This week, the United States Supreme Court rendered a decision on President Obama’s health bill. Having my mother ask me about it, I knew it was a big deal. Having discussed the insurance industry and Obamacare with people on an individual basis, I now want to take the opportunity and put thoughts to
paper blog post so that anyone would be able to see my insights on this and partake in the discussion.
While the entire bill is thousands of pages, the largest issue by far is the individual mandate and establishment of individual insurance exchanges. This specific issue is also the one on which the success of this bill hinges on.
Lets take a step back for a moment though. Insurance, be it life, health, disability, unemployment, long term care, auto insurance, or any other, all works the same way. People who choose to have piece of mind for whatever, choose to transfer the risk to an insurance company, who would pay out in case of a qualifying event. The insurance company tries to estimate the total risk and what they think they will have to pay out, add in all administrative expenses, a targeted profit margin, and split the share of risk across the total insured pool. Any insurance is social insurance. If the risk for payout is high, the premiums will be higher, if the chance of something happening is small, the premiums will be lower.
One of the things that people will bring up in any conversation is how “evil” insurance companies are. “They are greedy, corporate (insert expletive) who take my money monthly and don’t care about me.”
When you look at the earnings, Aetna for instance, it may support that belief. Aetna earned 1.986 Billion dollars for year ending Dec/2011. Fuming yet? Well, here is the cold hard truth. Aetna, and other insurance companies, have some of the lowest profit margins around. Aetna had revenues of $33,780,000,000, that is 33.78 Billion dollars, or a 5.87% profit margin.
So that would be you opening up a lemonade stand, selling a glass of lemonade for a $1 that costs you $.94 to make. The reality is, the insurance companies are doing anything possible to keep costs and premiums down as low as possible, due to rising costs, legislative actions, and worse health pools (sick people buying insurance with intent of using it for existing health concerns.)
To give you a comparison, Apple, with those shiny white iPads, iPods, and iPhones had net income of $25 billion on revenues of $108 billion, or about a 24% profit margin. Starbucks was sipping on a 10.64% profit margin, Google found a way to a 25% profit margin. I don’t believe we have people screaming at these evil corporate giants. In fact… the typical 99% Occupy Wall St rally people could of been found protesting the evil corporations while doing a search on Google, on their Apple iPhone 4S, drinking a Venti Mocha Caramel Macchiato Light, with 2 Splenda from Starbucks. (I prefer Dunkin Coffee actually, but we all know you don’t go to Starbucks for the coffee, its about the experience.)
While we like to complain about the insurance company, let us remember that no one complains when the insurance company just paid $2,000 for you to have that MRI done on your knee, or has been paying you $5,000 a month disability benefit (tax free might I add) because you went skiing and broke your leg.
The real issue with health-care costs all comes down to a few things. Insurance works when there is a large pool of people buying it. Effectively, it will work best when the market system is left to work for itself. Where we have issues, is when too many people try to control the equation, be it to make more money, or as legislators “trying to do the right thing.”
Here is the scenario right now when it comes to health insurance, and to all insurance in the grand scheme. Currently, each state has an insurance regulator who controls and approves all insurance products at the state level. Meaning, if you want to start an insurance company, you would have to apply to each state where you want to sell your policy. Then each state will add its own “feel-good” regulations. What you are left with, are too many people with their hand in the pot. You have a bigger mess than congress, and increased costs all around.
Lets look at two states really close to us, New Jersey and Pennsylvania.
Being in Princeton, we are close to both, licensed in both states, and have clients with policies in both states. On the average, policies in New Jersey are about 50% more than the same policies in PA for healthy people. Why? In NJ we already have “Obamacare -lite. ”
How are insurance policies in NJ? Over the past few years, many of the provisions found in Obamacare, have implemented in place in New Jersey. We have had dependent care coverage up to age 26 for college aged students living at home, but most of all, guaranteed issue. While in NJ, individual health insurance policies have a pre-existing conditions exclusion clause (pre-existing conditions are not covered by insurance for a certain period, typically 6 months) much like elsewhere, unlike in other states, we have guaranteed issue. Meaning…. no matter how healthy or unhealthy that someone is, they can get health insurance in the great state of New Jersey. More-so, everyone pays the same rate, whether you are a smoker, non smoker, whether you run 2 miles a day and go to the gym 5 times a week, or you are a frequent shopper at McDonald’s where you are known on a first name basis and you drink 6 liters of soda a day. In New Jersey, you can live as unhealthy as you want, knowing full well you will be able to get health insurance coverage at any time, no matter how sick you are. Pissed off yet? This is why our average premium is sooooo much higher here than in other states.
