Health Insurers Invest in Tobacco?

Say it ain't so! Or, let's get past the initial shock of the matter and disect some reasons why this might be the case.

Firstly, it is worth pointing out that tobacco companies, largely in response to the state liability lawsuits from a decade ago, have made some very shrewd business decisions. Even in the face of multi-billion-dollar judgments, these companies still were flush with cash. Recognizing that the lawsuits they had been subjected to were not likely the end of tobacco litigation and possibly signaled the beginning of the end for the tobacco industry in general, tobacco companies went on a diversification spree.

Philip Morris, for instance, bought Kraft foods in 2003. The "new" Philip Morris was a diversified company whose products line the shelves of grocery and convenience stores with far more than tobacco; in honor of this new business model (and wanting to distance itself from its tobacco-dependent past), Philip Morris renamed itself "Altria". (Although Altria has since divested itself of Kraft, the company still produced 25% of its revenue from non-tobacco sources as of 2006). Altria is part of the S&P 500, an index that is widely used as a surrogate for the US stock market and was a part of the Dow Jones Industrial Average until 2008. If you own a mutual fund or are part of a pension plan, it is incredibly likely that you are exposed to shares of Altria.

Which brings us to the realization that anyone investing money in the US stock market is likely to own some "tobacco" stocks. Private insurers are among the larger investors in the US stock market, and so by direct extension, are likely to own "tobacco" stocks. Why would any rational investor exclude a significant US industry, especially one that happens to be recession-resistant?

Let's assume for a moment that the (evil) health insurers are purchasing shares of tobacco companies purposefully, and purposefully beyond the extent any ordinary investor in the US stock market would. According to the a source quoted in the article, this is a potentially worrisome conflict of interests: "If you own a billion dollars [of tobacco stock], then you don't want to see it go down...You are less likely to join anti-tobacco coalitions, endorse anti-tobacco legislation, basically, anything most health companies would want to participate in." But there is a vital assumption being made here: That a health insurance company (or life or disability insurance, which for reasons that are not entirely clear get lumped in with health insurers) invests money with tobacco companies expecting the investment to grow. "Why would any rational investor do otherwise?," you may ask. The answer is both surprising and does a remarkable job of showing that these investments might not be the conflict of interest they are purported to be.

Tobacco users are almost universally bad risks. They are prone to developing numerous health problems, tend to take more risks as a group, and generally die younger than their tobacco-free peers. Their insurance rates reflect these risks. However, the reality is that most tobacco users will not develop their problems immediately, not even in the near future. They may even develop their problems long after they have quit smoking and quit paying higher insurance premiums. What are insurance companies, who deal with large aggregates of people to do? While investing surpluses now to deal with shortfall later is certainly part of their strategy, what if they could invest some of their money in such a way that it would correlate with their future tobacco-related claims? Say, by investing in tobacco companies.

As smokers continue to smoke, shareholders of tobacco companies continue to receive income in proportion to smoking. In other words, insurance companies who hold tobacco company stock receive income in proportion to the risk they incur by covering smokers as part of their policies. As the number of tobacco users declines, so do the profits from the tobacco industry, and so does the risk born by health insurers. Seems rather sensible to me.

The most damning part of the article comes early on and is given laughably short mention by its author: The letter on which the article is based "is the third report that the doctors – who all support a national healthcare program – have published in the last 14 years." (Empasis added.) So now we know the real reason behind the report: It's not about tobacco, it's nt about conflict of interest, it's about universal health care. And anything that demonizes private insurers, is good for universal health care advocates.

Source article, "Health insurers want you to keep smoking, Harvard doctors say" via boingboing.net.