From an Insurance Guy Who Knows What Hes Talking About: Well, this is going to have to be an on-going series on why Obamacare is and will be and must be a debacle. If I put too much in one post, nobody will read the whole thing (maybe I could add in a few pictures of ponies or naked girls or something.) Heres the latest installment. Past post(s) are pasted below. 2nd Post All of the sudden, I’ve been hearing a lot “Experts” talk authoritatively about terms which until the advent of ObamaCare, or what is euphemistically referred to as the Affordable Care Act, were fairly esoteric words and phrases used only by underwriters considering entering into slice business on fully insured deals. Now they are everywhere, and apparently everybody is suddenly an expert and has always been deeply concerned about that aspect of the employer group insurance product. What I’m talking about are the phrases you’ve surely heard over the last few months; Death spirals, adverse selection, pre-existing conditions, The Healthy (i.e. the critical needed for premium subsidizing but invincible young bucks that make no claims and are required to fund the entire debacle (discussed in the first post)). You’ve probably also heard about the premium crushing mandated benefits. The most oft heard example of this is the maternity coverage required for a 50 year old woman or a 25 year old single man (a good, devout Christian young man, just to make the point). There’s a lot to discuss here, but first a few basics of insurance, which I’ll discuss in this post. The purpose of insurance is to protect against existing risk. Nothing more. You have likely heard insurance often compared to gambling. That second sentence of this paragraph should, for the careful reader, dispel that comparison. With gambling, there is no existing risk until you walk into the casino and lay down your 5 $20.00 bills and say to the dealer “I just need 1 $100.00 chip”. By doing that, you’ve just created a brand new risk. That is, you’ve got 1 hand and you’ve either doubled or lost your money. In general, except for the lucky few or those really clever bastards from MIT a few years back, that’s a bad risk and nobody is going to insure you against that loss. On the other hand, if you buy a house, you don’t do so on the off chance that you’ll make a bunch of money when it burns down. You do it to have a place to put your stuff, store your family at night, and if you’re lucky, maybe have a kick ass fire pit (which I do, so there). A second aspect of insurance is that the insurer will generally try to take as many people as possible with similar risk profiles and group them together. You can get pretty granular in that endeavor in some markets. For example, in the individual market, each person is medically underwritten. That is, you look specifically at that person’s specific health position and price a deal accordingly. And you group people in similar risk positions together. So you can charge a similar premium for insuring against similar risks to each member in that category. In effect, you attempt to create a group policy comprised of individual policies. With the thought being that although the risk is similar for each member of that group, the actual payout will vary by individual, and if you price it right, you will come out, in aggregate, just a little bit ahead in the end after you have paid all the claim costs and administrative expenses. But you also don’t want to insure all the people in a specific risk category. To give a non-health care example of the danger in taking on all the risk in any given category, take Florida and the existing risk of hurricanes. Every house on or near the coast of Florida is in danger of having their house damage by a hurricane. Back when Hurricane Andrew hit, it almost wiped out the entire state, of course hitting those properties on the coast the hardest. State Farm Property and Casualty had decided to get as deep into that market as possible and spread the risk by insuring as many properties in the danger zone as possible. What their underwriters didn’t consider was a storm that took out virtually all of them out at one time. It was a disaster for State Farm. Virtually every insured property sustained damage in that storm that State Farm had to pay to repair or replace. They nearly went out of business and was only able to stay afloat by taking a loan from State Farm Auto Insurance Company. The tough lesson was that you cannot accept all the risk at the same time. You need to diversify the risk not just within a certain group, but also across multiple carriers. So, insurance protects against known risks, not known expenses. So if a person been diagnosed with cancer and is looking for an insurance policy, they are not protecting against a known risk, they are looking for somebody to pay for a known expense. That’s not to say we, as a rich society, cannot help those individuals. But it is to say that it is no longer insurance, it’s a society helping those who found themselves in an unfortunate situation, and didn’t take any steps to protect themselves from that potentiality. So when Obama talks about the discrimination against those with pre-existing conditions in the context of insurance, it shows that he is either incredibly ignorant of what insurance is, or he is being… disingenuous (some might actually say lying). However, he did recently say, in defense of the embarrassing rollout of ObamaCare, that the administration has learned through all this that insurance is, in fact, hard. I’ve been doing this for almost 20 years, and I would have to agree, but it didn’t take a failed website for me to realize that. All he would have had to do was ask me, or someone like me, and we could have saved ourselves a whole lot of effort and expense. I also would not have tried to take over that industry without fully understanding that not only is it hard, but why it is hard. Part 3 tomorrow 1st Post That people are losing their insurance should not be a surprise to anybody. The big shock is going to come in a year. Once the employer mandate comes into effect, well see the same sort of disruption, but on a much larger scale. AEI estimates between 50-100 million Americans are will lose their current benefits. Thats a necessary component of Obamacare. Let me explain why. Im an underwriter, and in the past I have underwritten hundreds of fully insured health insurance plans. Whenever there is more than one carrier offering benefits to one company (thats called a slice deal), I would require that the employees must engage in active enrollment. Which means they must be booted off their current plan and actively chose a new plan, although usually their current plan would be one of those options offered. Otherwise inertia will keep them in their current plan without them looking at the other options (i.e. the plan that I am offering) and theyll just stay where they are. Thats underwriting 101. It must happen, otherwise you dont write a slice deal. Its called disruption, and its key to getting people into your plan. (You also dont ever want to offer the richest plan design, but I can get into that in a later post if there is any interest.) Disruption is a necessary aspect of Obamacare, although far from sufficient to make it work. The people that put this plan together have no idea what they are doing. I say that as an underwriter, not as a partisan (which I surely am). They are counting on the young and healthy to cough up for an extremely expensive health plan they will likely rarely or never use. The reasoning of the young and indestructible is: Im not going to get sick. Maybe Ill get really hurt mountain biking or skiing or by a bolt of lightning, but probably not, so why do I need health insurance . The premium each month is equal to about 20 six packs of beer. Im going with the beer. Thats why you require the employers to pay at least 75% of the premium when you quote group full of young indestructible guys. If it only costs them 4 or 5 six packs, they will sign up, but any more than that, they dont. In that type of scenario, I provide the insurance, the company/plan sponsor provides the premium subsidy and the member gets the health care insurance. The problem with Obamacare is that Obamacare provides the insurance and Obamacare provides the premium subsidy. That simply cannot work. You can argue that technically there are third party companies providing the insurance program, but that doesnt change the basic point. The young buck is being subsidized by the taxes paid by the young buck. Recycling dollars doesnt create new dollars. Im talking math, not politics. The young and healthy will not cough up because they love our dear young leader in the Whitehouse. They will instead get the six pack.
Posted on: Wed, 27 Nov 2013 19:02:01 +0000
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