ObamaCare: more unintended consequences

As mentioned here and in other articles ObamaCare, the unread, un-debated , and poorly crafted legislation has immediately yielded consequences.

The final 2000+ page bill went unread, un-analyzed, and un-debated. That is to say, if common sense had been applied, the amended Senate bill which became the ObamaCare bill, required weeks if not months to be read and analyzed. Then the results of the analysis needed debated to be sure wording and intent was correct. However, the bill was rushed through unread and un-debated.

It boils down to this statement by Nancy Pelosi: "But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy". (1)

Brilliant!


Senators, representatives, and staffers to be removed from current coverage?

Although the electorate demanded that if Congressional Democrats thought that ObamaCare was so grand, that Congress should participate in ObamaCare as well. However, Congress supposedly wrote the bill in such a way to exempt themselves from ObamaCare. Or did they?

Apparently passing the ObamaCare bill, unread and un-debated, has left senators, representatives and their staffers not able to retain their current coverage. Ironic?

Please see the following excerpts from the New York Times article entitled 'Lawmakers Baffled by Obama-care':

**"It is often said that the new health care law will affect almost every American in some way. And, perhaps fittingly if unintentionally, no one may be more affected than members of Congress themselves.

In a new report, the Congressional Research Service says the law may have significant unintended consequences for the “personal health insurance coverage” of senators, representatives and their staff members."

**"For example, it says, the law may “remove members of Congress and Congressional staff” from their current coverage, in the Federal Employees Health Benefits Program, before any alternatives are available.

The confusion raises the inevitable question: If they did not know exactly what they were doing to themselves, did lawmakers who wrote and passed the bill fully grasp the details of how it would influence the lives of other Americans?

The law promises that people can keep coverage they like, largely unchanged. For members of Congress and their aides, the federal employees health program offers much to like. But, the report says, the men and women who wrote the law may find that the guarantee of stability does not apply to them.

“It is unclear whether members of Congress and Congressional staff who are currently participating in F.E.H.B.P. may be able to retain this coverage,” the research service said in an 8,100-word memorandum.

And even if current members of Congress can stay in the popular program for federal employees, that option will probably not be available to newly elected lawmakers, the report says." (2)

ObamaCare to control insurance prices?

Leading up to the vote on ObamaCare, vilification of the insurance industry along with health insurance price controls was the mantra of Mr. Obama. Of course its economic axiomatic that price controls merely cause non-price rationing of one sort or another e.g. time/quality and reduces supply.

Please see these excerpts from the LA Times.com article entitled 'Healthcare overhaul won't stop premium increases':

**Public outrage over double-digit rate hikes for health insurance may have helped push President Obama's healthcare overhaul across the finish line, but the new law does not give regulators the power to block similar increases in the future. "

**"The irony here is that it was the Anthem rate increase that breathed new life into the healthcare bill," said Jerry Flanagan, medical policy director of Consumer Watchdog, a longtime supporter of tougher premium regulation. "But there is nothing in this bill to guarantee that it doesn't happen again."

The lack of muscle is stoking concerns that more rate jumps -- and an angry backlash from ratepayers -- could undermine support for implementing the healthcare overhaul.

Insurance industry officials say that talk of more regulation is misguided and have urged federal officials to focus instead on containing rising medical costs, which help drive up premiums.

"Politicians are much more comfortable looking at healthcare premiums," said Karen Ignagni, president of America's Health Insurance Plans, the industry's Washington-based lobbying arm.

Ignagni, as well as some independent healthcare experts, said policymakers should look at ways to control what hospitals and other providers charge, although few elected officials have shown much appetite for doing so." (3)

Apparently, the unread and un-debated ObamaCare bill lacked any wording leading to any mechanism to apply price controls. Hence ObamaCare has not ability to apply price controls.

Go figure!

These consequences seem very ironic. Or is it really better summed up by: "But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy".

(1)http://hotair.com/archives/2010/03/09/pelosi-we-need-to-pass-obamacare-so-that-the-public-can-find-out-whats-in-the-bill/

(2)http://sweetness-light.com/archive/nyt-lawmakers-baffled-by-obama-care

(3)http://www.latimes.com/features/health/la-na-health-premiums13-2010apr13,0,6241013.story

ObamaCare: Centralized Control

Two major objections to the construct of ObamaCare are:

(1) the elimination of pre-existing conditions and the unintended consequences that will occur,

(2) price controls that merely lead to non-price rationing.

