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.

Thomas Sowell - The Future Of Social Security

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: The Ultimate Premium Increase, $940 billion becomes $1.76 trillion.

Many headlines appeared 03/14/2012 such as the following:


CBO: ObamaCare Price Tag Shifts from $940 Billion to $1.76 Trillion, YahooNews. (1)

What does the $1.76 trillion price tag mean vs. the old price tag of $940 billion? It means your premium came due, again, and….. ouch! What an increase!



By The Numbers


First off, the $1.76 trillion is a ten year cost period hence $176 billion per year. The $940 billion figure is the ten year comparison period number generated at inception of ObamaCare -or- $94 billion per year.

The most recent total expenditure on health-care in the US is 2.6 trillion (2010 stats):“U.S. health care spending grew 3.9 percent in 2010 following record slow growth of 3.8 percent in 2009; the two slowest rates of growth in the fifty-one year history of the National Health Expenditure Accounts. Total health expenditures reached $2.6 trillion, which translates to $8,402 per person or 17.9 percent of the nation’s Gross Domestic Product (GDP).” (2)

Moreover, as of 2010, total annual private health insurance premiums written were $378 billion, Medicare cost was $446 billion and Medicaid was $380 billion. Hence private and public equals $1.204 trillion premium/quasi-premium volume. (3)

With ObamaCare you have a new total consisting of: $1.204 trillion plus $176 billion = $1.38 trillion of premium.

Note: the $1.76 trillion would appear in private subsidized premium and Medicaid costs as many will merely end up on Medicaid and part of the $176 billion goes to that quasi-premium portion.

Hence, by-the-numbers, you have a social insurance scheme of some sort, that has an old premium of $90 billion, and in two annual renewal cycles since inception, the social insurance scheme premium changed to a $176 billion annual premium. A 95% premium increase since inception, two short pricing cycles ago. According to research, and stand to be corrected, a $86 billion dollar increase in premium over two years might be considered the ultimate premium increase.


What Does Your $176 Billion Per Year Insurance Premium Buy?

The $1.76 trillion (over the next decade) regarding the cost of ObamaCare is made up of the following:

(a) the cost to provide coverage to the current uninsured (should fall from 16% to 6% uninsured i.e. not all will be insured),

(b) cost of expanded coverage,

(c) administration cost.


The cost to provide coverage to the current uninsured:

(1) many of the uninsured will be placed in Medicaid and hence the annual cost of Medicaid increases,

(2) those purchasing coverage that have means, but not total means to buy, will be subsidized (up to 133% of poverty level qualify for subsidy),

(3) those firms ending coverage due to cost, those subsequent uninsured employees will then purchase individually and some will fall into #2 above (subsidy).


The cost of "expanded coverage" (scope of coverage) e.g. first dollars coverage for annual physical, colonoscopy, etc. means the premium is driven up, hence the cost for subsidies increases with the underlying premium cost increase to cover expanded benefits. Also, the scope of coverage will include no pre-existing condition exclusion yet charge the impaired risk nothing extra, hence driving all premiums higher, hence driving the subsidy higher.


The administration of ObamCare by a federal bureaucracy speaks for itself.


The Other Side of the Coin

　

What about the payment of the annual cost of $176 billion vs. the old annual cost of $90 billion per year?

That is, the myriad of ObamaCare associated taxes, the penalty fines for not buying, the penalty fines for not providing (firms), etc. had to equal $90 billion. Now it has to equal $176 billion hence the tax and fines have to increase -or- you decided to deficit spend -or- you cut the program benefits -or- all of the above.

And About That Base Economic Model that is Broken?


What about this $176 billion regarding changing the base model of health-care (a $2.4 trillion dollar per year broken model)? It does nothing about fixing the model. If anything it exacerbates the broken model through mandated coverage under ObamaCare which is a basically a low deductible major medical plan which causes over utilization......meaning the coverage itself is a cost driver and hence you are subsidizing an ever increasing cost driver. Ops!


Cost Containment and Price Fixing Schemes


The "cost containment" within ObamaCare is a price fixing scheme. That is, they intend to contain cost ala Richard Nixon. There is not one price fixing scheme in all of economic history that was ever successful. Why? If one doesn't use price as a rationing agent, then some other rationing agent must replace price. That is, price fixing merely affects supply quantitatively and qualitatively. Or, alternatively, supply merely deteriorates in quality and the new lower quality supply is rationed over time.



Notes:

(1) CBO: ObamaCare Price Tag Shifts from $940 Billion to $1.76 Trillion, YahooNews.http://news.yahoo.com/cbo-obamacare-price-tag-shifts-940-billion-1-163500655.html

(2) https://www.cms.gov/NationalHealthExpendData/downloads/highlights.pdf

(3) Insurance Industry Overview, http://www.plunkettresearch.com/insurance-risk-management-market-research/industry-statistics

And About that "Lock Box" and Social Security.........

The video above is brought to you courtesy of Dr. Donald Boudreaux, Economics Department, George Mason University. An excellent two minute lesson regarding the wonderful world of social insurance and economic security. (1)

Yes, social insurance and economic security, that fun filled world of impossible promises brought to you by politicos past and present. Yes, those propositions based on "the way things ought to be" which are magic pixie dust carried in the pockets of forest nymphs in the economic pretend world of politicos.

Ah, Boudreaux is merely exaggerating to make a point. There has to be a lock box! There has to be value in that lock box! Where is that lock box and lets go inspect it!

OK! Off to see the wizard of lock boxes!

Social Security: There is No Trust Fund, Only IOU's - Don Luskin, Capitalism Magazine, April, 11, 2005

On Tuesday, President Bush had the most bizarre cabinet meeting any president is ever going to have. It was a meeting with an actual cabinet. A filing cabinet. A filing cabinet in Parkersburg, W. Va., to be precise.

Strange? Yes. But then again this is a very remarkable filing cabinet. By one way of looking at things, it contains $1.7 trillion dollars. But by another, it contains nothing at all.

Of course I'm taking about the filing cabinet in the offices of the Bureau of the Public Debt that holds the assets of the Social Security Trust Fund.

After the meeting, President Bush declared, "a lot of people believe that the Social Security trust is -- the government takes a person's money, invests it, and then pays it back to them upon retirement... It doesn't work that way. There is no 'trust fund,' just IOUs that I saw firsthand..."

In other words, there's nothing there.

The president's opponents were quick to look at it another way. Democratic congressional leaders Harry Reid and Nancy Pelosi said the same day, "It is simply wrong to suggest that the Social Security Trust Fund does not exist, or that the securities held by the Trust Fund are merely pieces of paper. For a president to even suggest that the federal government might, for the first time, default on a security backed by the full faith and credit of the United States unnecessarily misleads American workers..."

Who's right? Is the president right, that the Treasury bonds held by the trust fund are "just IOUs"? Or are the Democrats right, that those bonds are sacred obligations of the United States, just like any other Treasury bond?

Is the president raising valid concerns about the way Social Security is financed? Or, as the Democrats charge, is he threatening to default on the nation's debt?

Both the president and the Democrats are right in their own ways. But that means, necessarily, that both are wrong. I told you it was a remarkable filing cabinet.

Here's the truth about it.

The Democrats are correct that the Trust Fund's cabinet holds actual Treasury bonds, and those bonds are every bit as real as the Treasury bonds you probably have in your IRA or brokerage account. Those bonds -- the Trust Fund's and yours -- are backed by the full faith and credit of the United States, and a default on any of them would be an unprecedented and unthinkable catastrophe for our country.

And nothing whatsoever that President Bush has said should be construed as a threat to default on those bonds. So don't worry -- at least not about that. Period.

There's one very important thing, though, that makes the Trust Fund's Treasury bonds different from yours. You aren't an agency of the US government, but the Trust Fund is. That means when you invest in Treasury bonds, they represent a debt owed by one party to another -- in this case, the government to you. But when the government itself invests in Treasury bonds, those bonds represent a debt owed by one party to itself.

You can't owe money to yourself. What would it even mean to borrow 20 bucks from yourself today and promise to pay it back to yourself on Tuesday?

Here's another way to think about the problem. Social Security is a commitment by the government to make payments to people in the future. The Trust Fund exists, supposedly, to secure that commitment by setting money aside today -- so that in the future, the money doesn't have to come from taxes, borrowing, or spending cuts. Fine -- in principle. But when that money is invested in Treasury bonds, those bonds themselves will have to redeemed in the future, and the money to do that will have to come from taxes, borrowing, or spending cuts.

Of course that makes the Trust Fund's Treasury bonds no different from yours or mine -- they all have to be repaid someday from taxes, borrowing or spending cuts. But my point is that when the Trust Fund holds them, it doesn't accomplish anything. Whether the Trust Fund holds Treasury bonds or nothing at all -- or for that matter, whether or not the Trust Fund exists -- to pay benefits in the future, the government is going to have to tax, borrow or cut spending.

So in that sense, President Bush is absolutely correct when he says "There is no 'trust fund.'"

That makes the Democrats wrong when they fret that Bush's statement amounts to threatening to default on government debt. Think again about the 20 bucks you lent yourself. Suppose you refused to repay yourself when Tuesday rolled around -- is that a default? Would you sue yourself to recover the money you owed yourself?

In other words, since the existence of those Treasury bonds doesn't really affect the government's wherewithal to pay benefits one way or the other, then it would make no difference whatsoever if the Trust Fund simply surrendered them, or for that matter tore them up and threw them in the ocean.

Given Dr. Boudreaux video depiction and Mr. Luskin's analysis, we must give equal time to the forest nymphs and their pockets of pixie dust. Who better to reply then Jacob Lew director of the White House's Office of Management and Budget!

"When more taxes are collected than are needed to pay benefits, funds are converted to Treasury bonds — backed with the full faith and credit of the U.S. government — and are held in reserve for when revenue collected is not enough to pay the benefits due." (3)

Ah ha! We write I.O.U's to ourselves! Suppose we could call these I.O.U'S written to ourselves a real "Lew Lew". Ops! Spell check corrects it to: a real "Lou Lou".

Notes:

(1)http://www.xtranormal.com/watch/11226537/?listid=18148621

(2) http://www.capitalismmagazine.com/politics/social-security/4190-social-security-there-is-no-trust-fund-only-iou-s.html?print

(3)http://www.usatoday.com/news/opinion/editorials/2011-02-22-editorial22_ST1_N.htm?loc=interstitialskip

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