Marine Insurance shows why Obamacare won’t Work

Posted by PITHOCRATES - February 22nd, 2014

Week in Review

As ships began to ply the world’s oceans some of them did not make it to their destination.  Instead, they ended up on the ocean floor.  The financial loss for a ship lost at sea was enough to bankrupt a shipper.  Which greatly inhibited early transoceanic trade.  But then the good men at Lloyd’s of London began selling marine insurance out of a London coffee house.  Spreading the risk of a large financial loss across all shippers.  Where each shipper paid a small fee (i.e., an insurance premium) to cover the financial loss for the few ships that sank.  It was an excellent system.  Mitigating the risk of the very risky transoceanic trade.  It worked so well we still use it today (see Ship loses more than 500 containers in heavy seas by Tim Lister posted 2/22/2014 on CNN)

On any day, between 5 million and 6 million containers are on the high seas, carrying everything from potato chips to refrigerators. But not all of them make it to their destination, as the crew of the Svendborg Maersk have just found out.

Their Danish-flagged ship was in the Bay of Biscay last week as hurricane-force winds battered the Atlantic coast of Europe. Amid waves of 30 feet and winds of 60 knots, the Svendborg began losing containers off northern France. After the ship arrived in the Spanish port of Malaga this week, Maersk discovered that about 520 containers were unaccounted for. Stacks of others had collapsed.

It’s the biggest recorded loss of containers overboard in a single incident…

The Through Transport Club, which insures 15 of the top 20 container lines, has put the loss at fewer than 2,000 containers a year. But other industry sources say the number may be as high as 10,000. That would still represent far less than 1% of the containers traversing the world’s oceans. Maersk, one of the world’s largest lines, says that its highest annual loss in the last decade was 59 containers.

If we crunch some numbers we can see how insurance works.  Let’s make some assumptions.  Conservative ones.  Let’s assume the low end of 5 million containers.  And the high end of lost containers (10,000).  This puts the total loss of containers at 0.20% of the total shipped.  Which means that 99.8% of all containers shipped reach their destination.  So the insurance pays for a very small number of lost containers.  Now let’s assume an average value of $250,000 per container.  That makes the value of all containers shipped $1.25 trillion.  And the value of containers lost $2.5 billion.  Or 0.20% of the value shipped.  Which is a small fraction of the total.  If we spread this amount over each container shipped that comes to an insurance premium of $500 per container.  A small price to pay to avoid a $250,000 loss.

This is why marine insurance works.  Because it’s insurance.  Where shippers pay a small premium to insure against a very large possible financial loss.  Which is why Obamacare won’t work.  Because Obamacare isn’t insurance.  Neither was health insurance before Obamacare.  Because people expect a free ride.  If they have ‘insurance’ they don’t want to pay for anything.  Which isn’t how insurance works.  That would be like shippers having someone else pay for their marine insurance.  And then expect to ship things across the ocean for free because they had insurance.  Marine insurance doesn’t work like that.  And neither should health insurance.

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FT208: “Good liars can make anyone like them while those who don’t lie can’t.” —Old Pithy

Posted by PITHOCRATES - February 7th, 2014

Fundamental Truth

Having Government remake our Health Care System is not the Limited Government of our Founding Fathers

According to a Gallup poll approximately 38% of people identify themselves as conservative while only 23% identify themselves as liberal (see Liberal Self-Identification Edges Up to New High in 2013 by Jeffrey M. Jones posted 1/10/2014 on Gallup).  With most of the rest (34%) identifying themselves as moderate.  Or, in other words, 77% of the people do NOT identify themselves as liberal.  That’s over three-quarters of the population.  Which means if you were in a group of four people only one of the four would be a liberal.

And yet we have Obamacare.  Thanks to the Affordable Care Act passed on partisan lines when the Democrats controlled both chambers of Congress.  The most liberal change to our health care system (the government will charge people a fine/tax if they don’t buy health insurance).  The only time in history that government has forced people to buy something against their will.  Without having any kind of say in the matter.  Like we do with car insurance.  If you don’t want to buy car insurance all you have to do is NOT drive a car.  But with Obamacare there is no choice.  Everyone has to buy health insurance.  Period.