An article appeared in the Wall Street Journal on Friday April 9th, 2010 entitled The Massachusetts Insurance Blackout, Insurers go on strike after Deval Patrick imposes price controls.

Please see excepts from the article below:

"This week it became impossible in Massachusetts for small businesses and individuals to buy health-care coverage after Governor Deval Patrick imposed price controls on premiums. Read on, because under ObamaCare this kind of political showdown will soon be coming to an insurance market near you."

"Yet all of the major Massachusetts insurers are nonprofits. Three of largest four—Blue Cross Blue Shield, Tufts Health Plan and Fallon Community Health—posted operating losses in 2009. In an emergency suit heard in Boston superior court yesterday, they argued that the arbitrary rate cap will result in another $100 million in collective losses this year and make it impossible to pay the anticipated cost of claims. It may even threaten the near-term solvency of some companies. So until the matter is resolved, the insurers have simply stopped selling new policies."

"One irony is that Mr. Patrick's own Attorney General and his insurance regulators have concluded—to their apparent surprise—that the reason Massachusetts premiums are the highest in the nation is the underlying cost of health care, not the supposed industry abuses that Mr. Patrick and his political mentor President Obama like to cite. "

"On top of that, like ObamaCare, integral to the Massachusetts overhaul are mandates that require insurers to cover anyone who applies regardless of health status or pre-existing conditions and to charge everyone about the same rates. This allows people to wait until they're about to incur major medical expenses before buying insurance and transfer the costs to everyone else. This week Blue Cross Blue Shield reported a big uptick in short-term customers who ran up costs more than four times the average, only to drop the coverage within three months."

"Last July, Charlie Baker detailed similar gaming at Harvard Pilgrim, the health plan he used to run. Between April 2008 and March 2009, about 40% of its new enrollees stayed with it for fewer than five months and on average incurred costs about 600% higher than the company would have otherwise expected. "(1)

The Massachusetts plan was the blueprint for ObamaCare. Opps! Price controls have never worked, never-ever worked, in all of recorded economic history. Its an economic axiom that price controls merely cause non-price rationing of one sort or another (time/quality) and consequently supply shrinks. (2)

Pre-existing conditions is an underwriting criteria that controls cost in a private welfare system (private insurance). Removing underwriting criteria merely leads to cost acceleration for the group of insureds making up a private welfare system. Removing underwriting criteria also can threaten the solvency of a private welfare system. (3)

The gathering back lash and the prior protests regarding socialized medicine comes down to placement of control. The root objection is placement of control.

Thomas Sowell’s example of the mighty forest best describes the basis of attitudes regarding "control" within economics. The forest is a very efficient system. However, this efficient system is generated by random items such as which acorn grows or rots, where a leaf will fall upon the forest floor, which blade of grass will grow etc., etc.. Hence we have random items with the end product being a very efficient forest. (4)

It’s the natural eco-system of the virgin forest. That this natural eco-system was produced through random events that produced an end result of a highly efficient forest eco-system.

A certain sub-section of ideologues think that “control” is necessary as randomness scares them. The inherent freedom of randomness scares them and hence the answer is to control by removing the freedom of randomness.

The freely occurring randomness of a free market produces efficient results just like the randomness of the forest eco-system. The free market is made up of millions upon millions of economic decision makers who as a group are making zillions of economic decisions per day. Yet each decision maker on the whole makes rational decisions in their best self interest. They also make those decisions on the basis of the simplest least expensive path that actually solves their particular problem. Hence the random nature of a free market is really the rational, simplest, and most cost effective economic organization that actually solves economic problems.

Conversely, a planned economy such as the former Soviet Union was an attempt by few to plan the zillion decisions made daily. The most glaring example of the control experiment by the Soviet Union was to set a hundred thousand prices every year. The price setters only had mundane knowledge to set a very few prices with the remaining prices set as a pure guess. Once they set prices then the random nature of economic decisions were constrained by price fixing and shortages occurred over and over while surpluses occurred in other sectors. Hence the control produces a very, very inefficient system of allocation of scarce resources to competing ends. (5)

Remember, all economies (capitalistic, socialistic, monarchy, fascist, communist, etc.) function under the axiom of the allocation of scarce resources to competing ends.

