Sunday, May 26, 2013
The Demand Side of ACA: “overutilization”, insurance deployment and the risk management matrix
In the book Obamacare Survival Guide, Nick Tate makes the point that the architects of the Affordable Care Act (ACA) were determined to tax “Cadillac” health insurance plans as the plans lead to overutilization of health-care. That the architects believe the prime driver of health-care price is overutilization. How can the master schemers of ACA argue, in any convincing fashion, that Cadillac plans be “taxed” based upon overutilization then in turn create a maintenance policy design within Obamacare, that indeed promotes overutilization? (1)
Somehow one is to believe it is a perfect and airtight argument to vilify one overutilization design meanwhile creating another overutilization design -and- tax one overutilization design in order to cross subsidize the other overutilization design? Huh? How can one put forward an aggregate argument that overutilization of health-care is a prime driver of health-insurance price yet create the very plan one argues against? That is a new zenith in the realm of nitwitery!
John Cochrane of the University of Chicago Booth School of Business has stated on numerous occasions that insurance is being promoted and deployed within the ACA for the wrong reasons. That is, that insurance should be for catastrophic events. True. However, the argument of catastrophic events and the insurance match might be better illustrated/supported/delineated by a basic insurance tenet: the risk management matrix. (2)
Within the risk management matrix low frequency/high severity is the only efficient deployment of insurance given the known-known of the matrix of frequency and severity. All other deployments of insurance within the matrix are inefficient uses of insurance and should be avoided. Hence inefficient deployment of insurance is very much related to movements, within the matrix, away from low frequency/high severity. Stated alternatively, moving away from low frequency/high severity toward high frequency/high severity, high frequency low severity and/or low frequency/low severity means one has knowingly elected to deploy insurance in an inefficient manner.
Hence the argument that insurance should be for catastrophic events might be better and more fully framed as: insurance should be for catastrophic events as any other deployment of insurance, given the known-known of the risk management matrix, is a movement in the direction of inefficiency.
The basic and valid point of “insurance should be for catastrophic events” may not resonate, to the degree one would hope, with James and Jane Goodfellow. That knowledge and decisions need enhanced, for as much as James and Jane pay for a variety of insurance on a daily basis, James and Jane simultaneously suffer from unfamiliarity with insurance. Hence the argument needs that second step of: how the knowledge and decisions set forth in the risk management matrix allows James and Jane to identify and avoid an inefficient allocation of their scarce resources. That is, the “why” behind the oft quoted “insurance should be for catastrophic events”.
(1) ObamaCare Survival Guide, Nick J. Tate, 2012, pgs 195 -197.
(2) After the ACA: Freeing the market for health care, John Cochrane, 10/18/2012.