How long have we been hearing about teh dread H1N1 Swine Flu—a month or more? And do you remember when this was supposed to be the next global pandemic? You know, smallpox, Spanish Influenza, the Black Plague…
And weeks later, the headlines shout: “U.S. swine flu deaths hit double-digits”
News flash: double-digits = 10.
In yesterday’s post about the actuarial necessity of Pre-Existing Conditions exclusions, someone left a comment here accusing me of not knowing what “adverse selection” is1, and that maybe Politicians do know. So it was fortunate for me, that my friend Zach e-mailed me this article from this morning’s NYT, which gives me the opportunity to demonstrate yet again that politicians either don’t know anything about the industries they’re attempting to regulate, or, if they do, they’re more than willing to sell us out to the highest bidder. In fact, I propose that one of the only things politicians are any good at, is colluding with Big Business in order to steal from the rest of us.
The article describes how some of the big players in the Insurance industry have pulled an about-face, and are now prepared to drop their policy of charging higher premiums to those people with existing conditions or poor health histories, otherwise known as actuarially sound risk management:
Insurers said they were willing to discard an element of their longstanding business model — pricing insurance policies, in part, on the basis of a person’s medical condition or history.
To review: broadly, there are only two types of people who don’t have insurance:
When insurers are able to charge premiums based on risk, and some choose not to, low-risk customers will defect to companies willing to accurately price them, and high-risk customers will for the most part flock to the companies that neglect risk-management in favor of non-discriminatory pricing. This is a move that guarantees bankruptcy for any company which practices it. Because of this, no insurer can individually pursue a policy of ignoring very relevant factors, like medical history, existing/pre-existing conditions, etc., because the non- or the not-as- risky policy holders will defect to another company willing to pool their individual risk with others who are more similar. Competition and knowledge generally render null any attempt to secure profits by adverse selection.
What insurance companies all would like to do, is insure as many low-risk (and as few high-risk) individuals as possible. But they can’t do this, unless they also control prices, and the only way they can come close to controlling price is if everyone, or nearly everyone has to buy policies from them. So there’s one very important caveat to Big Insurance’s “concession”. They want Congress to do some favors for the insurance industry. They need the strong arm of the government to force these people (and there are a lot of them!1) to buy from them.
…In the past, insurers have warned that if they could not consider a person’s health status in setting premiums, the rates charged to young, healthy people would need to soar. But they said Tuesday that they were exploring ideas to prevent such sharp increases by spreading the risk and costs broadly across a larger population, including the healthy and the unhealthy
Translation: all your money are belong to us.
In exchange for risk-rated pricing the insurance industry would like Congress to adopt “A comprehensive plan requiring all Americans to carry insurance.” Think about what that means for a moment: Businesses are willing to give up otherwise sound business practices in exchange for Oligopoly/Monpoly market power, and the rents that might be extracted from the people, if they can get their way, which would allow them to “spread the risk and costs broadly across a larger population”. And they probably will, what with “Universal Coverage” being politically à la mode.
In their letter to Congress on Tuesday, Ms. Ignagni (of America’s Health Insurance Plans) and Mr. Serota (of Blue Cross and Blue Shield Association) said that if Congress enacted an enforceable requirement for everyone to carry health insurance, “we could guarantee issue of coverage with no pre-existing condition exclusions and phase out the practice of varying premiums based on health status in the individual market.”
Risk shouldn’t be “spread across the whole population,” especially when it’s distinctly identifiable and largely controllable. Otherwise, it destroys any incentive for people to be responsible for their own actions (encouraging socially undesirable behavior and consequences. It breeds contempt for others, who have no more regard for their fellow man. It violates every notion of justice and equity in the name of “fairness” and “progress.” And this so-called “progress” destroys charity, compassion, and community.
If this becomes law, that choice currently exercised by 28 million people will become a punishable offense. Most of them will “consent” and buy whatever minimum policy they can get away with. Thus, “universal” coverage is achieved when those people who don’t want it (but can afford it) are forced to pay premiums in order to support the others who want it (but don’t want to pay for it). This is not a free market, it’s fucking fascism. And when it fails (and it will fail) don’t you dare make a scapegoat out of the “free market”, because I told you so.
Whenever you see the word “require” or “enforce” especially when it pertains to your health and well-being, you should be very afraid.