Having government remake our health care system is not the limited government of our Founding Fathers.  It is actually more in keeping with a royal decree issued by the king the Founding Fathers fought for their independence from.  Ye shall do this.  For the ruler has spoken.  And ye shall pay more taxes to fund this huge growth of government.  Another thing not in keeping with our Founding Fathers.  Higher taxes.  So how have we come to this when 77% of the people don’t want any of this?  Because liberals are some of the best liars in the world.  That’s how.

Discounted Reimbursements are causing Doctors and Hospitals to leave the Obamacare Network

To make Obamacare work they needed to get people to pay more for their health insurance.  So they could raise a lot of money to subsidize health insurance for those who could not afford to buy it.  Which they couldn’t do if people kept the policies they liked and wanted to keep.  Especially those lower-cost ones.  So they made the policies people liked and wanted to keep noncompliant with the Affordable Care Act.  Forcing their insurers to cancel them.  And forcing people to buy more costly policies.  This providing the subsidy money Obamacare needed.

So this was the plan.  To cause mass cancellations.  And then force those people with cancelled policies to buy more expensive policies.  But this was only part of the formula.  To keep more of those higher insurance premiums they also raised deductibles.  So not only did people pay more for their health insurance policies.  Those policies paid for less.  Forcing people to spend a lot more out-of-pocket before their insurance kicked in.

We have huge budget deficits.  And growing national debt.  A big part of that debt is from Medicare and Medicaid (and Social Security).  Getting people to pay for other people’s health insurance won’t cut these costs.  But there is something that will, though.  The same thing the government is doing with Medicare.  Pay doctors and hospitals less.  By discounting their reimbursements.  It worked pretty well with Medicare.  So they were sure it would work well with Obamacare.  Of course, health care providers overcharged private insurers to recoup what the government didn’t pay.  So this will no longer be an option under Obamacare.  Which has caused a lot of doctors and hospitals to already leave the Obamacare network.

People would rather hear a Pleasant Lie than an Unpleasant Truth

There was a lot if opposition to the Affordable Care Act.  For the people did not want national health care.  And they felt that was where Obamacare would lead to.  So President Obama told people in person.  And looked into the camera.  Making a promise to the American people.  “If you like your health care plan you can keep your health care plan.  If you like your doctor you can keep your doctor.  If you like your hospital you can keep your hospital.  Period.  No one was going to take these away from you.  All we’re going to do is give you better health insurance while saving the average family $2,500 on their annual insurance premium.”  None of which was true.

Of course, had the president told the truth he would only have confirmed everyone’s fears.  Which is why he lied.  A lie so big PolitiFact named it the Lie of the Year.  And he told the lie so easily.  He was so reassuring that the people believed him.  In fact, they wanted to believe him.  For they liked this president.  And they trusted him.  Despite his economic policies having failed to produce a strong economic recovery.  For even when polls showed the people thought his policies were taking the country in the wrong direction the people still liked him.  Because he tried.  Always saying things the people wanted to hear.  A lot of feel-good things.  Affordable health care for everyone.  Leveling the playing field.  Making the rich pay their fair share.  Free birth control.  Not enforcing federal drug laws in Colorado and Washington.  With talk like that no wonder the people liked him.  And why it was so easy for him to lie to the people.  As they were willing to believe just about anything he said.

President Obama is everything our parents aren’t.  Who tell us what we need to do.  What we should do.  And what we shouldn’t do.  Regular killjoys.  Unlike the president.  And the Democrats.  Who don’t mind people having a little fun in their lives.  Unlike the Republicans.  Who are as bad as our parents.  Always telling us things we don’t want to hear.  Like truths.  Facts.  And how things are.  Reality.  While the president and the Democrats tell us how things could be.  How life can be more fun and more carefree their way.  Whereas life requires a lot of hard work and sacrifice the Republicans’ way.  Because reality can suck.  Which is why some people use intoxicants to escape it.  Or vote Democrat.  Willing to accept on faith their fictional
alternative to escape reality.  For it turns out people would rather hear a pleasant lie than an unpleasant truth.  And people will like you if you tell them pleasant lies.  While they won’t like you very much if you tell them unpleasant truths.  Which is why good liars can make anyone like them while those who don’t lie can’t.  This is why people didn’t like Mitt Romney.  He told the truth.  And why people liked President Obama.  Because he told them what they wanted to hear.  Such as things like the Lie of the Year.