“Control” in the free market is the individual making rational economic decisions in their own self interest leading to the least expensive and simplest solutions that actually solve for an economic problem. When you remove the control from the individual and allow the state to control, the result is irrational decisions leading to the most expensive and complicated solution that does not in fact solve the problem.

It’s the placement of “control” that divides ideology of free markets vs. other planned authoritative schemes.


(1) http://online.wsj.com/article/SB10001424052702304198004575171782805022028.html?mg=com-wsj

(2) http://thelastembassy.blogspot.com/2009/12/socialized-medicine-scheme-bending-cost.html

(3) http://thelastembassy.blogspot.com/2009/10/fun-and-games-with-preexisting.html

(4) Intellectuals and Society, Thomas Sowell

(5) http://thelastembassy.blogspot.com/2009/11/socialized-medicine-scheme-and-central.html

ObamaCare: consequences, unintended consequences and hidden consequences

ObamaCare, the unread, un-debated , and poorly crafted legislation has immediately yielded consequences.

We need to examine the immediate consequences, immediate unintended consequences, and the continuation of consequences and unintended consequences. Once we examine the self evident consequences we can then seek hidden consequences.

What kind of consequences and unintended consequences have already occurred and what hidden consequences can one expect as time passes?

News stories will surely rage on as the consequences and unintended consequences continue to mount. Over time the unintended consequences will begin interacting with one another creating yet a new set of unintended consequences. Then all the unintended consequences will begin to cascade and create a seemingly insurmountable economic mess.

However, hidden consequences need examined as well.


Why are there going to be Unintended Economic Consequences?

The ObamaCare legislation fails a series of important economic axioms and fails a series of important insurance axioms. The major axioms violated by ObamaCare is that the plan is the world's most expensive and complicated solution that does not solve the problem. ObamaCare is a scheme to allocate scarce resources to competing ends through price fixing which merely causes non-price rationing (time/quality). (1) (2) Also, the risk management matrix of insurance being applied to low frequency/high severity risk is totally mismanaged. (3)

The correct solution would have yielded the simplest and least expensive solution that actually solves the problem. The correct solution would have allocated scarce resources to competing ends through a free market based on price as the only logical rationing agent. The correct solution would have applied insurance to its most efficient area which is low frequency and high severity risks.

It should be clear to all that violating economic and insurance axioms sets a stage for a train wreck. The violations listed above are a mere sampling of axioms broken. The list of economic and insurance errors within the legislation creates a laundry list. Violating sound economic and insurance principles yields unpleasant unintended consequences.

Put aside economic and insurance axioms for a moment and purely look at ObamaCare from a consumer purchase perspective: (a) the consumer has been warned for years to "read their insurance policy" before purchasing the policy, (b) understand your insurance before you purchase the insurance, (c) ask questions before you purchase insurance, (d) fit the insurance to your particular need for insurance. ObamaCare violates every basic consumer purchasing guideline.

What are the immediate Consequences and Unintended Consequences?

Mr. Obama hadn't put his pen down after signing the poorly crafted legislation into law when the consequences and unintended consequences began. Here is a short sampling:


(a) not all components of the plan where scored by the Congressional Budget Office (CBO) and hence any deficit savings referred to were immediately lost when additional components were added and a $260 billion dollar deficit increase appeared over the next 10 years. Hence an already widening deficit ending as national debt puts the U.S. in a more precarious financial situation, (4) (5) (6)


(b) the medicare physician fee schedule change aka "Doc Fix" was not added into the CBO calculation by design. Hence add another $371 billion to the deficit over the next 10 years. More debt to an already out of control deficit and consequently national debt, (7)


(c) authorizes the hiring of 16,000 additional IRS agents to enforce the rules yet no enforcement mechanism was written into the legislation. We then have 16,000 more public employees with no mechanism for enforcement, (8) (9) (10)


(d) AT&T, 3M, Deere & Co., Caterpillar Inc., AK Steel, Valero Energy and Verizon by law had to immediately restate earnings to reflect the present value of their long term health liabilities as well as the higher taxes. The total amount is estimated at $14 billion once all companies write down earnings. Companies had been incentivized through the tax code to provide benefits to retired employees. That tax incentive has been removed. Retired employees with health-care benefits and drug benefits provided by their x-employers will likely be cut loose by smaller employers and hence forced to purchase such coverage themselves. (11) (12) (13)

