Tuesday, October 5, 2010

Fruits of Obamacare

“Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”
- Ambrose Bierce
The Washington Post reports that, "Some of the country's most prominent health insurance companies have decided to stop offering new child-only plans, rather than comply with rules in the new health-care law that will require such plans to start accepting children with preexisting medical conditions after Sept. 23." Existing policies will be honored but no new child-only polices. An industry spokesman points out that with no right of refusal, parents can "wait until their child becomes very sick before purchasing coverage." Under Obamacare, child-only plans could rapidly skew towards mostly children with expensive medical bills, either bankrupting the plans or forcing insurers to make up their losses by increasing premiums for all customers.

The skewing of insurance to the very sick is already happening in Massachusetts where anyone can buy health insurance last second. Many individuals buy when sick and cancel after treatment. In Massachusetts it is cheaper to pay the uninsured penalty than pay for coverage when not needed. Health care advocates can yell and scream, "[It] is immoral, and to blame their appalling behavior on the new law is patently dishonest." But it is the advocates who are dishonest. The Health Insurance is a for profit business, not a charity, and the advocates conveniently forget how Insurance companies work.

The theory behind insurance is simple: spread the risks of a few amongst the many. The sick are subsidized by the many healthy who are paying in. Just like Social Security for retirement is covered by the many employed paying in. Imagine that the aging population reaches the point where 50% of all adults in America are retired seniors. Then every person on Social Security would be funded by one working person. A working person would have to earn enough for his/her own family plus taxes plus enough to give a retiree a living income plus the overhead cost of a government bureaucracy managing the money. That just not feasible. Likewise with heath insurance, the system collapses if mostly the sick are the only ones making payments since each sick person is receiving back more than they are paying in.

A spokeswoman for the Department of Health and Human Services says, "We expect [insurance companies] to honor that commitment. Insurers shouldn't break their promise and turn their backs on some of our most vulnerable Americans." This is just absurd. There is no promise, no commitment, there is only business and the new law allows families to "game" the system and violate the priciple of insurance with a large pool where many contribute but only a few collect.

People may think the insurance model is "unfair". But it is no different than lottery systems or any gambling business. Many pay a small amount with the hope of a big payout. The size of the payout and the odds of winning are carefully balanced against the number of people paying. The lottery system would collaspe if there were "high risk" individuals who were super lucky and frequently picked winning numbers. The lottery would want to ban these individuals just like Casinos ban card counters from Black Jack or anyone else they think is having above average luck at winning. Obamacare is equivalent to telling the Lottery and Casinos that they must accept all players no matter how "lucky" they are. In response I would expect Casinos to stop playing Black Jack to prevent losses from card counters.

Bottom Line

The Washington Post article ends by pointing out that "most poor children with preexisting conditions already qualify for insurance through programs such as Medicaid and the Children's Health Insurance Program. And those who are not poor will be able to apply to new high-risk pools established by the law."  Also the insurers who will stop child-only policies will still accept children with pre-existing conditions with new family plans. The healthy family members help cover the costs of the sick child.

The idea that insurers "turn their backs" on sick children is just spin. What has happened is that government has changed the law in such a way that child-only policies may become unprofitable. Insurers are jumping ship before they get stuck with a loss for these specialized policies. Families may still buy family policies.

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