Saturday, December 19, 2009

Good intentions and health care reform

The Senate just reached their compromise, it's been scored by the CBO, and now it will move forward against an entrenched Republican opposition.

One provision of the bill rather frightens me:
Under the proposal from Senate Democratic leader Harry Reid, health insurance plans for large groups would have to spend at least 85 cents out of every dollar on medical costs. That means just 15 cents could go toward overhead and executive salaries, among other things. Small groups or individual plans would have to spend at least 80 cents on the dollar for care. That proportion of spending, known as a "medical loss ratio," has a major impact on how much profit companies can make and is closely eyed by Wall Street. Consumer groups and other critics have long argued that insurers aim to trim medical spending and raise customer costs to boost profits and please shareholders, a charge the industry has denied, saying premium increases mirror rising healthcare costs overall.

What frightens me about this (other than the obvious government price control)? Textbook analysis: An insurance company calculates a "fair premium" by calculating the probable loss on the policy. If it expects to pay out $1,000 in losses on your policy, then the least it can charge is $1,000 (this is the "fair premium").
Besides charging you extra (called "loading") to cover administration, marketing, and make a profit, insurance companies charge extra in order to have a larger capital cushion in the event of large losses. When assets > liabilities, a company becomes insolvent.
By limiting the amount of loading that insurance companies can charge, Congress is increasing the chances of them going bankrupt.

In most cases if your insurer goes bankrupt your state will pick up the tab in the event of a loss (with a limit). But that's putting even more taxpayer money at risk.


Jessica said...

And here, I thought it sounded like a good thing . . .

JDTapp said...

In a bill like this you're going to have some good and some bad. As David Brooks said Friday, it's a tough call as to whether the good outweigh the bad here.