(e) your freedom to choose different health care plans has been extremely curtailed and mandated coverage elements must be included in your plan regardless of your needs. The most ridiculous being that single men and women who can't have children must still have pediatric services included in their plan and pay the premium to fund the benefit. Further, the reduction in available deductibles, the mandated inclusion of preventative benefits and the many mandated coverages will force insurance cost to rise significantly, (14)


(f) an additional 2.3% tax is imposed on medical device makers and an annual tax of 2.3 billion will be applied to drug makers. When you increase the tax on something you get less of that item. Medical devices that could save your life or a drug that could save your life will now be curtailed,
(15) (16)

(g) the mandate of requiring everyone to buy health insurance was immediately challenged by a series of state attorney generals as unconstitutional. (17) The U.S. Constitution has no clause requiring a citizen to buy any particular product. Will you be required to by a vehicle from GMC next?


Will there be more Unintended Consequences?

ObamaCare's 3000 pages are basically an outline. The legislation authorizes over 100 new government departments that will then write the rules and regulations. That is to say, ObamaCare is an attempt to centrally plan a once free market through rules and regulations. Planned economies always fail as they attempt to plan what were once millions of daily individual decisions made in each individuals self interest. Each individual made decisions based on the least expensive simplest solution that actually solved their individual problem.


The mountain of rules and regulations that are about to appear will attempt to duplicate the workings of a free market. The "control" of the individual and his/her individual decisions that existed with in a free market is now replaced with "control" being mandated and assumed by a central authority aka government. The attempted central planning is no different than the former Soviet Unions attempts to centrally plan. That somehow the central government has "special knowledge" that you and other individuals do not possess and hence this special knowledge replaces the individuals self interest based decisions. Centrally planned economies result in vast shortages in many areas while creating mass surpluses in other areas.

Hidden Consequences

Hidden consequences are those economic undercurrents, those economic trends and economic phenomena acting in the background.

There lurks plenty of hidden economic consequences. However for this discussion think of these three factors acting in the economic shadows:

(1) over 100 new federal government departments created to handle a command and control market for health-care and health insurance,

(2) 16,000 new IRS agents to enforce government mandates,

(3) the unionization of the personnel in (1) and (2) above.


Consider this economic phenomena: the tax increases added to medical device manufacturers and drug makes will be passed onto consumers. Its an economic fact that input costs, and tax is an input cost, is always reflected in the final price of the producer. Hence the consumer of a product or service ultimately pays any tax placed on the producer.

Now consider this economic phenomena as described by William Graham Sumner is his 1883 essay The Forgotten Man:


"Sometimes people go on to notice the effects of trades-unionism on the employers, but although employers are constantly vexed by it, it is seen that they soon count it into the risks of their business and settle down to it philosophically. Sometimes people go further then and see that, if the employer adds the trades union and strike risk to the other risks, he submits to it because he has passed it along upon the public and that the public wealth is diminished by trades-unionism, which is undoubtedly the case. " (18)

What Sumner is explaining is an economic phenomena in the private sector. Unionization of the public sector had not occurred in 1883. However, just like taxes being assessed to a producer and ultimately transferred to the consumer, the cost of unionized labor is transferred from the producer to the consumer.

Now think about the difference between the private sector producer negotiating with unionized labor and the public sector negotiating with unionized labor. What incentive exists for the private sector producer to negotiate with unions vs. the incentive that exists for the public sector to negotiate with unions? That is, do the incentives differ between private and public entities when negotiating with unions?

William Graham Sumner and Milton Friedman


If we take Sumner's theory that the cost of unions to the producer is consequently a cost passed onto the consumer, then the cost of unions in the public sector is passed onto the tax payer. Then is there a difference in the magnitude of the "transfer of cost" of union labor in the private and public sectors?



The magnitude of the transfer of cost of union labor in the private and public sectors is related to Milton Friedman's four categories of spending. In other words, incentive exists in the private sector to negotiate for the best price for union labor. In the public sector there is less incentive to negotiate for the best price therefore causing a greater transfer of cost. The less the incentive to negotiate with union demands surely affects the magnitude of the transfer cost of union labor. Why is there less incentive in the public sector?

