Insurance Pools, Premiums and Obamacare

Posted by PITHOCRATES - October 7th, 2013

Economics 101

For Health Insurance to work More People need to Pay Into the Pool than Collect from the Pool

It’s here.  Obamacare.  Which promises to give more people health insurance.  With health insurance policies paying for more than policies do now.  More tests.  More procedures.  Even birth control.  Obamacare will also provide coverage for people with preexisting conditions.  Remove caps on benefits and forbid insurance companies from cancelling insurance coverage.  Forcing insurance companies to give policy holders a lot more benefits.  All while reducing insurance premiums.  Which seems to defy common sense.  Getting more while paying less.  To better understand this let’s look at a sample insurance pool.

Obamacare Impact on Insurance Premiums - Before

Insurance pools are larger than 10 policy holders but this will suffice for this example.  In this example there are 5 individual policy holders with a monthly insurance premium averaging $118.  There are 4 family policies with a monthly insurance premium averaging $400.  And one policy holder with a chronic health condition who pays a premium that people with preexisting conditions pay.  In this example paying $1,200 a month.  It’s that high because this person requires medical care in excess of $30,000 each year.  The average of all premiums is $339.

Now, this is how insurance works.  There is a pool.  People in the pool each pay a small premium compared to the medical costs they MIGHT incur.  The word ‘MIGHT’ is key here.  For insurance to work more people need to pay into the pool than collect from the pool.  This allows the pool to pay the few who have a large unexpected medical expense.  If the insurance company’s actuaries get their premiums right the total of premiums paid into the pool approximately equals the total of expenses paid by the pool.  So premiums in basically equal payments out.  Premiums in can exceed payments out.  But payments out cannot exceed premiums in or else the insurance company will go bankrupt.

Obamacare will Increase the Price of Health Insurance for Men because Insurers can’t Charge more for Women

Obamacare’s individual mandate is an attempt to make sure premiums in exceed payments out.  By forcing more young and healthy people who will not use health insurance pay into the pool.  Young and healthy, see, is the key.  Because that’s money they can spend on other people.  So the young and healthy are the answer to the high cost of the old and sick.  So Obamacare, then, is basically a cost transfer from the old and sick to the young and healthy.  And it will work to lower the cost of health insurance.  If the young and healthy buy health insurance and never use it.

Obamacare Impact on Insurance Premiums - Adding Young and Healthy

If we add 12 young and healthy people to the pool who will not use the insurance the premiums become more affordable.  When there were only 10 people in the pool the total premiums added up to $3,390.  By adding these 12 young and healthy to the pool the total premiums paid in increases to $4,000.  An increase of 26.3%.  So if we discount all premiums by 26.9% we still get a total of $3,390 paid in.  Which is how Obamacare is supposed to lower the cost of health insurance.  By forcing people who won’t use it to buy it.  So they can pay for the people who do use it.  Thus lowering the average premium to $154.09.  And bringing down the premiums for single, family and preexisting conditions to $78.03, $294.78 and $884.35, respectively.  Lowering price across the board.  Making everyone happy.  Except, of course, those forced to buy something they won’t use.  So this part can lower insurance costs.  But it won’t.  Because Obamacare complicates things.

Obamacare Impact on Insurance Premiums - Adding Coverage Requirements

Obamacare will raise premiums because it requires insurers to cover more.  In addition to the things already noted there are some other costly requirements.  Such as the ban on price discrimination based on sex.  Meaning insurers can no longer charge women more for health insurance.  Even though women are more costly to insure.  Primarily due to their reproductive systems.  And other biological differences.  If they can’t charge more for women then they must charge women what they charge men.  And to cover the higher costs of insuring women they must charge men a higher premium.  So when they charge women that premium it will cover birth control, breast exams, pap smears, etc.   In our example we assume singles and families will pay twice as much.  While those paying preexisting conditions premiums will pay 50% more.  Bringing the average premium to $288.08.  While bringing the premiums for single, family and preexisting conditions to $156.06, $589.57 and $1,326.52, respectively.

The Key to Obamacare is to get more Young and Healthy People to buy Insurance that they will Not Use

But premiums will cost even more.  Because insurers cannot deny coverage for people with preexisting conditions.  And they can’t cancel coverage for people if they come down with a very costly chronic health problem.  Basically meaning there is no cap to what an insurer may pay on an individual.  Which makes the insurance equation more difficult to balance.  Making sure that payments out do not exceed premiums in.  Which is more difficult to do when there is no limit to what those payments out can be.  So insurers will have little choice but to charge people for the worst case scenario.  That a large percentage in the pool will have long-term chronic illnesses.  And that some people will be buying insurance for the first time after being diagnosed with a long-term chronic illness.

Obamacare Impact on Insurance Premiums - Pre-Existing Conditions

Insurers will have to make assumptions.  With no limit to their high-end exposure they will have to charge everyone more across the board.  So they will have to take their greatest risk—the exposure to preexisting conditions and long-term chronic illnesses—and factor that into all premiums.  In our example we charged singles 25% of the greatest risk.  And we charged families 50% of the greatest risk (the more people on the policy the greater the risk of long-term chronic illnesses on that policy).  Raising the average premium to $437.  And raising the premiums for single, family and preexisting conditions to $331.63, $663.26 and $1,326.52, respectively.  Or an increase of 181%, 66% and 11%, respectively from before the implementation of Obamacare.

