaranteeing returns and mandating the allocation of remaining premiums to claimants, we can ensure the industry serves the public good and prioritizes policyholder welfare. This transition is not merely a structural adjustment; it symbolizes a philosophical shift, redefining the purpose and responsibilities of insurance carriers in a way that recognizes that third-party liability insurance carriers are essential public goods. This revolutionary approach promises increased payouts, enhanced policyholder benefits, and a collective pursuit of societal well-being. The pivot from a profit-centric paradigm to a model centered on public welfare, where the interests of consumers are placed above unchecked profit accrual. In the long term, this alteration can be a catalyst for more claims being paid and funds being utilized for the purposes they were intended. Insurance is in place to reimburse those who have suffered through no fault of their own, and a utility model can assure that more monies are paid to consumers and less goes into the coffers of companies beyond what is needed to service these portfolios.
[1] “Visualizing the 50 Most Profitable Insurance Companies in the U.S.,” HowMuch.net, https://howmuch.net/articles/top-50-most-profitable-us-insurance-companies-2020. Data is based on Fortune 500 listings.
[2] Elisabeth Rosenthal, “Insurance policy: How an industry shifted from protecting patients to seeking profit,” Stanford Medicine Magazine, May 19, 2017, https://stanmed.stanford.edu/how-health-insurance-changed-from-protecting-patients-to-seeking-profit/.
[3] Nathalia Bellizia, Davide Corradi, and Jürgen Bohrmann, “Profitable Growth Is King: The 2022 Insurance Value Creators Report,” Boston Consulting Group, September 2, 2022, https://www.bcg.com/publications/2022/insurance-total-stakeholder-return-value-creation-report/.
[4] Rosenthal, “Insurance policy.”
[5] National Consumer Law Center, Access to Utility Service, 6th ed. 2018, 1.1.5, www.nclc.org/library; Jason Fernando, “What Are Public Goods? Definition, How They Work, and Example,” Investopedia, March 20, 2022, https://www.investopedia.com/terms/p/public-good.asp.
[6] David E. McNabb, “Chapter 1: Public utilities: essential services, critical infrastructure,” in Social and Political Science 2016, October 28, 2016, 3-18, Elgar Online, https://www.elgaronline.com/display/9781785365522/chapter01.xhtml.
[7] Jonathan D. Washko, “It’s Time to Resurrect the Public Utility Model Concept–But This Time for Healthcare,” Journal of Emergency Medical Services, October 18, 2017, https://www.jems.com/news/it-s-time-to-resurrect-the-public-utility-model-concept-but-also-for-healthcare-this-time/.
[8] McNabb, “Chapter 1: Public utilities: essential services, critical infrastructure.”
[9] Marshall Allen, “Why Your Health Insurer Doesn't Care About Your Big Bills,” NPR, May 25, 2018, https://www.npr.org/sections/health-shots/2018/05/25/613685732/why-your-health-insurer-doesnt-care-about-your-big-bills.
[10] Samuel S. Flint, “Public Goods, Public Utilities, and the Public's Health,” Health & Social Work, Volume 36, Issue 1, February 2011, 75–77, https://academic.oup.com/hsw/article-abstract/36/1/75/659133?redirectedFrom=PDF.
[11] Carter Dredge and Stefan Scholtes, “The Health Care Utility Model: A Novel Approach to Doing Business,” NEJM Catalyst, July 8, 2021, https://catalyst.nejm.org/doi/full/10.1056/CAT.21.0189.
[12] Samuel L. Dickman, David U. Himmelstein, and Steffie Woolhandler, “Inequality and the health-care system in the USA,” America: Equity and Equality in Health 1, The Lancet, April 8, 2017, Volume 389, 1431-1441, https://www.thelancet.com/pb/assets/raw/Lancet/pdfs/US-equity-and-equality-in-health-1491475717627.pdf.
