ACA: a price rocket -or- Wernher Von Braun warned of such launch pad explosions.

 

An item of ACA that escapes discussion is "fully reserved". That is, private insurance must reserve for future losses. However, social insurance, in the main, the "reserve" thereof, is implicitly and explicitly assumed to be the political authorities ability to coercively tax. Historical experience tells one, in no uncertain terms, that social security type plans with a quasi-reserve such as a trust fund do not reserve for future loses rather they raise taxes in that the tax functions/substitutes as the reserve.

 
 

Another item to consider is, in the aggregate, experience tells one that social insurance schemes are generally way too rich in benefit design based upon an extremely under estimated price.

 
 

Regarding ACA, the schemers have created a design that has the attributes of a social insurance plan yet the insurance mechanism is privately insured. Unlike U.S. Social Security and Medicare which have paper tiger trust funds [or worse in that the dupery of being one's own debtor and creditor is at work] and escalating historical tax rates, ACA is underpinned with a real tiger reserve [private insurers] and hence escalating premium rates. Stated alternatively, the premium rates will mirror the escalating tax rates of general social insurance schemes yet escalate even more as the future losses must be reserved and those reserves based upon ever escalating price. No hiding behind unfunded future liabilities.

Consider for a moment that Medicare had been originally designed based on the ACA design. For example, circa 1965 to today there would be no such item as unfunded liabilities. All future losses would have to be reserved [private insurance mechanism]. Exactly what kind of insurance premium would one currently face and would have faced between 1965 and today?


Would it be the current zero price per month for part A and $100 per month for part B? The only way part A could remain at a zero price would be to have an extreme escalation in the payroll tax and part B's price would need to increase substantially as well.


Moreover, if such program had been fully reserved all along, then there would be no need to massively escalate price today as that mass escalation would have occurred over time [1965 - 2013]. The price, if fully reserved, would have been a bone of contention, politically speaking, during the vast majority of Medicare's life span.

 

In essence, there is no bending the cost curve in ACA. The curve is now fully priced for escalating price based upon too rich of a benefit design AND fully reserved for the price today and escalating price of tomorrow. No hiding behind paper tiger trust funds and unfunded future liabilities. Moreover, ObamaCare taxes will need to rise as well to subsidize the escalating price of certain groups selected for subsidization.
 

As with all social insurance schemes price containment will end in cutting benefits and/or price control schemes that will merely exastrobate the situation.

 

 

 

 

**note** how many times and in how many ways does one see/hear the basis regarding  the future viability of collective action as "the political authorities ability to coercively tax."


How many programs, when challenged on viability, are defended by "the political authorities ability to coercively tax." The nitwitery of the argument is that if all programs had to call in their marker regarding  "the political authorities ability to coercively tax" then the tax rate would be 101% which means there would be no economy as no tax at 101% can exist.

Krugman’s Table D'Hote: Delusive Broccoli

“Why? When people choose not to buy broccoli, they don’t make broccoli unavailable to those who want it. But when people don’t buy health insurance until they get sick — which is what happens in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn’t work, and never has.

There are at least two ways to address this reality — which is, by the way, very much an issue involving interstate commerce, and hence a valid federal concern. One is to tax everyone — healthy and sick alike — and use the money raised to provide health coverage. That’s what Medicare and Medicaid do. The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship.” - Broccoli and Bad Faith, Paul Krugman, 03/29/2012, New York Times


One might want to examine the following statement more closely:


“But when people don’t buy health insurance until they get sick — which is what happens in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn’t work, and never has.”

Krugman’s statement is backwards. Krugman is substituting the concept of mandate for the concepts of the pre-existing condition clause and the risk selection process [underwriting the risk]. Stated alternatively, Krugman is stating that without a mandate the risk pool [collection of underlying risks] deteriorates when people don’t buy health insurance until they get sick when in fact the collection of underlying risks remains unchanged as anti-selection is avoided by a pre-existing condition clause and risk selection aka underwriting the risk. That is to say, in order for Krugman’s statement to be correct if would have to be written as: …..in the absence of a pre-existing condition clause and medical underwriting, anti-selection occurs hence driving up the price to insure the underlying collection of risks.

The next question is how in the world does private insurance work well without a mandate? According to Krugman  "in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive" however no such mandate exists in life insurance and that particular private insurance program works well. What about private property that is insured without mandate? That insurance program works well. What about pet health insurance? No mandate and the plan works. Hence putting forth "mandates" and asserting "worsening of the risk pool" concluded by "makes insurance more expensive" is a sweeping fallacious statement.

Looking at Krugman’s statement from another angle, its actually the “mandate” in conjunction with the elimination of pre-existing condition clause and the elimination of underwriting that makes the underlying collection of risk characteristics deteriorate. How so? If all comers are insured, as Krugman suggests in the following statement “The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship“ then he is making the implicit assumption and explicit assumption based on his prior statement of “…..don’t buy health insurance until they get sick” as he assumes all comers are healthy and totally insurable as they are purchasing insurance before they are sick. Nay, nay! The collection of all comers would be made up of some healthy, some healthy but with penned up demand for health maintenance, some unhealthy with acute problems and some unhealthy with chronic problems. Hence the assumption Krugman makes is that the healthy comers somehow, someway outweigh the unhealthy comers in the area of cost and by some magical pixie dust phenomena known as “insurance” the risk characteristic and associated cost disappears.


Examining Krugman’s other statement:

　

“There are at least two ways to address this reality — which is, by the way, very much an issue involving interstate commerce, and hence a valid federal concern. One is to tax everyone — healthy and sick alike — and use the money raised to provide health coverage. That’s what Medicare and Medicaid do. The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship.”