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Health Insurance Premiums and Deductibles

Posted by PITHOCRATES - October 21st, 2013

Economics 101

The Requirements of Obamacare force Insurers to Cancel their Less Costly Policies

We buy health insurance to protect our financial assets in case of a catastrophic health problem.  Such as a bad accident requiring costly hospitalization and rehabilitation.  Or a costly disease.  Like cancer or a heart attack.  As bad as those things are the good news is that most people don’t suffer from these health problems.  Which allows us to use insurance to protect our financial assets.

People in an insurance pool pay a small premium to pay for a potential loss.  Such as a catastrophic health problem.  Because not everyone in the pool will suffer from a catastrophic health problem the insurance premium can be much smaller than the cost of medical care for the few that do.  A premium small enough that individuals and families can budget this amount and rest comfortably knowing that a catastrophic health problem won’t cost them their home, their kids’ college fund, their retirement savings, etc.  A system that has worked well.  Until we started using insurance to pay for everything under the sun.  Which has caused insurance premiums to soar.  And Obamacare just doubles down on this trend and turns insurance into welfare.

Premiums before and after Obamacare R1

Obamacare raises the coverage requirements for all insurance policies.  To a ridiculous extent.  For example, couples whose children are grown adults still need pediatric coverage.  Obamacare requires a lot of standard coverage like this that is virtually impossible for some people to use.  Thus greatly raising insurance premiums.  In our example our fictitious insurance pool contains 10,000 individuals and 10,000 families.  To include everything the Obama administration wants to include raises individual premiums 240%.  And family premiums 257%.  Which causes a problem with President Obama’s promise to the American people.  That thing about keeping your current insurance if you like your current insurance.  As insurers have no choice but to cancel their less costly policies.

The Affordable Care Act makes Premiums Unaffordable by Requiring Insurers to Cover More

That promise was, of course, a lie.  Because you can’t buy more for less money.  You just can’t get more for less.  So if the policies cover more they cost more.  If they cover a lot more they cost a lot more.  Well, that creates a bit of a problem for the optics of the Affordable Care Act.  When you make the existing health care system ‘affordable’ you really can’t raise the cost of insurance by over 200%.  Even if you are giving more insurance coverage.  Because if it’s just too expensive people won’t have the money available to pay for it.  So they brought the premiums down from what they would need to be to do what they want them to do.  To something a little more affordable.  Like this.

Premiums before and after Obamacare Adjusted R1

Which brings the increases to 80% for an individual policy.  And 129% for a family policy.  These are still steep price hikes.  But with the more these policies cover and subsidies for those who need them they are an easier sell.  Of course, there is another problem.  Selling these policies at these lower prices won’t bring as much money into the insurance pool.  Which will limit what this pool can pay for.  Leading to rationing.  And longer waiting times.  As health care providers will have to tell patients ‘no’ because the insurer denied the treatment or procedure.  Which sort of defeats the purpose of Obamacare.  Affordable health care for everyone.

So what to do?  To cover everything under the sun requires hefty premiums.  But hefty premiums are not affordable.  There appears to be a paradox here.  And that’s because there is.  Because you can’t get more for less.  But Obamacare has a workaround for this paradox.  At least for the optics of Obamacare.

The Ultimate Goal of Obamacare may be to Fail to Clear the Way for Single-Payer National Health Care

There’s another part of health insurance.  The deductible.  The out-of-pocket portion of our health care expenses.  When insurance was truly insurance we paid for our routine health care expenses out-of-pocket.  We took our kids to the doctor for their vaccinations and the doctor billed us.  Then we paid the bill.  Using our insurance only for those catastrophic health problems that we couldn’t plan for.  Or budget for.  And it’s the deductible that makes Obamacare look more affordable than it is.  By making their deductible far exceed their premium.  So a lot of people pay into the pool but never collect from it.

