19 February 2010

Divide and Conquer

Dr. Krugman has at it again about the health care scandal, today taking on Wellpoint. Here's the story. What he doesn't talk about, I suppose for lack of space is what I propose to talk about: divide and conquer.

In economics, there is the term market segmentation, wherein a producer seeks to extract profit by walling off groups and charging each a greater price than would exist without the walls. If you read the Wikipedia article, it's voiced rather blandly, only making a passing remark about monopoly. (You can see how this works by reading about consumer's surplus. The Market Segmentation author doesn't provide the link, which shows the bias.) The fact is, market segmentation (and its other name, price discrimination) is what the health insurance companies have been getting away with for decades.

For those old enough to have been there, in the 1970's health insurance was to be replaced by Health Maintenance Organizations (HMOs); the archetype being Kaiser-Permanente. The driving notion behind the HMO movement was that it is cheaper to take care of problems early rather than late. So, HMOs would engage in preventative care, screenings, and regular visits to a primary care physician. In recent years, studies have been done and promoted by insurance companies claiming that HMO practice is more expensive and no better at maintaining patient well being. It is also true that shortly after HMOs began to proliferate (often as part of traditional health insurance companies) the acronym became Healthy Members Only. Market segmentation.

The point behind insurance is shared/pooled risk. While it may be dismissed as just academics, if you've been an economics student you've known of or taken Risk and Insurance (the most common name). In such a course, you learn the algebra of risk and probability, and how it is that the many can pay a small amount to support the occasional disaster which befalls the individual. The whole point is market aggregation, not segmentation. The Wellpoint assault is purely segmentation. They claim that each segment, which they define as they choose, should make lots o money. The fact that the whole enterprise manages to make billions is denied. Wellpoint, and the rest, of course oppose the public option. The reason, which they'd never admit, is the public option removes the opportunity to segment the market and make monopoly profits.

Lastly, note the similarity here with the Banksters of The Great Recession. Having lost their shirts (and our trousers) in CDOs and such, they now seek to recoup their profits by squeezing those retail customers; most of whom have few other options given that the number of Banksters has shrunk. Again, segmenting the market. We need a revolution, and not the Tea Party sort.

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