Krugman yet again substitutes concepts. Krugman substitutes a social insurance [social welfare plan] concept/argument for a private welfare plan [private insurance] concept/argument. What Krugman is stating, in effect, is that the entire field of insurance, both private and public, is based upon social insurance concepts which is fallacious. Moreover, he fails to tell the reader that “tax” and more succinctly escalating tax over time, in social insurance [social welfare plans] is a substitute for “reserve” in private insurance [private welfare plans]. That is, in a private insurance plan adequate premium supports reserves that are in anticipation of future losses. In most social insurance schemes, no reserve exists for future losses [does the phrase “unfunded future liability” ring a bell?] hence the private insurance “reserve” for future losses becomes escalating tax over time in social insurance schemes as no reserve exists hence increasing taxes function to pay for unfunded future losses [fund future losses = increasing tax].

One can only surmise that there is economist Krugman, then there is Mr. Krugman, and finally there is columnist Krugman.

ObamaCare: purposely designed to end as a single payer plan?

Many commentators make a general argument that ObamaCare was purposely designed to end as a single payer plan. However the same commentators hop scotch over the concept of private insurance vs. social insurance reserves which needs examined as a component of the assertion that ObamaCare was purposely designed to end as a single payer plan .

That is to say, beyond the myriad of arguments against ObamaCare including the demise of consumer directed health plans, price fixing resulting in quantitative and qualitative reductions in service, a centrally planned market for health care through massive and expensive bureaucracy replacing price coordination in a decentralized economy, one point that gets little press time is the difference between private insurance and social insurance reserves.

What are insurance company reserves?

A simple definition is: "consumers make insurance claims in the future and depend on insurers to honor their earlier commitments. Reserves—the financial assets in which insurers invest their premium income—are often the most tangible sign of an insurance firm's staying power". (1)

A more complex definition is: "amount designated as a future liability for life or health insurance to meet the difference between future benefits and future premiums. net level premium is determined so that this basic relationship holds: the present value of a future premium equals the present value of a future benefit. This relationship, incidentally, exists in fact only at the point of issuance of a life insurance policy. After that, the value of future premiums is less than the value of future benefits because fewer premiums are left to be paid. Thus, a reserve must be maintained at all times to make up this difference". (2)

An alternate definition is: "[means amounts—] which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies". (3)

Underwriting, Preexisting Conditions, and Reserves

The concept of "preexisting conditions" has become a hot political topic that is used in debate with much verbal virtuosity. However, preexisting conditions is actually a term that describes a condition of a risk uncovered through "underwriting". In private insurance, which is reserved to pay for future claims, underwriting directly effects reserves and ultimately pricing. The key in private insurance is "a reserved plan to pay future claims" which is achieved in part through underwriting.

On the other hand, social insurance programs are notorious for reserving for future claim paying ability through the taxation authority of a central government. That is, future claim paying ability shows up as future unfunded entitlements that are "reserved" through the ability of the central government to raise taxes to fund the unfunded future claims paying ability.

Reserves vs. Taxes

Social insurance can remove/reduce underwriting allowing for preexisting conditions as social insurance does not reserve their ability to pay future claims. If social insurance was required to reserve future claim paying ability, then suddenly underwriting and preexisting conditions would immediately be placed back on the table and permanently placed back on the table. Therefore, underwriting which uncovers conditions of a risk known as preexisting conditions can/are removed in social insurance as "tax" is the reserve.

The end game is by removing underwriting in social insurance, in effect, guarantees future tax increases as the reserve must increase to accommodate anti-selection due to the removal of underwriting. Anti-selection leads to adverse claim experience hence causing additional reserve needs to expand exponentially.

Private Insurers Reserves and Price Increases

Once you go through the above reserve comparison exercise regarding private insurance vs. social insurance, then you can proceed to the argument regarding ObamaCare being purposely designed to end as single payer plan. A major reason ObamaCare ends as a single payer plan through design is because private insurance can not possibly reserve to pay for future claims when underwriting is eliminated. Private insurance can raise prices in the short run but as they eventually see insolvency on the horizon due to reserve problems they merely exit and end operations.

Note: private insurers, even in the short run, will have difficulty raising premiums at a rate needed to increase reserves as ObamaCare is a price fixing scheme in regards to insurance premiums as well as health-care services. Any price increase by insurers are immediately met with angry inquiries such as those by Kathleen Sebelius of the H.H.S. . (4)

Meanwhile, while private insurers reserves become inadequate and private insurers exit, the exiting private insurance administration is dismantled. However, existing private insurance administration could be utilized as an administration source for ObamaCare. The organization and expertise already exists. But ObamaCare authorizes its own massive bureaucracy built from the ground up with little expertise hence the existing private insurance administration ends. Note that in the short run you have duel administration of exiting private insurers and ObamaCare bureaucracy which is an additional cost driver.

Summary

The single payer end game, a government administered plan, is in essence a non-reserved entitlement where "tax" is the reserve. Hence "tax" must increase as you have elected not to reserve to pay for future claims paying ability in a social insurance plan. Taxes will increase as anti-selection increases claims, due in part to the removal of underwriting, which means future claims paying ability must be further reserved. You either reserve or you tax. In social insurance you tax.

Notes

(1) Federal Reserve Bank of Minneapolis http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3605

(2)http://www.allbusiness.com/glossaries/life-insurance-reserves/4948746-1.html

(3)Cornell University Law School http://www.law.cornell.edu/uscode/26/usc_sec_26_00000816----000-.html

(4) Sebelius Has a List, Wall Street Journal http://online.wsj.com/article/SB10001424052748703597204575483900330728436.html