Claims Individual and Family R1

In this example we look at some claims.  The money the insurance pool pays out.  The above numbers are net of the deductible.  So the annual claim per individual and family is money from the pool paying their bills.  Most people get little.  While the breakout with the fewest members have a catastrophic health care problem.  The total claims for this pool for both individuals and families come to $159,750,000.  While premiums total only $123 million at our adjusted premiums.  That’s a $36,750,000 shortfall.  Well, insurers can’t pay out more than they collect so they need to find another $36 million or so without making this affordable health insurance appear unaffordable.  So where can we find another $36 million?

By raising the deductible, of course.  If we raise the deductible for both individuals and families to $7,500 those claims at $7,500 or less are out-of-pocket.  They don’t come from the insurance pool.  If we add up the claims that become out-of-pocket they total $57,250,000.  More than enough to cover the shortfall.  As well as provide subsidies for the poor.  And all those new government jobs to run Obamacare.  With these higher deductibles AND higher premiums people will be paying far more for their health care than they did before.  Perhaps more than they can afford.  Thus making the Affordable Care Act unaffordable.  Which may be the ultimate goal of Obamacare.  To fail.  So the government can blame greedy insurers who the people will hate even more.  And setting the stage to get the people to acquiesce to a single-payer system.  Or national health care.  Which the left wanted all along.

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FT188: “When it comes to Obamacare the left is either ignorant or devious.” —Old Pithy

Posted by PITHOCRATES - September 20th, 2013

Fundamental Truth

People buy Insurance to pay a Small Fee to Insure against a Large and Unexpected Financial Loss

What is insurance for?  To help mitigate a large financial loss.  Crossing the ocean can be dangerous.  There are storms.  Wars.  Even pirates.  Shippers can lose very costly cargoes.  Most ships make it to their destination without incident.  Wise people noted this a long time ago.  And they came up with an idea.  Insurance.

Let’s illustrate this with an example.  Let’s say there are 100 ocean crossings in one year.  Each one of these crossings has cargo valued at $10 million each.  Let’s say of those 100 crossings only three sink.  A loss of $30 million.  A loss few can afford.  But there are only three ships that sink.  And at the beginning of the year no one knows whose ships will sink.  It could be anyone.  And everyone of the anyone has a very strong desire not to be the one losing a ship with a $10 million cargo.  So they are willing to pay a small fee to insure against a greater loss.

Here’s a general idea of how it works.  With 100 crossings valued at $10 million each that’s $1 trillion in total cargo.  Of that $1 trillion there’s a very good chance based on past history that $30 million of it will sink to the bottom of the ocean.  So if we divide that catastrophic loss by those 100 crossings that’s an additional $300,000 insurance cost to add to each of the 100 crossings.  So instead of a possible loss of $10 million a shipper will only have a definite ‘loss’ of $300,000.  Which is far less than $10 million.  And something they can plan for.  As they can add it to the price to their customers.

People don’t buy Health Insurance because a Larger Percentage of the Population doesn’t get Cancer or have Bad Car Accidents

Because of insurance none of these shippers will have to suffer a $10 million loss should it be their ship that sinks to the bottom of the ocean.  This is insurance.  Everyone pays a small fee to protect themselves from a great financial loss.  And that fee is far, far smaller than that potential financial loss.  This is the only way great things get done.  Great things require huge outlays of money.  And no one would risk those outlays if they didn’t have a way to mitigate their losses should their ship sink.  Literally.  Or figuratively.

This is insurance.  Paying a small fee to insure against an unexpected and catastrophic financial loss.  Health insurance today doesn’t do this.  It pays for everything.  Including the routine things we know about and can budget for.  Things that are unlikely to bankrupt us.  Office visits.  Flu shots.  Physicals.  Breast exams.  Colonoscopies.  These are all part of living.  We know we will have these expenses.  Just as we know we have to buy groceries and gasoline.  But there is no grocery and gasoline insurance.  And thank God for that.  They’re expensive enough.  Can you imagine their costs if they went up like health insurance?

The reason why health insurance is so expensive is because it is not insurance.  It doesn’t just pay for the unexpected and catastrophic financial losses.  Like incurred from a cancer diagnosis.  Or a car accident.  It pays for everything.  In our shipping example that would be like those shippers paying a $10 million insurance premium to insure a $10 million cargo.  Which would never happen.  Because it would be less costly to lose the occasional cargo.  Because every ship doesn’t sink.  At most three may in one year.  Even if all three ships were yours it would be cheaper to replace $30 million in cargo than paying $1 billion in insurance premiums.  This is why a lot of people choose NOT to buy health insurance.  Because a larger percentage of the population doesn’t get cancer or have bad car accidents.

