Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Creative Destruction for Health Insurance Companies

New York Stock Exchange

Of the stocks now listed as members of the Dow Jones Industrial Average -- the largest and most successful corporations on the New York Stock Exchange-- only one of them made the list in 1900. That was General Electric, and although GE is still a successful business, it' s definitely not the wizard it used to be. Every investor, indeed anyone with a pension fund, should recognize that corporations have a natural life expectancy of about seventy-five years. No matter how successful a company is, when it reaches seventy years of age, three scores and ten, it is time for portfolio rebalances to consider replacing it with something younger. This curious life cycle of institutions usually regarded as immortal is unexplained, but it may match the life cycle of the man who initially formed the company or the decline of the founding family; or perhaps the original business plan becomes obsolete, unable to keep up with changing times. One alternative principle needs to be explored further, however: it always costs more to repair and reconstruct, than to start all over from scratch. A nation which prospered within a constantly expanding frontier may someday need to revisit this basic idea underlying "creative destruction". Automobile insurance companies, for example, often startle their claimants with the news that it is cheaper to "total" a dented car than to repair it. Building a new car involves engineering to compete for low-priced quality, but repairing an almost-new car after an accident will always involve tailoring a hand-made restoration. In the meantime, the whole healthcare insurance industry of America needs to be more reconciled to the possibility that it would just be cheaper to start all over with basic premises. And state regulation might be one of them.

Along these lines, there is an old joke in Philadelphia about the father who advised his teen-aged daughter, "If necessary, you may sell your body. But never, never sell your Pennsylvania Railroad stock."

Joseph Schumpeter

Consequently, it is not a sign of disloyalty or thirsting for vengeance to observe that what we now call health insurance companies were created in the 1920s, and therefore unsurprising if we saw them decline or go out of business relatively soon. Joseph Schumpeter seemed to proceed from the same observation, regarding it as one of the democracies' strengths that major corporations regularly undergo "creative destruction". Whether a good thing or a bad thing, it seemingly is a fact of life. Therefore, nostalgia for the good old names an investor recognizes from his childhood doesn't necessarily make the best investment strategy. But face it. Buying "cats and dogs" isn't so smart, either, so it's usually better for most folks to stick with companies that have some seasoning. The conflict between brand names and entropy is thus a continuous process of adding and subtracting. And because it is easier to have something automatic doing unpleasant things, this one probably needs an external threat to move the needle.

Originally published: Thursday, January 09, 2014; most-recently modified: Wednesday, May 15, 2019