Health Insurance, Co-Ops, Demutualization, and the Legacy of Reaganism

The historical forces which have pushed us to the current health care crisis are long and complex, and I have no interest in reducing them to one determining factor. However, I have seen relatively little written here on the direct connection between 1980's style privatization of insurance entities and our current problems, so I want to discuss that a bit. We know, of course, that the 80's theology so thoroughly infected the financial sector that it led to its near total collapse, as the Gramm Leach Bliley legislation opened the door to all manner of retrograde and self-defeating problems (which really only exacerbated the contradictions in the industry that New Deal reforms sought to keep in check). But one can draw a direct line between the financial crisis and the health care crisis - not through "employment," but through the structural adjustment in the health insurance industry: demutualization.

I know demutualization because, in another life so to speak, I worked on insurance demutualization - for the bad guys, as it were. We demutualized Anthem Insurance, and several others. I was the specialist on insurance demutualizations at one of the big law firms, counsel for the underwriters. I've read the S-1's, done the due diligence, and leafed through thousands of pages of regs. Again, this was another time, ten or so years ago, another me. But I saw it close up.

So, what is demutualization? I'm going to simplify here, since the details - while important - are beyond my purpose. Insurance companies began as "mutual" companies; they were essentially owned by the policy holders. At the very basic level, a mutual company is a bit like a community resource. A bunch of folks agree to throw resources into the pool to protect individuals who encounter difficulties. Now, by the 1980's, all such companies were already interested in profits, but the drive for profits could never exceed the desire of the policy-holders to be protected, since the policy holders were the "owners." This all smelled a bit like communism, and had the further problem of making infusions of new capital difficult, since mutual companies (with the exception of certain split structured entities) can't exactly issue equity securities: the equity is not the share, but the policy.

So, starting in the 80's, and really accelerating through the late 1990's and early 00's, you saw a wave of "demutualizations." The insurance industry saw both the financial firms and dot-coms getting fed plenty on the roaring bull market, and wanted its piece. But first, the mutual companies had to get rid of the policy holder owners and get a new set of owners: share holders. The process was long and expensive, with the current owners (that is, the policy holders) having to agree to demutualization, which generally involved being bought off with promised IPO shares or cash. You also had to get approval from various state and federal insurance entities, which involved public meetings and a bevy of consumer groups screaming bloody murder (it turned out they were right, as usual).

Now, I think we can see the obvious difference: when your owners are your policy holders, you are responsible to them. When your owners are any random set of share holders, your responsibility is to profit alone. While the roots of the current crisis has many factors indeed, a key factor is this drive to demutualization, which transformed the - and here's the important point - structure of responsibility for the whole health insurance industry. What demutualization teaches us is the utter catastrophe of Reaganism as it crept into all sectors of social and commercial life. The Republicans took over Congress in 1994, bringing with them the most radical privatization program in history. This had real effects, in the financial industry as well as in the insurance industry. Within 15 years, it has sunk us into near total crisis. It doesn't work.

So, what are these health "co-ops?" They are, essentially, an attempt to produce "remutualization" of insurance providers: mutual "companies" under another name. It's kind of funny, actually. For most of its history, insurance worked as a "co-op." That's the whole idea of insurance in the first place. So we got all these fanciful financial instruments hooked into what was essentially a mutual operation, and it turned into "private insurance." Now, somebody says "Hey, I have an idea!" What if the insurance was just a big pool owned by the policy holders instead of a company owned by shareholders? What if we changed the structure of responsibility? What if we made it not entrepreneurial, but social? Well, no shit.

But insurance demutualization gets almost no hearing in the press, yet further evidence of media complicity with the failed Reaganite program. Nobody stands up and says "Hey, you know all that demutualization we did 10 or 15 years ago? Maybe that was a really shitty idea?" Nobody even mentions that co-ops can only be viewed as a direct response to reverse demutualization. Now, I don't think co-ops are the best response, but I think they have to be understood in the context of this larger trend in the industry. The problem, of course, is that any co-op that grows successful enough will rush to "demutualize" in its own way, and without severe interrogation of demutualization itself, we'll just repeat the cycle.

I was unaware that insurance companies, at one time, were not inherently evil. Of course, the profit motive in insurance is a big part of our current health care crisis, and it's sad that the ghost of Reagan is so powerful that we can not even fathom the degree to which this is all his fault (and the fault of those who bought and continue to sell his rhetoric).

I see you are doing penance with this post, as you were, obviously, a big part of the problem at one time.

;)

Thanks for shifting your alliance to the people.

:dem:

-Laelth

...to the Knights of Pythia, one of the major reasons for the American fraternal organizationswas to insure its members, especially if those members had a hard time accessing traditional sources of insurance.

They also did health care directly, with societies hiring doctors on a capitation basis.

A lot of working class people in the New York metro area find work in the financial industry. I never for a minute thought anything I did there was anything other than despicable.

:-)

if you want to pay more for your electricity, be sure to move where your home is served by a cooperative.

What I found what that electrical co-ops are acknowledged to be less efficient -- but also that they overwhelmingly serve rural, sparsely populated areas and are thus small and unable to enjoy the economies of scale.

At the very least, this suggests they are not a good model for arguing the advantages or disadvantages of co-ops in general.

And they were one of the few effective responses to dereg anyway.

Energy's in on the game, too.

I remember in the 80's an insurance company I worked for was demutualizing. Demutualizing was across the financial sector too, specifically the Savings and Loans, so was the S&L crisis of the last 80's another "unintended consequence" of Demutualization?