The Left learned after the 1994 Mid-Term Elections that they had to Lie to get National Health Care

Obamacare just makes everything worse.  Because it forces insurance companies to pay for even more routine and expected medical expenses.  Increasing the cost of health insurance even more.  Which in turn increases the cost of business.  Which provides most health insurance these days as an employee benefit.  With Obamacare mandates to provide more of everything the cost has grown so much that businesses have been dropping their health insurance benefits.  Or cutting back hours to escape the Obamacare mandates.  Making Obamacare a big part of the anemic economy.  For it is a great disincentive to creating jobs.  And hiring people.

Now, anyone with a rudimentary understanding of economics knows this.  If you keep raising the cost of business you will see less economic activity.  The left understands this when it comes to interest rates.  It’s why they want to keep printing money to keep interest rates low.  To lower the cost of borrowing so businesses borrow more to expand their businesses.  So they do understand at least one cost of doing business.  But they seem to be completely ignorant when it comes to taxes and regulatory compliance.  For while they worry about rising interest rates hurting business they don’t have any concern about rising taxes or regulatory compliance costs.  Why?

Because they are truly ignorant?  If so they shouldn’t be anywhere near the economy.  Or they are devious?  And lying through their teeth to deceive the American public to get something they want?  Well, they may be ignorant.  But the smart money is on devious.  For the left has always wanted national health care.  But the people don’t.  When President Clinton tried it he lost the House in the 1994 midterm election.  And the left learned a lesson.  To get national health care they had to lie to the people.  Which is what Obamacare is.  A big lie.  It will do nothing President Obama said it would do.  All it will do is destroy the private health insurance industry by placing regulatory compliance costs on businesses and the private health insurance industry that will simply put the private health insurance business out of business.  As we are seeing.  Leaving uninsured people that the government must step in to insure.  And once they do they’ve got their national health care.  While giving the American people the middle finger.  “Say no to our national health care?” they’ll say.  “Well, [deleted expletive] you.”  They will say this figuratively, of course, with their actions.  For they will never let go of the lie that Obamacare is about lowering costs and insuring the uninsured.  And not the truth that it is nothing but a means to advance their agenda.

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Medieval Barbers, Supplemental Insurance, the Baylor Plan and Blue Cross Blue Shield

Posted by PITHOCRATES - May 28th, 2013

History 101

Barbers once Dressed our Wounds and Bled us when we were Sick

Awhile back one of our most beloved public figures suffered a serious accident.  The injuries required significant rehabilitation.  So he missed a lot of work.  People worried how he was going to pay his bills if he couldn’t work.  Groceries.  Rent.  Child care.  Etc.  Health insurance would pay his medical bills.  But what about that lost income?  What would replace that to allow his life to go on as before during his convalescence?  Thankfully he had Aflac supplemental insurance.  Which would pay his bills until his wings and beak healed.  Allowing the Aflac duck to continue on with his life.  Until he was able to return to work.

For a small insurance premium anyone can buy supplemental insurance.  This will allow them to pay their bills should there be an interruption in their earnings due to an illness or accident.  The Aflac duck probably did not pay for this coverage.  One of the perks of being the face of the company.  And the Aflac duck is fictional.  And fictional entities don’t have bills to worry about during any interruption in their fictional earnings.  But the duck is cute.  And it illustrates what the first health insurance policies actually did.  Replaced lost income.

Health insurance hasn’t been around for long.  For costly hospital stays haven’t been around for long.  Once upon a time you visited the local barber to have a wound dressed after an accident.  Or for a bloodletting when you were sick.  And if you had a toothache.  So he could yank your tooth out of your mouth.  As well as give you a shave and a haircut.  Things that weren’t really that costly.  But if you were a black smith with a lame hand you could go for awhile without being able to earn any income.  And this is what the first use of health insurance did for us.  Like that Aflac duck.  It paid our bills until we were ready and able to return to work.