The incentive level between private and public sector negotiations with union labor costs lies within Milton Friedman's four ways that money is spent:

The first and most common way in the private sector is people spending their own money on themselves. In this case, the buyer is interested in both quality (the best product or service that he can afford) and value (getting it at the best price) because he is both the producer of the wealth being spent and the consumer of the good or service being procured.

The second way is when people spend their own money on others (such as gifts). Here they are still concerned about value (it's their money), but less concerned about service quality as they are not the consumer.

The third way is spending other people's money on yourself. Think of the rich man's girlfriend who buys herself the nicest dresses in the store on his credit card without even looking at the tag. She wants quality, but value is irrelevant since she sacrifices nothing.

The fourth way is when people spend other people's money on other people. In this case, the buyer has no rational interest in either value or quality. Government always and necessarily spends money in this fourth way. This guarantees inefficient public spending because the spenders have no vested interest in efficiently allocating those funds.

Public sector money falls in the fourth way of spending. Bureaucrats spend your tax money when negotiating with federal workers that are almost all unionized. In other words, other people are spending other people's money on other people. Since no rational interest exists in either value or quality, we find that the union employees within government have negotiated large salary, benefit, and pension packages.

Hence Sumner and Friedman are correct. Much of their correctness lies in the fact that today public sector employees total compensation far exceeds that of private sector employees. (20)That is, over time the fourth category of spending has benefited public sector unions and the enormous cost has been passed onto the consumer which is the tax payer.

Therefore we have a hidden economic phenomena at work within ObamaCare. Those public sector employees charged with overseeing the centrally planned program known as ObamaCare will create a dynamic, continuous, shadow cost driver. The unions representing these public sector employees will push as hard as ever for compensation enhancements. The compensation enhancements will be approved just as they have in the past due in part to Friedman's fourth category of spending. And as Sumner explained those compensation enhancements will be passed onto the consumer (taxpayer).




(1)http://www.washingtonpost.com/wp-dyn/content/article/2010/03/14/AR2010031401389.html

(2)http://online.wsj.com/article/SB10001424052702304871704575159940357375132.html

(3)http://thelastembassy.blogspot.com/2010/03/socialized-medicine-scheme-trickle-up.html

(4)http://www.gop.com/index.php/comms/comments/obamacare_quick_facts/

(5) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=527363

(6)http://article.nationalreview.com/429092/an-off-budget-office/thomas-sowell

(7) http://www.gop.com/index.php/comms/comments/obamacare_quick_facts/

(8) http://thehill.com/blogs/on-the-money/domestic-taxes/87697-republicans-assail-irs-provision-in-health-care-bill-

(9)http://www.newsmax.com/InsideCover/Obamacare-Democrats-healthcare-IRS/2010/03/18/id/353209

(10)http://online.wsj.com/article/SB10001424052702304370304575152181030785348.html

(11) http://online.wsj.com/article/SB10001424052748704100604575146002445136066.html

(12)http://www.smartmoney.com/investing/economy/congress-hates-capitalism-it-seems/

(13) http://online.wsj.com/article/SB10001424052748704100604575145981713658608.html

(14) http://www.investors.com/NewsAndAnalysis/Article.aspx?id=528137

(15) http://www.smartmoney.com/investing/economy/healthcare-change-will-leave-you-with-less-change/

(16)http://farrmiller.com/blog/?p=323

(17)http://www.ameripac.org/original-articles/states-wage-constitutional-obamacare-legal-war/

(18) http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=1654&layout=html#chapter_108194

(19)http://newsgroups.derkeiler.com/Archive/Soc/soc.history.medieval/2006-05/msg00040.html

(20)http://mjperry.blogspot.com/2010/03/two-americas-public-vs-private-sector.html

The Socialized Medicine Scheme: disregarding public opinion

People can not believe Obama , Pelosi and their progressive followers are ramming through their particular version of health-care reform when public opinion is standing at 75% to "start over".

Maybe this helps explain their attempt to ram through legislation against overwhelming public opinion opposition. Roscoe Pound (early progressive): “ …in the hands of a progressive and enlightened caste whose conceptions are in advance of the public and whose leadership is bringing popular thought to a higher level”. (1)

Hence Obama, Pelosi and their progressive followers are coming right out of the progressive playbook and actually believe they are “enlightened” and the “concept” of their enlightened view of health-care is “in advance of the public”.

