Contemplating Health Care Reform

Sunday, August 16, 2009

Fixing High Insurance Premiums by Increasing Premiums?

During President Obama's Town Hall meeting in Colorado Saturday, he claimed that he is seeking to protect policyholders from increasing insurance premiums and out of pocket health care expenses by forcing insurance pools to pay for unlimited care.

"So insurance companies will no longer be able to place an arbitrary cap on the amount of coverage you can receive or charge outrageous out-of-pocket expenses on top of your premiums. That’s what happened to Nathan and his wife. Their son was diagnosed with hemophilia when he was born. The insurance company then raised the premiums for his family and for all his coworkers who were on the same policy. The family was approaching their cap.....Now thankfully, Colorado’s law doesn’t allow coverage for small businesses to permanently exclude preexisting conditions like his son’s, so eventually they found insurance. But they’re paying increasing premiums and they still have to face the prospect of hitting their new cap in the next few years.”

The president's ignorance of even the most basic economics of insurance is puzzling given that he is proposing an insurance overhaul. Nothing about the process of calculating caps, premiums and the share of health care expenses which must be borne by the policyholder is random. In fact, all of those features are very precisely calculated and disclosed as part of the voluntary legal contract between the insurance company and the policyholder.

As we pointed out here earlier, someone must pay for Nathan's son's care. The only way for Nathan's insurance companies to obtain the resources to pay for Nathan's son is to collect premiums from its policyholders - including Nathan. If the insurance company doesn't collect enough in premiums from policyholders to pay for the care of the members of the pool who become ill, then it will not be able to pay for anyone as it will soon go bankrupt. If the insurance pool is forced to pay for unlimited care for every policyholder, then insurance premiums will soon become so high that people will start dropping out of the insurance pool in search of lower premiums. To keep premiums lower for the group, the insurance company must cap how much it will pay over the lifetime of each individual in the group. The undeniable reality is that there is a limit on how much we can force someone else to pay for a benefit to us.

If insurance companies can't shift some of the cost of care for an individual in the pool to that individual (a limit touted by Mr. Obama), then it must raise premiums to cover the cost of unlimited care for all. President Obama's complaint is that insurance is too expensive. He proposes to fix this problem by making insurance even more expensive.

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