Thursday, October 31, 2013

Whats wrong with Supercats for Health Insurance?

Before the ACA consumers had the opportunity to buy the equivalent of a "super cat" policy to cover only the extraordinary costs of health care.   Insurance is an agreement between the company and the insured.  There are two key concepts about insurance - frequency and severity.   Some insured events happen often, others not so much.   Some insured events are expensive and others are not.  A third idea one needs to understand about insurance is the concept of retention (Retention = deductible) which is really the amount of risk you are willing to bear.   In many cases people are willing to bear small and frequent risks from their own resources and hoping to have an insurance pool cover those larger costs that occur infrequently.

Think a bit about your car.   You can reduce the cost of insuring your car by increasing the level of risk you are willing to accept -for example if you raise your collision deductible you can lower your out of pocket costs that you pay to an insurance company.  But when accidents occur you have to pay out more on each incidence.  Thus, there are two implicit bets being made by people who raise their deductibles.  First, they believe that over the long term the net savings in premium by accepting a higher deductible will be greater than the costs incurred by auto accidents.   At the same time the make an assumption that they can bear the costs of the large expense when it comes.  

In health insurance, younger customers who do not have a lot of health problems can save a lot of money by buying a high deductible policy.   The attachment point for these can be a lot or a little - but the assumption is that day to day costs of health are borne out of pocket.   So doctor visits are not covered but major operations probably would be.

One size does not fit all in health insurance.   It has some characteristics that are similar to life insurance - as you age benefits are more likely to be paid out.   But as with life insurance some older individuals might choose to forgo full coverage of insurance.  One of the dynamics of the ACA is that it allows (and indeed even potentially encourages) individuals to postpone making a decision on health care costs because no person can be denied coverage.  Depending on one's income and situation in life it might be most economical to not sign up for Obamacare until you are faced with a catastrophic event.

Yesterday the President described the high deductible policies as "junk" - that is utter nonsense - although some of these policies are certainly less useful than others many are designed to meet consumer needs.  An implicit assumption in the President's logic is that all people who buy high deductible policies are unintelligent consumers.   In reality people who buy these policies are like the rest of the population - heterogeneous.    Some are young and don't use the system much.   Some are not wealthy and they are likely to be served by the expansions in Medicaid.  But many have made a wise decision of postponing spending on health care to accomplish other things.   They have more money in their pockets that they can use for other purposes.

There is plenty of evidence that the expansion of insurance and governmental interventions has increased cost structures in health care.  Many doctors have begun to reject both Medicare and Medicaid patients.  I have found that in some medical offices if you came in before the ACA and offered to pay cash (and thus allow a medical office to not go through the forms process) they would offer you a discount over their normal fees.

A wiser course when the ACA was being considered would have been to allow some of these "super cat" policies - that might have been acceptable even if those consumers were required to sign a disclosure (as one does in lending transactions) acknowledging the types of risks being assumed by the purchaser.   But the majority that passed the bill would have none of it.  And the Secretary charged with implementing it went about her work in the most doctrinaire manner possible.

No comments: