Adverse Selection on Steroids

I was hoping no one would ask me about the healthcare legislation. Then I got this email from someone who doesn’t follow politics:

Since you work for a health insurance company, what impact will this health bill have not only on you, but the policy holders?

I’m sick of everyone having their hands out but I’m especially sick and tired of the politicians, Democrats and Republicans, who vote with what the latest poll indicators reflect rather than voting what they think is best
for their constituents and the country. As I’ve said many times before, the number one priority of every politicians is to win reelection.

I really don’t follow politics that close so I’m showing my ignorance here. But I needed to vent.

My response:

I have to correct you on two points. First, this isn’t Democrats and Republicans doing. Not a single Republican in either the House or the Senate voted for this. Second, this isn’t a case where the politicians are following polls instead of principles because a majority of Americans don’t want this. The Democrats are following principles, they’re just principles that are radically at odds with everything this once great country stood for, but would fit in with what Chavez is doing in Venezuela.

This healthcare law creates yet another unaffordable government entitlement program when the government has essentially maxed out its credit. The real purpose isn’t to lower costs (which will actually skyrocket once it fully takes effect in 2014), but to greatly expand the size and power of government and radically redefine the relationship of citizen and state, and not in a good way, i.e., more dependency, less freedom and personal responsibility.

Consider that our current national debt is approximately $15 trillion. Consider also that the national debt is not measured according to generally accepted accounting principles (GAAP) that businesses use to report their finances, which include unfunded liabilities. Using GAAP, the US as a business would have a net worth of negative 70 trillion, nearly double the GDP of the entire world. Would you invest in such a business?

Given the predicament we are in, what’s Obama done? He’s increased the deficit from $400 billion under Bush’s last year in office to $1.8 trillion, with $2 trillion or greater annual deficits projected for the next decade. Using the government-created financial crisis as a pretext, Obama decided that healthcare “reform” was needed to “fix” the situation.

Instead of doing things that would help lower healthcare costs, the Democrats opted to take over 1/6th of the US economy. They used Enron-like accounting gimmicks to make the legislation appear almost affordable when it will cause the deficit to skyrocket. These gimmicks include: (1) counting 10 years of tax revenue and 6 years of spending (most of its provisions don’t take effect until 2014 after the Presidential election, (2) double counting the same savings under different headings, (3) funding some of the cost via Medicare cuts that are unlikely to happen, and (4) using unrealistically rosy projected economic growth to skew the numbers further.

Despite the various gimmicks, the CBO still says the legislation will cost 1 trillion. Take away the accounting gimmicks and the cost rises to 2.5 trillion. Even that figure’s too low because CBO estimates are invariably lower than actual costs. Why? Because they fail to take into account the spike in demand when something is “free” or somebody else is paying. Spikes in consumption when goods/services are provided “for free” are the CBO’s blind spot (not their fault, they have to score based on the assumptions they’re given and the government never assumes “free” will increase demand).

The 75% of Americans who currently have health insurance won’t see any benefit from this, but they will see their taxes go up. If this bill would leave the 75% of us alone and actually do something for the remaining 25%, it likely would have had bipartisan support. In reality, the bill will drive up costs on insurers and small businesses, causing premiums to skyrocket. This in turn will cause many companies to stop providing health insurance altogether, thereby increasing, not lowering the number of uninsured.

Costs will go up because the law says insurers can no longer deny coverage for pre-existing conditions or impose lifetime maximums. You don’t have to be an actuary to understand that this will cause premiums to skyrocket. Imagine if auto insurance companies were forced not to deny coverage for your car’s pre-existing conditions? What that means is people will wait until AFTER they get into an accident to buy insurance, and the insurance company will have to cover them as though they already had insurance. This undermines the very concept of insurance, which depends on the many people who stay healthy to cover the few who get sick.

The elimination of lifetime maximums has the same effect. When you buy auto insurance, you can get minimum coverage or pay extra for more coverage. The cost doesn’t go down when you increase coverage, it goes up. Another way of looking at what the bill does is from a financially responsible customer’s point-of-view. I have much more than minimum coverage with my auto insurance policy, but I don’t have unlimited coverage, because that costs more than I can reasonably afford. The government bill forces everyone to have unlimited coverage, whether we can afford it or not. What will that do to premiums?

Some people think this doesn’t affect them because their employer “pays for their healthcare.” This is nonsense. Our employers pay us less than they otherwise would because of the high cost of healthcare. When premiums skyrocket (Did I mention the bill also includes additional mandates that private insurance must provide, which will further drive up prices?), either our salaries will go down, our cost share will go up, or we’ll lose our healthcare coverage altogether. So much for the empty promise that if you like your existing insurance (most do), you can keep it (many won’t).

To address these obvious problems, the law forces people to buy insurance whether or not they want/need it. Except it doesn’t. The fine is much less than the cost of health insurance so most healthy people will find it cheaper to pay the fine than buy insurance until they get sick. One of the things that causes premiums to skyrocket and insurers to go broke is a problem known as adverse selection, which is what happens when you have a much sicker insurance pool than the general population. ObamaCare is adverse selection on steroids.

The new law also massively expands access to Medicaid, another bankrupt entitlement program largely responsible for the financial crises in many states. Think about this. While the government is cutting Medicare (which our parents and grandparents PAID FOR), it is expanding Medicaid. In other words, it’s taking away health benefits from seniors who paid for them while providing care for those who didn’t. Spread the wealth, eh, eh comrades?

I haven’t even mentioned the bloated Byzantine health care bureaucracy the legislation creates to decide what treatments/drugs will and won’t be covered, how much doctors/hospitals are paid, etc. The bill is over 2,000 pages long (not counting the many thousands more pages in regulations to follow). Compliance costs associated with this legislation will be enormous. Needless to say, this regulatory burden will not add one penny to our wealth as a nation. In fact, it will make us poorer. It’s as if we forced farmers to run on treadmills for several hours a day during harvest time, leaving them too tired to gather crops before they spoil. Government never seems to consider the opportunity cost of time wasted on activities that serve no other purpose than complying with arbitrary government rules and regulations.

To put this legislation in everyday terms, imagine if the government was an individual named Uncle Sam. Sam is completely broke, yet he wants to buy a brand new Rolls Royce (ObamaCare). Sam can’t afford the Rolls Royce, so he plans to use his inheritance from his grandfather (Medicare) to cover the payments. But Grandpa is broke too, and even if he had the money, he wouldn’t give it to his miserable grandson who stole from Grandpa to buy a new sports car for his girlfriend (Medicaid).

Even if Grandpa had the money and was willing to give it to Sam, how can Sam afford a Rolls Royce when he’s maxed out all his credit cards and has several girlfriends with expensive tastes. Yet Sam just went and bought himself a Rolls Royce.

What kind of person behaves this way? Someone who belongs in jail or on Jerry Springer. Which tells you exactly the kind of Congress and President we have.

And to top it all off, that Rolls Royce is actually a lemon.

That’s why Americans who’ve been following this are so stoked. But I’m not worried for the poor Democrats. They’re going to ram through immigration “reform” next to add 7–10 million new Democrat voters to provide even more Hope and Change.

Just like in Venezuela.


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