Unknown risks mean unknown costs

As part of his excellent analysis with the many flaws in ObamaCare, Richard Esptein explains the problems with mandatory issuance of insurance coverage and maximum allowable overhead.  Buried in here is an interesting actuarial and risk issue:

As those options are stripped from insurers, they may well find that their costs turn prohibitive as prospective customers flock to those health insurers whom they think will supply them with the best coverage, only to withdraw when their medical needs are satisfied. But it is an open question whether the premiums that they will be permitted to collect will be sufficient to cover the risks. [….]

To make matters worse, the current law stipulates that once the administrative expenses go above a government set minimum threshold, usually 15 or 20 percent of total costs, the insurance companies must make refunds to the payers. But just who are the payers?

Some of the reason that an insurance company may not pay out 80% of premiums as benefits, in any given year, is that one particular year had lower costs than normal.  Medical spending fluctuates every year, and those variances will be larger with smaller insurance companies.  (In fact, it’s statistically quite abnormal to have the same risk, and, with insurance, spending, every single year.)

Ideally, an insurance company would take extra money from a low-payout year and keep it for a high-payout year. (Yes, insurance companies will often use this extra money to pay out bonuses. Sigh.)  Under ObamaCare, however, insurance companies will be forced into “government accounting” – use it all in a single year, whether or not you need it that year.

This will only be exacerbated by the unknown risks associated with taking all comers and charging them the same amount of money (for the same age), regardless of health risks; increasing participation in the individual market, wherein risk is not spread amongst thousands of people; and the huge influx of people in and out of the private insurance market, first as they are required to purchase it, and then as they go on state-run health exchanges.

A sensible insurer would raise rates to ensure that it can properly cover any bills that are submitted by patients.  That runs directly counter to the purpose of the other provision, which is to limit the amount that an insurance company can take in without spending on health care.

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Filed under Economics, ObamaCare

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