In Pennsylvania, you have a model typically found elsewhere in the United States where health insurance is not guaranteed. The typical insurance underwriting process is something like this. You are quoted a standard rate, which depending on health conditions, can potentially double. The insurance company will do a health interview and request medical records They may request a physical examination. Unless you are in pretty bad shape, you will get a reasonable premium and be covered for the future. Pre-existing conditions will be excluded for a period of time.
The reason the rates in NJ are higher is not because the insurance company earns more, but because the insurance pool is far worse. You have more sick people getting insurance because well, why in the right mind would someone very healthy choose to buy insurance when the premiums are twice as high as anywhere else in the country, and your premiums are supporting unhealthy behavior. If you become sick in the future, you can always get insurance anyway, right? So who is left buy insurance in NJ? Few healthy people, and a lot more sick people. This is what’s called adverse selection.
In PA, and other states where there is no guaranteed issue of insurance, the premiums are lower because well, for the most part, you need to be of decent health to buy into insurance, so you have a lot more healthy people supporting fewer sick people, and thus insurance is what it is, coverage for unforeseen circumstances for which you are not prepared…. and not let me spend $100 because I know I expect insurance to pay out $1,000 for my upcoming procedure.
Now obviously there will be issues and no system is perfect. As much as I am all for helping those who are in a dire situation, my problem is this. Why should you, or anyone else for that matter support bad behavior? I am happy to help someone that lost their job, had an unfortunate occurrence, and cannot afford to pay for health insurance for their family. Where anyone should draw the line is rewarding poor lifestyle choices. Why would you want to support people smoking or eating their way to a heart-attack?
This issue is what Obamacare tries to tackle. In order for everyone to be covered, and for the carriers to not experience adverse selection (only unhealthy people buying insurance because they will expect to use it), is to have as big of an insurance pool as possible. In this case, everyone. If the goal is to get everyone insured, no matter if you are healthy or sick, rich or poor, abusers of insurance or those that want to buy it for protection, you need to have everyone pay into it. This is the individual mandate.
To be quite clear… I am very confident that if EVERYONE was required to have insurance, the overall premium, at least for those of us in guaranteed issue states, will go down, it will have to go up in other states (but hopefully not too much), and the social agenda of having everyone covered will succeed.
Here is my big problem though, I don’t believe the US Government should tell anyone that they have to buy insurance, especially since the President is saying it is not a tax. The supreme court disagrees and believes it is a tax, and as such, the only reason the bill was deemed constitutional, as the government cannot force you to buy insurance, but they can force you to pay taxes.
Personally, I agree with a lot of provisions, such as dependent care coverage up to the age of 26. I further firmly agree that having everyone buy into the system, would give us the true insurance pool, and minimize adverse selection, however I don’t believe it should be forced upon people. There are many people out there, who live healthy lifestyles, that would choose to self insure. Instead of paying $1,000 a month for health insurance, they would be wise to put that money away into a health savings account, to pay for expenses as they incur.
We can absolutely make great health care reforms, but Obamacare is not the answer. Health insurance reform should be more like life insurance, we can have guaranteed issue, but I certainly believe those making poor lifestyle choices should pay more than healthy people. Smokers should without a doubt pay more than nonsmokers. Get rid of the insurance mandate, but make it easy for people to buy insurance. Streamline guaranteed issue (higher premium of course), or go through a physical exam and if you are healthy, pay a lower premium. This way, anyone will be able to get coverage, however healthy people will not be subsidizing the unhealthy lifestyles.
Furthermore, instead of punishing bad behavior (tax penalty for those that do not buy insurance), we should give a tax credit to those who buy insurance and are not a risk on everyone else. If someone is living below the poverty line, I would support having them go on Medicaid, however have stringent oversight. We should never reward bad behavior, and most of all, we should stick to what makes this country the greatest place on earth, Entrepreneurship and personal liberty to make our own choices.
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