Obamacare seems like a windfall to the insurance companies.  Which is why some of them supported Obamacare.  But the key to Obamacare was to get more young and healthy people to pay into the insurance pool while not using that insurance.  The young and the healthy.  Individuals.  Who don’t have families.  Those who will see a substantial rise in their insurance premiums.  As much as 181%?  Perhaps.  But if the increase is too great for these young and healthy individuals to afford they will not buy health insurance.  And they can’t get a subsidy.  Because it’s the young and healthy—those who are supposed to pay into the insurance pool without using their insurance—who are to provide the money for the subsidies.  So they won’t increase the amount of premiums going into the pool.  While the additional requirements of Obamacare will increase the payments going out of the pool.  Causing the insurance equation to go out of balance.  Putting the private health insurance business out of business.  The ultimate goal of Obamacare.  So the left can get what they wanted all along.  National health care.

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2010 Midterm Election: The Good, the Bad and the Ugly

Posted by PITHOCRATES - November 3rd, 2010

Big Cities, Big Union and Big Government

If you look at a map of the House election results (provided by The Washington Post), you can see the two Americas.  What you see is a red map with small dabs of blue.  And where are those blue areas?  The Big Cities, the big colleges, the big unions and the big urban concentrations of poor and minorities.  And, of course, the liberal elite in and around the Big Cities.  In other words, where you find Big Union (manufacturing, trade unions, school teachers and government employees) and Big Government.  And it’s the dynamic between Big Union and Big Government that empower the liberal elite.   Big Union provides campaign money and foot soldiers for Big Government.  And Big Government rewards Big Union by favoring their small minority over the majority of Americans.  It’s a throwback to before our Founding when kings and nobles ruled nations.  Political power is devolving into fewer and fewer hands. Into those little dabs of blue.

To get a perspective of how bad and how oppressive this ruling minority elite has gotten, consider two races.  Two people nationally despised won their reelections.  Barney Frank, who is largely responsible for giving us the subprime mortgage crisis, won in liberal Massachusetts.  And Nancy Pelosi, who forced her liberal agenda on the American people against their wishes, won by a whopping 80% in San Francisco.  This is what the Founding Fathers meant when they spoke of the tyranny of the minority.  These two have caused great harm to the American people.  Yet they represent such a sliver of minority thought in this nation.  They could not win a national vote.  Yet they can destroy a nation by winning their local vote.

But it’s not all bad.  If you look at the map, you see a lot of red in once dominate blue areas.  New England is not completely blue anymore.  New York State isn’t as blue as New York City.  Pennsylvania, Ohio, Indiana, Illinois and Michigan are red outside of the Big Cities.  Chicago, in fact, is a small pocket of blue adrift in a sea of red.  And in Washington, Oregon and California, if you move in from the Big Money coast, you see mostly red.  More importantly, if you click on the governors tab in the map, you see change, too.  New York and California are blue, yes, but there’s more red than blue overall on that map.  Which gives one hope that the republic the Founding Fathers gave us is not yet dead.  It will be hard to gerrymander those congressional districts around the Big Cities to give such little, elitist, local voices a large national voice anymore.

It’s the Economy, Stupid.  Was, and still is.

So, outside of the blue Big Cities, what do we know?  Well, the exit polling told us what we already knew.  It’s the economy, stupid.  We’ve lost too many jobs.  And that’s what we want.  Jobs (see Exit poll: Economy the big dog for worried voters by Connie Cass, Associated Press, posted on Yahoo!

About a third of voters said their household suffered a job loss in the past two years.

And as we lost our jobs, we lost our homes (see Homeownership at lowest level in a decade by Alan Zibel, AP Real Estate Writer, posted on Yahoo! News). 

The nation’s homeownership rate is at the lowest level in more than a decade, hampered by a rise in foreclosures and weak demand for housing.

And while we lose our jobs and our homes, what is the president doing?  Going on vacation to an exclusive 5-star resort.  And it’s going to cost the American taxpayer a pretty penny (see US to spend $200 mn a day on Obama’s Mumbai visit posted by Press Trust of India. 

The US would be spending a whopping $200 million (Rs. 900 crore approx) per day on President Barack Obama’s visit to the city.

Does the royal family feel our pain?

Not only do they govern against our will, but they flaunt it in our faces.  We struggle because of the likes of Barack Obama, Barney Frank and Nancy Pelosi.  We lose our jobs and our homes (which is ironic considering we’re in this mess to begin with because of Washington’s policy to provide affordable housing to those who could not afford to buy a house).  And what does the ‘royal’ family do?  Go on vacation that will cost the taxpayers millions of dollars per day.  I guess they can’t feel our pain.  Or that they just don’t care.  So think back to last summer when you spent your family vacation in your backyard because money was tight.  And that team Obama will probably raise your taxes come January 1 to be ‘responsible’ to pay for their irresponsible spending.  Take solace in the fact that at least he could live large on your dime.  Even if you had to spend summer ‘staycation’ in your backyard.

As we proceed from the 2010 midterm elections, do not forget the dynamic between Big Government and Big Union.  It won’t be easy, but they’ll continue to try to help fund those under-funded union pension plans.  And they will point to the Republicans as obstructionists.  That they need to compromise.  Put partisanship behind us.  Especially now.  Since they lost the House of Representatives, the Left can’t be partisan anymore.  Like they have been the last two years.

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