Imagine government G, through a series of highly regulated insurers of the same government G, heavily advertises a new taxpayer subsidized insurance plan, independent of underwriting criteria (all comers), and such plan receives only a tepid response attracting less than 400,000 applicants. (1) (2) (3)
The plan is very difficult to apply for and application for such plan does not guarantee the plan was issued. Hence one must spend hours, if not days, applying for coverage and once what appears to be a successful application is finally submitted one must follow up by correspondence and phone calls to assure the application was accepted. Even then many applications can not be found or where transmitted with errors.
Meanwhile, government G, through a series of third party administrators has been maintaining a high risk plan of 101,000 insured‘s. Government G's published intention (known-known) is to end the high risk plan with an inordinately high loss ratio and dump the high risk plan into the aforementioned heavily advertised, taxpayer subsidized, independent of underwriting criteria plan that is difficult to apply for and determine issued-bound coverage. (4) (5)
Since the plan is very difficult to apply for yet has no underwriting criteria, the vast majority of those applying, those that would take enormous amounts of time to apply and follow up to make sure coverage adhered, are likely those that would benefit from the non-underwriting criteria plan. Stated alternatively, the subject of the insurance at hand, given the non-underwriting aspect, strongly attracts those wanting the insurance subject at hand, due to the non-underwriting aspect.
Does the above sound familiar? Please note that the above description is not of insurance, rather it is a description of a scheme known as Obamacare. As Thomas Sowell has noted many times: Not everything called insurance is insurance.
Nicolaus Copernicus, They Are Not
If one examines Obamacare’s latest enrollment figures one finds about 1.2 million applicants with 800,000 going into Medicaid and 400,000 going into subsidized private insurance (note that 1.2 million applicants does not indicate 1.2 million insured as no one appears to be able determine coverage adhesion). The 400,000 subsidized private insured’s are very likely made up of, in large portion, of those desperate for coverage and the despair leading to a grand incentive to take advantage of non-underwriting criteria and hence spending hours if not days applying for coverage and doing all the follow up to make sure coverage is effective. (6)
Rewinding a few years one finds that the Affordable Care Act (ACA) authorized a “Risk Pool” that covered applicants with pre-existing conditions. Approximately 101,000 remain in this pool. Further, state run risk pools that have existed longer than ACA have approximately 235,000 members. Meaning the 336,000 risk pool members will be added to the 400,000 non-underwritten applicants described above on or before 01/31/2014. (7) (8)
Hence the scheme has 400,000 members who’s make-up is likely an inordinate amount of chronically ill which in turn is combined with 336,000 chronically ill to produce a 736,000 anti-selection case that likely rivals or even surpasses anti-selection in another non-insurance insurance scheme known as Flood Insurance.
Upon Further Review
Consider for a moment that the ACA risk pool had to begin turning away applicants the first week in March, 2013 as the plan was going bankrupt as the $5 billion of taxpayer money (subsidy) used to initiate the pool and the premiums paid by members of the pool were not enough money to offset the claims of the pool. Hence any new applicants could not be accepted as current premiums paid by members plus the $5 billion of taxpayer money was calculated to exhaust by 01/01/2014 which met the criteria for dumping the pool into Obamacare. (9)
Insurance (Scheme) Death Spiral
The premiums paid, including taxpayer subsidy, will not sustain a 736,000 member plan that is likely made up of the chronically ill to a very large degree. Historical insurance plan results predict that losses will easily exceed premium causing a major premium adjustment upward. The upward premium adjustment will cause many healthy insured’s to find the plan too costly and they will drop out. As the healthy drop out one ends with an ever increasing concentration of the chronically ill. Round after round of premium increases occur until, theoretically, premium paid equals benefit derived. However, the premium equals benefit point is never reached as the plan implodes prior to that point as even the chronically ill find the plan too costly. (10)
But The Group Will Become Larger and That Will Solve the Problem
Nay, nay! The law of large numbers is only one criteria within legal reserve insurance. The oft mentioned mantra of “pooling the risk”, and all problems are solved, is a misnomer.
A pool of homogeneous exposure units spread across a wide geographic area, subject to underwriting criteria, with risks priced according to potential loss, with future losses fully reserved, is a totally different concept than some fuzzy panacea of: “pooling the risk”.
Furthermore, the accumulation of the group into the future, if indeed it does accumulate; each and every new applicant, healthy or chronic, is faced with the original price driver as mentioned above, as well as, the future price driver of risks not subject to underwriting criteria, with risks not priced according to potential loss. Stated alternatively, cross subsidy exits in that each applicant is either a subsidizer or a subsidized.
It becomes a fiction that at price subsidized (Ps), that all can insure off one another at price Ps. Price does not function as a signal nor rationing agent, price merely becomes a political price (a price based upon politics, not economics).
Moreover, the younger, who are more healthy and less wealthy, cross subsidize the more wealthy and less healthy in regards to base premium, beyond the non-priced-risk phenomena and price subsidized fiction (Ps). Therefore the more healthy and less wealthy produce an additional subsidy for the benefit of the more wealthy and less healthy, which is directly related to price having become based upon politics, not economics.
(1) New Enrollment Figures Show Obamacare is Not on Track, breitbart.com, 12/11/2013
(2) Obamacare’s Medicaid enrollment crowding out private plans, Daily Caller, 10/29/2013
(3) 70% of ObamaCare Enrollees Are In Medicaid, breitbart.com, 12/11/2013
(4) Health insurance and high-risk pools, health insurance.org, 12/12/2013
(5) High Risk Insurance Pool Enrollees Losing Coverage Because of Obamacare, 11/19/2013
(6) Economist: ‘Triple Whammy' Could Send Obamacare Exchanges Into ‘Death Spiral’ - cnsnews.com, 10/21/2013
(7) Funds run low for health insurance in state ‘high-risk pools’, Washington Post, 02/16/2013
(8) Obama administration extends state high-risk pools through January, Washington Post, 12/12/2013
(9) Funds run low for health insurance in state ‘high-risk pools’, Washington Post, 02/16/2013
(10) Economist: ‘Triple Whammy' Could Send Obamacare Exchanges Into ‘Death Spiral’ - cnsnews.com, 10/21/2013