'Speaker of the House Nancy Pelosi told an audience yesterday that it was necessary to pass the health care bill to see what was in it away from what she termed the "fog of Washington".' (2)

In other words, Pelosi is stating that her enlightened concept of health-care is what is good for you hence merely pass the bill basically sight-unseen and trust Pelosi as you'll like it.

A final point is that Obama and Pelosi are benevolently giving the public 72 hours to read, digest, understand, and make an informed decision on a 3,000 page bill written in legal jargon regarding a highly dynamic subject. It is a ridiculous notion that an informed decision can be made in 72 hours. Its a ridiculous notion that a 3,000 page bill should not be subject to a long debate regarding all the aspects of the bill.

(1) Roscoe Pound, "The Need of a Sociological Jurisprudence," The Green Bag, October 1907, pp. 611,612.

(2)http://www.aim.org/don-irvine-blog/pelosi-pass-the-health-care-bill-to-find-out-whats-in-it/

The Socialized Medicine Scheme: the false choice of central planning

An underlying argument within the health-care debate is that the free market is being compared to a government plan that is somehow likely to perform as the alternative to a free market.(1)

Basically, the free market is a series of individuals, making individual decisions, decisions in their own self interest. That when the zillions of economic decisions are combined, the combination of decisions sets the allocation of scarce resources to competing ends.


The free market intuitively appears chaotic. It appears unorganized. The appearance of a chaotic, unorganized free market however yields the most efficient allocation of resources to competing ends as well as having the attribute of individuals solving for the least expensive, simplest solutions to their perceived problems/needs/wants.

Thomas Sowell has explained the appearance of chaotic and unorganized characteristics of the free market to the ecosystem of a forest. The ecosystem of the forest was not planned. The ecosystem of the forest came about due to a zillion chaotic and unorganized activities that produced an efficient ecosystem. (2)

However, advocates of central planning (government planning as an alternative to a free market) make the assumption that a central authority can better plan and hence create a better outcome than the results of a free market. The problem is:

(a) central planning then supplants the individual. It supplants individual decisions, decisions made in the realm of individual self interest, and precludes decision made by individuals attempting to find the least expensive and simplest solutions to their perceived needs/wants/problems,

(b) central planning then must set prices for scarce resources to competing ends. Regardless of the organization of your economy, resources are scarce and participants in the economy are competing for the use of those scarce resources. We know that no one individual can set a price for more than a few prices that they might be familiar with due to mundane knowledge of a particular product/industry. Then how can a central planned economy (government planning as an alternative to a free market) set the prices for hundreds of thousands of prices? Who is smart enough to set those prices? The very best example is the former Soviet Union where central planners had to set thousands and thousands of prices each and every year that merely caused resource distortion with major surpluses in some areas and severe shortages in other areas, (3)

(b2) going back to Sowell’s forest ecosystem, exactly when should the acorn fall from the tree, where should it land, and should it root and grow or should it rot? Now try planning every leaf, twig, blade of grass and growth/death within the forest ecosystem.

Its counter intuitive to think the seemingly chaotic and unorganized free market creates efficient outcomes. Its intuitive to think somehow intervention by adding planning will result in better outcomes. However, no one individual or group of individuals can plan a gazillion economic interactions or a hundred thousand prices. The ecosystem of the forest appears chaotic and unorganized yet results in an efficient outcome. Planning the ecosystem of a forest is impossible and if attempted produces an inefficient result. Planning economic activity is impossible and produces a highly inefficient result.

Hence the underlying argument within the health-care debate that the free market is being compared to a government plan that is somehow likely to perform as the alternative to a free market is a false choice/argument.

(1)http://www.econtalk.org/archives/2010/03/don_boudreaux_o_3.html

(2) (3) Intellectuals and Society, Thomas Sowell, Chapter 3

The Socialized Medicine Scheme: reverse risk management.

The proposed socialized medicine scheme aka ObamaCare fails the axiom of low frequency and high severity within the theory of insurance. Low frequency and high severity risks are the point in the risk management matrix where the insurance mechanism is most efficient and qualifies for deployment. (1) (2) (3)

The socialized medicine scheme's mandated coverage proposal merely moves one toward low frequency and low severity within the risk management matrix. This is a highly inefficient position within the theory of insurance and hence inefficient positions lead to increased costs.

