Why do insurance companies act the way they do?
Because they can.
The vast majority of people who have health insurance, nine out of ten according to the WSJ, get that coverage through their employment. Therein lies the problem. The federal law which governs employment based-coverage (including life and disability as well as health insurance) – the Employee Retirement Income Security Act (ERISA) – not only fails to prohibit bad behavior by insurance companies, it affirmatively encourages it.
If you get your insurance coverage through your employment, then in virtually every case ERISA preempts state law (meaning it cancels it out, eradicates it, takes its place). But, having gutted state law relating to insurance disputes, it fails to provide any reasonable substitute. The remedies it provides (i.e. what you get if you win a lawsuit) are very, very stingy. And ERISA severely compromises your ability to secure even the scant remedies it does provide.
First, remedies. ERISA limits the recovery you might get to the benefits which should have been provided in the first place, and an award on account of attorney fees in the court’s discretion. Example: you have your disability benefits wrongfully denied. As a result, you have no income, your credit rating is trashed, you lose your home and you are driven into bankruptcy. You file your ERISA suit and against the odds, you win. What do you get? The benefits they should have been paying you back when it might have done you some good. That's all (you might – might – get something on account of your attorney fees too).
The trashed credit, the lost home, the bankruptcy, the ruined life? Zero. ERISA does not allow for any recovery on account of these sorts of consequential damages -- none. This applies if an HMO’s denial of care kills you – no remedy allowed for that. And it applies even if the insurance company committed outright fraud when it denied your claim. Incidentally, I find it quite difficult to understand why the insurance industry, uniquely among all industries in America, needs to have immunity from liability for fraud if it is to offer its services at a reasonable price. Anyway, this concern goes beyond making people whole; it also directly impacts the behavior of insurance companies.
As of now we have a situation where the law tells insurers they face no meaningful consequences if they deny care improperly or even commit outright fraud. As one federal judge has commented,
if an HMO wrongly denies a participant's claim even in bad faith, the greatest cost it could face is being compelled to cover the procedure, the very cost it would have faced had it acted in good faith. Any rational HMO will recognize that if it acts in good faith, it will pay for far more procedures than if it acts otherwise, and punitive damages, which might otherwise guard against such profiteering, are no obstacle at all.
Insurance companies, of course, are not charities, but corporations; their boards are subject to a fiduciary duty to maximize shareholder value. If it is possible to accomplish this by mistreating claimants, then it follows insurers will do precisely that.
There's more: procedure. In ERISA litigation, courts have determined among other things that there is no right to a jury; that discovery (the pre-trial process where you obtain the other side's documents, take depositions and such) is to be significantly abridged; and that the evidence which may be introduced at trial is limited to the claim file assembled by the insurer. You don't get to testify and tell your side of the story, and you don't get to cross-examine the people who denied your claim.
And most incredibly, when the policy contains language vesting "discretion" in the insurer, if you prove the insurance company was wrong – you lose. In order to win, you must prove the denial was "arbitrary and capricious" – that is to say, ridiculous, absurd, unintelligible, crazy. And lo and behold, the insurance companies grant themselves "discretion" when they write their policies. In this way we treat insurance companies as if they were federal judges. But Earl Warren they are not.
The health care debate concerns what we do about the uninsured. ERISA matters a lot here, because if you get your insurance through your employment, then consider yourself to be in that group. If by "insurance" you mean something like an enforceable promise by an insurance company that it will pay for what it says it will, what you have doesn't qualify. What you have is a piece of paper saying some company will pay your claim if it feels like it. You don't have insurance at all – you only think you do.
ERISA’s pernicious impact simply must be amended if anything approaching real reform is to be achieved. Indeed, even the most strident free-market zealot will acknowledge that the rule of law is an essential underpinning of a legitimate free market. You can provide all the coverage, and all the "competition" in the world, and if you have a legal system which not only allows but encourages insurers to breach their contractual obligations it will be a waste of time; indeed it will be worse than that as the real problem will be all the more concealed beneath the perception of “reform.”
That notwithstanding, not a single proposal to date addresses this very significant problem; in fact HR 3200, the most-discussed proposal so far, affirmatively and explicitly preserves the malignant preemptive effects of ERISA for employment-based coverage (that’s at section 151). To the shame of the Democrats, the only pol who’s voiced even the slightest concern with this is a Republican, Arizona’s John Shadegg.