Monday, October 14, 2013

Affordable Care Act

One of the first things I learned when I went into the insurance business almost 40 years ago was that insurance was simply the prepayment of claims. It is paying in advance to cover some future bill or expense. It does not matter if it is life insurance, automobile insurance, or medical insurance. The same basic principle must apply. A policyholder pays monthly or annual premiums and these premiums are pooled with others to pay eventual claims. 

Medical insurance is no different. It only had its origins in the 1930s during the Great Depression. At that time hospitals and physicians were finding it increasingly difficult to collect from their patients, many of whom were out of work. As a result we had the birth of the “Blues.” Both Blue Cross and Blue Shield were products of the Depression. In short, people would enroll in these plans and pay a monthly or quarterly premium that over time would build up enough of a reserve to cover their future claims. This idea seemed to benefit everyone. Doctors and other health care providers would no longer have to go after their patients like collection agencies; and the patients would not have to come up with a large amount of cash to handle large, unexpected medical bills.

However, to avoid excessive or frivolous claims that raise the cost for everyone, most medical insurance policies included deductibles or co-insurance to reduce or eliminate small claims. This was right out of Insurance 101 since actuaries were well aware that the most cost effective strategy was to make the patient bear part of the cost out of pocket.

However, the use of medical insurance to cover future health care costs only took off after World War II. The war had finally taken the country out of the Depression and the economy was booming. In a major change the Federal Government allowed corporations to purchase group medical insurance plans for their employees. Employers were not required to provide health insurance but the government altered the tax code to provide a great incentive.

Unlike other forms of compensation the cost of the medical insurance would not be considered taxable income to the employee. This was important especially to high salaried employees at a time when the highest tax rate was 70%. In other words, employees covered under such a group insurance plan could now have most of their medical expenses paid with tax-free income. It was a no-brainer. Instead of giving all employees a $1000 taxable salary increase, the employer could give them a $1000 tax-free benefit that would cover future health related costs.

The employer sponsored plans were incredibly attractive to all concerned and sparked a veritable revolution in health care in this country. Employers could deduct the cost of their plans as an ordinary business expense while employees could rely on their pre-tax medical insurance plan to cover major medical expenses. Since these were group insurance plans all employees had to be covered even if they had pre-existing medical conditions. Increasingly these group insurance plans came to dominate the market.
Nevertheless, the basic principle of insurance still governed these group plans. They all involved a pre-payment of claims most often through automatic payroll deductions.

This system of corporate sponsored insurance worked remarkably well for the great majority of Americans for many years. There were obvious problems, however, that needed to be fixed. People would lose their coverage when they lost or changed their jobs. Self-employed people did not ordinarily have access to these plans. Unemployed workers would eventually lose their coverage. People with pre-existing medical problems would find it almost impossible to get coverage on their own.

Attempts had been made to deal with these problems but critics of the system still insisted that over 30 million people were without medical insurance. Even if that number was accurate it would be wrong to say that all those people lacked access to medical care. One of the problems with the system was that so many people refused to purchase medical insurance and just went to local hospital ER for even ordinary care.

Instead of trying to fix the problems in the old system, proponents of the Affordable Care Act (Obamacare) sought to overhaul the entire health care system in this country. Now instead of getting a tax break for providing employees with medical insurance, employers would be forced to provide such insurance or pay a penalty. Even though the Obama administration has arbitrarily extended the corporate mandate for a year, some employers have already chosen to drop their plans.

More importantly, it is clear that almost half the country will qualify for a partial or full subsidy from the government in order to purchase their medical insurance. Not only is this incredibly complex and difficult to administer, but it is also open to fraud. Nevertheless, under the ACA a very large percentage of Americans will not have to pay premiums for their medical insurance. No matter what you call it, this is no longer insurance but welfare.

How is the government that is already over 17 Trillion dollars in debt going to pay insurance premiums for almost half the people in this country? Will it just print more money, or will it have to raise the taxes on the other half. Despite these subsidies it would appear that most of the un-insured will not be able to navigate the red tape necessary to enroll, or even be willing to enroll. 

In the next year it would not surprise me if more people lose medical insurance than sign up for Obamacare.


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