What is the risk management matrix and why does it create an axiom? Why is risk management and self insurance important within the theory of insurance? Why does ObamaCare create an inefficient transfer of risk and hence becomes an insurance cost and health-care cost increase driver ?

The Risk Management Matrix

The most effective use of insurance is to find the simplest and least expensive solution that actually solves the risk problem. That point is found when you have a low frequency risk that results in a high severity result. That is, insurance is most effective when applied to catastrophic events that occur infrequently. (4)

The risk management matrix depicted above is the simplest risk management matrix in the theory of insurance. This particular simple matrix however creates an axiom within the theory of insurance. The matrix can also be expressed as a mathematical formula. (5) The matrix is also a building block to much more complicated risk management matrix used for specific risk situations. (6) (7) (8) The risk management matrix is also used in other disciplines. (9) (10) (11) (12)

Within the matrix you find the combination of high frequency-low severity. The most popular example of this type of risk is your weekly grocery bill. Hence insuring the weekly grocery bill would cost exactly the value of your weekly grocery bill. Using insurance would be ineffective. In high frequency-low severity risks the most effective solution is to retain the risk (self insure) and use loss control and risk management techniques such as using shopping lists, clipping coupons, and shopping grocery store prices.

The next block within the matrix is low frequency and low severity. An example would be replacing a light bulb. The frequency occurs every six months or so and the cost to replace a light bulb is modest. Hence insurance would be ineffective. In low frequency-low severity risks the most effective solution is to retain the risk and self insure.

The next risk is the one that produces high frequency-high severity results. An example would be to build a home within the crater of an active volcano. The event is un-insurable. The chances of loss are high and the severity of loss is extreme. In this case risk avoidance is the only technique available.

The final combination is low frequency and high severity risks. This is the situation where insurance is a viable option. For example, pure risk in the field of property insurance such as fire, tornadoes, and lightning strikes create high severity losses. However, the chances of fire, tornadoes, and lightning strikes are of low frequency and random in nature over a wide geographic area. Hence the risk can be transferred to an insurer for a modest consideration (premium). (13)

Why is risk management and self insurance important within the theory of insurance?

Obviously risk management produces the risk matrix depicted above which indicates when insurance is viable. However, the study of risk management produces techniques such as risk reduction, risk loss control, and risk avoidance. Risk reduction from the loss of lightning strikes would be to install lightning rods. Risk loss control regarding lightning losses would be to install smoke detectors and fire extinguishers on each level of a property exposure. Risk avoidance of lightning exposures would be to not own property hence the property loss exposure is eliminated.
However, if a loss exposure is of low frequency and high severity and hence insurance becomes a viable option, and one decides to transfer the risk to an insurer for a consideration (premium), what amount of consideration (premium) does one want to pay to transfer the risk? Which brings you to another risk management technique known as risk retention. How can the premium be reduced through risk retention?
If the consumer can not avoid a risk, has deployed risk reduction and loss control, and has decided to tranfer the risk by the purchase of insurance, the next question is what amount of a risk can be retained? On one extreme of the risk retention spectrum is to retain a majority of a risk. On the other end of the spectrum is to have a zero deductible if loss occurs. Obviously retaining the majority of a risk results with the insurer having a much smaller obligation which in turn generates a small premium outlay for insurance. A zero deductible coverage results in a larger obligation by the insurer resulting in a relatively high premium outlay.
Hence risk retention is a cost management technique when insurance is the desirable avenue of handling a risk. Higher risk retention results in lower insurance costs.
Why does ObamaCare create an inefficient transfer of risk?
The mandated coverage within ObamaCare requires (mandates) low major medical deductibles and ancillary benefits such as low doctor office co-pays and low drug card co-pays. In other words, the mandated coverage leads to mandated risk retention. It mandates low risk retention and we know the lower the risk retention the higher the cost of insurance.
Low doctor office co-pays, low drug card co-pays, and a low major medical deductible means you are moving within the risk matrix (diagram above) toward low frequency-low severity losses. You are also taking a catastrophic coverage such as major medical insurance and attaching a very low risk rention dollar amount and hence settling for a very high cost. Any movement in the matrix away from low frequency and high severity block to any other block within the risk matrix leads to ever increasing insurance costs. Retaining small amounts of catastrophic coverage leads to high cost insurance. In other words, you are casting a blind eye at the insurance axiom produced by the risk management matrix and further driving up the cost of catastropnic coverage.