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1. Adverse selection can be summarized thusly: when insurers can’t charge premiums based on risk, all insurers seek to only insure those individuals who are the least exposed to potential loss. In theory, at some point the market disappears, because insurers are only willing to underwrite people who have little to no probabilistic need for coverage.
2. One popularly cited figure is that “46 million” American’s don’t have health insurance. Except that a quarter of the people counted in that figure aren’t even citizens. The remaining 36 million are disproportionately young and a majority of them (61%) earn more than $50,000 per year — above the median income. This proposal would require all 28 million of these folks to buy something that they are already free to purchase, if they’d like — they just choose not to.
Another pair of lawmakers, this time in West Virginia, have introduced legislation that seeks to over-ride the laws of economics. Jay Rockefeller and Joe Courtney would like to “eliminate pre-existing condition exclusions from health insurance policies.”
The industry has some concerns about a practice, referred to in the industry as “bump and run”, the process by which an individual takes out a policy “with the intention of obtaining medical care within the first few months of coverage, then not paying premiums after medical procedures are paid for.” And rightly so. If insurance companies can’t deny coverage for pre-existing conditions, what incentive is there for anyone to purchase a policy, if they are healthy?
None.
Insurance, as a business model is not rocket science. In short, it requires that there be a large pool of insureds, about which we have reasonably accurate predictions with regards to the class probability of certain perils and risks which might befall some of them. Insurance “works” because people have varying tolerances for risk. Many people (most of whom won’t become ill or die during the term) pay a modest premium to protect themselves and their families financial well-being in case they become ill or die during the term. These premiums then pay for the costs incurred by the small number of people who actually do become ill.
By removing the incentive to buy insurance when one is healthy as a preventative/protective measure against an unlikely misfortune, this legislation all but guarantees moral hazard. No rational person would purchase insurance until they needed treatment, which would essentially be the opposite of adverse selection: the only people with “insurance” would be people in dire need of immediate medical treatment. No insurance company, anywhere, ever, could survive more than a few days under this sort of regime.
“Au contraire!” say the legislators. In fact, they are so bold as to argue that this legislation would actually serve to make insurers more profitable! I can’t make this stuff up:
Both lawmakers said the change should not hurt the insurance industry, but increase the pot of customers, thereby bringing down the cost of premiums.
“Im confident this measure is something the market can deal with,” Courtney said. “This will expand the market, increasing customers.”
The market will in fact “expand”, but the pool of actual customers will be greatly reduced. Since exposure to risk under this scenario is increased, it follows that premiums would have to increase. In fact premiums would likely exceed affordability for all but the wealthiest.
Additionally, the cost of premiums is not determined by the size of the pool of policy holders – there is not really a volume discount or economies of scale at play here. The cost of premiums is largely determined by the exposure to risk. If exposure to risk increases, if economic loss is experienced more frequently, then premiums go up. If not, premiums remain unchanged or decrease.
Further statements from Courtney and Rockefeller indicate a profound ignorance of how insurance markets actually function.
Both lawmakers … said the insurance industry is set up to pool risk, not to avoid it, and should take on more policies and claims.
Indeed, the insurance industry is set up to pool risk. But “risk” implies some degree of uncertainty, and a person with a pre-existing condition is anything but an uncertainty. If you try to insure your car after it’s been hit by a semi truck (i.e., a “pre-existing condition”) the insurance company will rightly deny “coverage” to you. Why this fairly straightforward concept is so difficult to understand in a different context is beyond me.
“If we’re going to have universal health coverage, we’ve got to get these insurance companies under control,” Rockefeller said. “They are in business in order to pay for people who are sick.”
Wrong. Insurance companies are not in business to pay for people who are sick. They’re in business to pool and assume risk at a slight premium, and to pay for people who become sick, which is hardly an insignificant distinction. At least their motives are clear, though: this is simply one step in the process of back-dooring us into “universal” health coverage, which in practice has been a pretty abysmal failure, everywhere it’s been tried.
One thing is certain: the new bill proposed by Joe Courtney and Jay Rockefeller is ignorant beyond comprehension, both of what insurance is and of how it works. I have no idea whether these legislators are lying out of malice, of if they’re truly ignorant yet well-intentioned, but it doesn’t much matter: in either case, they’re absolutely and demonstrably unfit for the respsonsibilites to which they’ve arrogated themselves.
