Government Shutdown

 

The current government shutdown is in its fourth week. What is the issue? It is not Medicaid, or SNAP (food stamps). These are covered in the Continuing Resolution (CR) passed by the House of Representatives. The House resolution is called a "clean"one because it does not change anything. All current programs would be continued. The Democrat minority in the Senate, however, has used the filibuster to block the CR and demand the continuation of Federal subsidies for participants in the Affordable Care Act (Obamacare). Apparently, Obamacare enrollment has never reached expectations, while claims have skyrocketed to the extent that large premium increases are expected next year.  

 One of the first things I learned when I went into the insurance business over 50 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 taxable salary increase, the employer could give them a 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 the local hospital ER for even ordinary care.

 

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

 

More importantly, at the time the Affordable Care Act was passed in 2014, President Obama indicated that it would not be so affordable, and that Federal subsidies would be needed for a couple of years to help participants pay their premiums. As it turned out, the subsidies did not go away. Because of these subsidies many enrollees in Obamacare did not have to pay the full premium for their medical insurance. No matter what you call it, it was no longer insurance but welfare.

Even with subsidies it would appear that most of the un-insured did not find the plans attractive, or were not able to navigate the red tape necessary to enroll. The expected number of plan participants never materialized.   

 

When Obamacare was passed the Federal government was over 17 Trillion dollars in debt. Now the debt is over $37 Trillion. How is the government going to pay these subsidies?  Will it just print more money and add to inflation, or will it have to raise the taxes on everyone. It is a problem that deserves careful study and cooperation, not drastic measures like shutting down the government, and shutting down the benefits of the needy. 

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