Mandated low risk retention and the consequential third party effect and over utilization effect.
When risk retention is very low the group of insureds generally suffer from the third party payer effect caused by the mere existence of insurance. That is to say, insurance causes a disconnect between the provider of health-care and the consumer of health-care. The consumer disregards the cost of a health-care event as the insurance will pay for the health-care event. Hence the cost of a particular health-care event is dismissed by the consumer. If the consumer was paying for the particular heath-care event out of pocket, then the consumer would be very cost sensitive and sensitive to what amount of diagnostic procedures deemed necessary. Insurance has the effect of removing the cost and amount of health-care procedures the consumer demands.
Low risk retention also causes over utilization of health-care resources. If the insured faces a very small outlay in order to access health-care, then the insured is much more disposed to use health-care resources. Low deductibles and/or co-pays cause over utilization.
Freedom to choose.
Risk is a very individualistic problem/measurement. One individual is willing to completely self insure as they have large financial resources. Another individual is willing to retain a large amount of risk e.g. the first $10,000 of a risk as they have the resources to retain larger amounts of risk. Other insureds deploy risk management techniques and can retain more modest amounts such as $5,000. Finally you have a segment of insureds that are willing to pay more in premium as they are either unwilling to retain risk or would rather pay a higher premium as they can not currently retain risk (in effect financing retention).
Summary
Failure to follow insurance theory as spelled out by the axiom of the risk management matrix will cause insurance costs to rise. Mandating low levels of risk retention cause the third party payer effect and over utilization effect which are major cost drivers within insurance cost. Mandated coverage eliminates the consumers freedom to choose.
When risk management is discarded, failure to manage risks causes insurance prices to rise. ObamaCare is a plan, in which the plan itself, will from the very beginning cause prices to accelerate.
Note: the underlying cost driver of health insurance is the cost of the resource known as health-care. However, you can design the insurance mechanism in such a way to become a second cost diver that then magnifies the underlying base cost driver. Designing insurance to reduce cost should be the over aching strategy not creating an insurance design that merely drives up costs.
References

(1) http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=319988

(2) http://www.iag.com.au/about/insurance/media/IAG_Insurance_101.pdf

(3)(4) http://www.flatworldknowledge.com/pub/1.0/risk-management-enterprises-an/29742

(5)http://www.atuarios.org/docs/PDF/Intro_Credibility.pdf

(6)http://intranet.icea.es/solvencia/Documentos/Informe%20IAA%20Insurance%20Regulation%20Committee%20February%202002.pdf


(7)http://www.actuaries.org/EVENTS/Seminars/New_Delhi/chapters/page-73to89.pdf

(8)http://www.soa.org/files/pdf/C-21-01.pdf

(9) http://wiki.answers.com/Q/Method_for_computation_of_frequency_and_severity_rates_for_Industrial_Injuries_and_Classification_of_Industrial_accident

(10)https://www.palisade.com/industry/InsuranceModels.asp

(11) http://www.opalesque.com/asquare/452/High_frequency_low_severity_insurance_led_investing194.html

(12) http://www.medicalnewstoday.com/articles/12116.php

(13) http://www.flatworldknowledge.com/pub/1.0/risk-management-enterprises-an/29740

The Socialized Medicine Scheme: who pays for health-care?

One point that seems to be obscured in the current health-care/health insurance debate is the perception that 45% of health care
expenditures are government and 55% are private.

The statistics of Medicare, Medicaid, military, and other government programs make up 45% of health-care expenditures and hence government is 45% of the pie.

That somehow, some way, government pays for 45% of health-care. There is something very wrong with this perception and consequential arguments based upon government currently paying for 45% of health-care expenditures. The argument is flawed as "government" produces nothing and hence is merely a transfer mechanism.

In reality the private sector pays 100% of all medical care expenditures. That is to say, government does not exist without tax transfers from the private sector. A certain portion of taxes are extracted from the private sector by government for the subject of health-care. The government merely acts as a transfer agent of this private sector money.

Hence at the end of the day, 100% of all health-care expenditures are paid by the private sector.