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Wednesday, May 10, 2017
The AHCA Insurance Company Bailout
Richard E. Goldfien
Sometimes I talk to people about insurance, and I often joke that no politician ever lost an election by badmouthing insurance companies. Let's concede that the insurance industry is not well loved, but enough is enough.
In the current Obamacare repeal and replace saga, Republicans seem conflicted about the role and value of insurance companies, so let me address a couple of points: first, the claim that insurance companies are treating people unfairly by not insuring people with pre-existing conditions, and second, the idea that any funding the government provides to insurance companies to support coverage for pre-existing conditions is some sort of bailout.
The term "pre-existing conditions" does not refer to something that happens to people while they are insured so that they cannot maintain their insurance. Within the health insurance market, it means a known condition, being treated or requiring treatment, at the time someone initially applies for insurance. In the auto insurance business, it would be analogous to someone with major damage to his car applying for insurance so he won't have to pay the full cost of the repair. I invite anyone who thinks he can run a successful insurance company selling such coverage to start a new company right away, because I guarantee that many new customers will buy the product. Let me know how the fundraising goes too.
If this option were available, only a truly stupid person would buy insurance before he needed a repair. There are many ways to deal with pre-existing conditions, but it is neither good policy nor necessary to bankrupt privately owned insurance companies to do so.
How does this relate to insurance company bailouts? In the AHCA, as currently being legislated, individuals who choose to buy health insurance after the initial enrollment opportunity, or who fail to maintain it, pay a 30% surcharge for a year as a "penalty." This is anything but a bailout (but see previous comment about politicians and elections). People who decide to purchase insurance at a 30% premium to the cost they would have paid earlier are very likely doing so because something made them believe they now need the coverage. The 30% premium is simply meant to absorb some of the additional medical expenses late entrants to the insurance market will undoubtedly incur. The 30% surcharge is in no way a bailout, since a bailout implies that the insurer has made a bad business decision (or had bad luck) and now must be rescued. In reality, the government compels insurers to accept customers they would otherwise reject. Furthermore, there is no reason to believe that the 30% would come close to covering the additional costs.
The politics of this is bizarre, with politicians (I'm talking to you, Rand Paul) complaining that the government should not be protecting insurance company profits. There are at least four obvious choices on how to deal with this: do not sell insurance to people with pre-existing conditions, require insurance companies to eat the cost (i.e., investors get a lower return on their investment), allow insurance companies to spread the cost to their other customers (higher premiums for everyone else), or fund the deficit through an outside party such as the federal government (i.e., the taxpayer).
Technically you can't sell insurance to cover people for a pre-existing condition – that is actually a subsidy, but there are many legitimate reasons to use the insurance system to help such people, so let's take the option of eliminating subsidies off the table for now and turn to the issue of how to pay for them. It would be counterproductive to require insurance company investors or other insurance customers to bear the cost, since fewer people would invest in insurance companies and fewer "healthy" people would buy insurance, so the best option is have the federal government pay for it, since it is a federal mandate. Furthermore, it is only appropriate that taxpayers shoulder the burden, since they have implicitly approved of the policy through their federal representatives. This also has some side benefits: it would make the cost a bit more transparent, and it would help preserve the viability of the insurance markets for the 90-plus percent of customers purchasing true insurance as protection from future health problems.
The government can certainly benefit from the insurance industry's ability to manage claims and process health care payments, so it is not unreasonable to use the carriers' expertise and capabilities. However, the cost of subsidizing the health care expenses of people who would not qualify for true insurance should be borne by taxpayers, since coverage for pre-existing or uninsurable conditions is a social policy, not a business decision. Notwithstanding the temptation to do otherwise, politicians should stop blaming insurance companies for the hot mess the politicians themselves have created and propose solutions that work in the real world. But of course, that won't win any elections!
Full disclosure: I started my business career as an actuary and currently am a managing partner in a small employee benefits insurance agency.
Richard Goldfien is a managing partner with Auxilian Insurance Services in California and has spent over 25 years in insurance and finance.