Just Dropped In (To See What Condition My Pre-existing Condition Was In)
Obamacare has passed the Constitution sniff test and we now live in a socialist Worker’s Paradise. What about all those dead-beats who chose not to have insurance because of their pre-existing conditions? If it is bad for people to only buy insurance when they are sick, won’t Obamacare come tumbling down in 2014 when most of the uninsured sick people in America belly up to the trough at their local insurance exchanges to enroll? Is this going to bankrupt all of us responsible Americans who chose not to have pre-existing conditions? Are we as doomed as the Right claims we are?
Let’s take a little peek inside the black box of Obamacare, shall we?
The principle (and yes, it is a principle) of the pre-existing condition is that no insurance system could survive if people only bought insurance when they were sick. Insurance is about spreading risk to a wider population. The larger that population the better it is. Risk can be spread effectively if the actuaries (professional risk analysts) have a good knowledge of what overall risk they are facing. Then they can predict (fairly well) future costs and what each person in the pool will have to contribute. This all falls apart if unaccounted for risky people enter the pool. And there is no one who is at a greater risk of being sick than someone who is already sick or was sick recently. It’s not the case that there should be a few sick or risky people in a pool as possible. It’s that the actuaries need to know what percentage of the pool is sick or in high risk of becoming sick and ending up with a lot of claims.
Since our private insurance system had people cut up into different risk pools (one per company), the maintenance of predictability meant that many millions of people found themselves uninsurable. The solution to the problem of pre-existing conditions is to have a single pool with everyone in it and most advanced countries have done this via a “single payer” system. (One payer, one pool). We are now going to do what a few countries do, which is one pool, lots of payers. (The best example of this method is that other socialist Worker’s Paradise Switzerland) How are we going to manage that?
We think we have it licked with something in the ACA called “The Three R’s”. The Three R’s are a means to have one big insurance pool with lots of separate insurance companies selling insurance in it. We don’t really know what this one big pool is going to look like in terms of its riskiness, for the simple reason that we don’t keep claims of people who don’t use insurance. But we do know how things can go wrong and the Three R’s address the three main possibilities and in a manner that does not require that a lot of taxes be thrown at the problem. It is a capitalist solution and if you want to impress your geeky friends with your inside knowledge of the ACA, by all means, read on.
I am going to try to use the language the suspense novel to inject a bit of blood into this intrinsically dry subject. For the fact is, it’s not that the Obamacare statutes are hard to understand. It’s that they are a dry as a mummy’s toes and even people in the business like me have to flog ourselves to pay attention. So I will lay out the Three R’s in terms of the (insurance company executive’s) horrors they are meant to address.
Horror ONE – What if my company sells insurance on the exchange and all the sick people in the state buy only my product!?
The first R is called “Risk Adjustment”. Remember, right now each insurance company is its own little (or big) pool of well people and sick people. When the insurance exchanges are created, there will be lots of companies (we hope) selling on them; some large and some small. The large ones, having larger pools, are better able to dilute their risk. The small ones not so much. It is possible that some companies just by the luck of the draw will get a disproportionate amount of sick people and they may fail, while other companies get a disproportionate amount of healthy people and they make lots of money and have a stock split. How do we even this out?
On the exchange, each person who buys insurance will be assigned a “risk score”. If you are very healthy, your score will be low. If you are very sick, your score will be high. All of the scores for each company will be averaged. Those whose risk scores in aggregate are higher than average will receive compensating funds from those companies who aggregate risk score are lower than average. Is this socialism? Yes, if by socialism you mean that everyone in the race starts on the same starting line. What this does (and the Swiss have been doing this well for years) is transform the exchange into one big homogenous risk pool. No one is advantaged and no one is disadvantaged. And this is revenue neutral, in that it merely transfers funds to equal out all the insurance plans.
Horror TWO- All those sick people coming aboard the exchanges in 2014-2016 have accumulated years of conditions that are now going to have to be treated, swamping us in claims and destroying America as we know it.
The second R is called “Reinsurance”. It is true that we expect that 2014 especially will be a big year for lots of sick people who could not get insurance before to get it now. I am not talking Zombie Apolcolypse here, but claims are expected to be higher than normal. Now it turns out that insurance companies are not so worried about the real big claims that, say, top $100 thousand or more. Insurance companies insure themselves (this kind of insurance is called “reinsurance”) against the real big stuff, which tends to be rarer than you think. What insurance companies are more concerned about are mid-sized large claims, say between $30 thousand and $100 thousand. So for three years (2014-2016) the insurance companies and the government are going to set up the Second R – a reinsurance fund that kicks in at about $30 thousand or so in claims. This reinsurance fund will cover the gap between $30 thousand and the point where regular reinsurance kicks in. If you think about yourself or your friends with pre-existing conditions, something less than $100 thousand a year is probably more like their situation. This piece will be half tax and have assessment on all insured in the country (thus turning the entire population of the US into one big reinsurance pool for three years). This is the only one of the Three R’s that has a tax component.
Horror THREE – Even with the first Two R’s, the picture is very unpredictable. There might be a guy in a ski mask hiding around the corner. He might have an axe. Or he might have a big bag of cash. What if through no fault of my own I run into the guy with the axe while my competitor runs into the guy with the bag of cash. In other words, what can I do about my unforeseen downside risk in this brand new market?
The third R is “Risk Corridors”. In a brand new market, even with safeguards like risk adjustment and reinsurance, there still could be a lot of downside risk. Risk Corridors will cap profits and put a floor under losses. Profits are to be had in the exchange market, but if profits go above a cap, the company profiting has to remit these to a fund that will be used to cover (that is, provide a floor) for insurance companies that sustain a certain level of losses. This will continue for three years until everyone figures out how the market works.
Interestingly, this last R is probably the only remotely socialist thing about Obamacare. Profit caps in America? How Bolshevik! But the capitalist companies know that if they want downside protection (and you don’t want to pay for it with your taxes; after all, these are insurance companies, not banks) then there has to be an upside ceiling. We are tolerating this because the upside even with the caps is still pretty generous and we are more worried about the downside than the upside at this point. As we do our forecasting for the exchanges, the words “conservative”, “cautious”, and “prudent” come up a lot while the word “KA CHING!” never appears at all.
The point is, we know that there is going to be (and should be) a rush of people with pre-existing conditions getting insurance and that there is pent up demand. We know that it is going to be a rocky ride for us insurance companies for a few years and we think that the Three R’s is a conservative, cautious, and prudent way to make things more predictable and we finally find a way to cover most of the people in the United States (in a cost effective way).