Early Health Insurance didn’t pay for Hospital Stays or Medical Procedures but replaced Lost Income

Early hospitals bore little resemblance to what we have today.  In fact, most people preferred to stay out of them.  Choosing to recuperate at home.  The American Civil War killed over 600,000 Americans.  More than half of those were from disease.  Those wounded in battle feared the hospital.  Where you went to die.  Often by infection as surgeons went from one amputation to another without changing their bloody aprons or washing their hands.  This was in the 1860s.  Which isn’t that long ago.  There are people alive today whose grandfathers were born during the American Civil War.  Who were born into a world where surgeons still did not know that they should wash their hands before sticking them into someone’s body.

Medical care may not have been that good in the 1860s but we already had health insurance.  Introduced around 1850.  Thanks to the rise in rail and river transportation.  Which in their early days weren’t all that safe.  Hurting a great many people.  Brakemen fell off of moving cars.  And lost hands coupling cars together.  While steam boilers had a tendency to explode.  In fact, the greatest maritime disaster in U.S. history happened when a steam boiler exploded in the bowels of the S.S. Sultana in 1865 on the Mississippi River.  The American Civil War had just ended.  And the Sultana was carrying emaciated and frail Union POWs home after their release from Confederate prison camps.  Happy to be free.  And anxious to go home.  How sad that after all they had gone through that they would die not on the battlefield.  But on the voyage home.  The explosion killed 1600-2000.  A greater death toll than when the Titanic sank.

As the Industrial Revolution modernized the United States people got hurt in the machines of the Industrial Revolution.  Like brakemen losing hands.  And people getting hurt in boiler explosions.  Causing people to miss work as they healed.  Where they were unable to earn a living to support their families.  This is what our early health insurance did.  It didn’t pay for hospital stays or medical procedures.  You paid for that.  The health insurance replaced your lost income until you were able to return to work.

The Baylor Plan was a Prepaid Health Care Plan that gave School Teachers 21 Days of Hospital Services

But health care soon rose above the level of medieval barbers/surgeons yanking out our teeth.  And draining blood from sick people.  By the early 1900s medical skills and knowledge greatly improved.  We learned the importance of washing our hands before putting them into someone’s body by the late 1800s.  Making hospitals no longer the infectious deathtraps they once were.  We started taking x-rays.  Monitoring blood pressure.  Used newly developed medicines.  Medical training improved.  We developed standardized treatments for disease.  And procedures for emergency medical care.  People stopped fearing hospitals and stopped trying to avoid them.  They now sought them out when they were afraid of dying.  Not seeing them as houses of death.

All of this reduced supply as it took more training and equipment and licensing to become a doctor or to open a hospital.  And increased demand as people wanted to get better from what ailed them.  Low supply and high demand made health care, of course, expensive.  People were enjoying getting better.  But they sometimes had trouble paying their bills.  Something Dr. Justin Ford Kimball noticed.  School teachers having trouble paying their hospital bills.  So he developed the Baylor plan in 1929.  At the Baylor University Hospital in Dallas, Texas.  Participating teachers paid 50 cents a month.  In exchange they received up to 21 days of hospital services per year.  This brought in a steady stream of income to the hospital throughout the year.  And provided piece of mind for the teachers knowing that for a small manageable fee (i.e., a premium) they could go to a hospital when they needed to.

The Baylor plan was successful.  Other hospitals followed suit.  Health insurance spread.  Hospitals gained a steady source of income.  And people insured themselves from large financial losses by paying a little every month so they wouldn’t have to pay a large hospital bill at one time.  The system worked well.  For everyone using a given hospital didn’t get sick or injured and consume health care services at one time.  While the small premium everyone paid could pay for the few who did.  Hospitals then worked together to produce health insurance plans that could be used at more than one hospital.  In 1939 the American Hospital Association set the standard for these plans.  Plans that met the standard were called Blue Cross plans.  These separate plans merged in 1960 and became Blue Cross.  Physicians and surgeons also sold prepaid plans.  These plans merged into Blue Shield in 1946.  And in 1982 Blue Cross and Blue Shield merged into what it is today.  Blue Cross Blue Shield.  One of the largest providers of health insurance today.

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