Design or Incompetence (II)

Last week I wrote a post about how banks entice customers with promotions and then fail to keep up their end of the bargain, forcing customers to waste their time just getting the bank to do what it promised to do in the first place. As I wrote, then, the problem is by no means limited to the financial sector.

David Lazarus of the Los Angeles Times has a horror story about Aetna (AET), the large health insurance company. The basic facts are:

  1. Aetna increased a customer’s monthly premium by $32 as of August.
  2. On September 30, Aetna sent her a letter saying her premium had gone up. (This is the letter supplied to the Los Angeles Times by Aetna, which I think is pretty clear proof there was no earlier letter.)
  3. Beginning in October, the customer began paying the higher premium.
  4. In November, Aetna rejected payment for a doctor’s bill.
  5. The customer contacted Aetna, who said she had missed payment for October–which wasn’t true (she had paid the higher premium for October).
  6. When the customer appealed, Aetna wouldn’t let her simply pay the extra $64 (the difference for August and September), and insisted on rescinding her policy.

The customer in question is a cancer survivor who needs regular medication and checkups–hence the kind of customer that health insurance companies want to drop if at all possible.

When the LA Times intervened, Aetna agreed to reinstate her policy.

But what’s the penalty for Aetna? Zilch. What incentive does Aetna have to stop screwing its customers? None.

According to Alan Greenspan, the market can solve this problem: customers would leave Aetna because of its shoddy customer service. But most customers get their insurance through group plans and hence have little or no choice of their insurer, and the corporate HR departments for the most part select those plans based on price, since they are getting completely squeezed by rising health insurance premiums. There simply isn’t very much competition in insurance plans, which are sold on the state level. And the customer in this case was on COBRA, meaning she had absolutely no ability to switch (and would probably have had to pay a huge premium for insurance in the individual market because of her preexisting condition).

As far as I know, the health care reform bill wouldn’t actually solve this specific problem, since the general problem of companies screwing up their billing processes and then blaming their errors on the customer goes far beyond health insurance. (I think the simple solution is that companies should have increased liability for their own errors–some large multiple of the amount in question.) With reform, though, at least the customer could have gotten a new plan at a reasonable price (because of the prohibition on medical underwriting).

Thanks to Ted K. for passing this on (via email, in this case).

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About James Kwak 133 Articles

James Kwak is a former McKinsey consultant, a co-founder of Guidewire Software, and currently a student at the Yale Law School. He is a co-founder of The Baseline Scenario.

Visit: The Baseline Scenario

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