Flashback - Health Insurance

[My argument back in July 2011 was that people needed to better understand how health insurance works to keep from getting fooled by advertisers and politicians. Here is the entry in full.]

A flyer in the newspaper today reminded me how naïve consumers are about understanding the economic process, business and insurance, or at least how naïve advertisers think we are.

An ad from AARP promoting their Medicare supplemental insurance plan states that Medicare pays only about 80% of Part B (non-hospital) expenses and the other 20% is up to you.  (True.)  Right below is the statement that a supplemental insurance plan could save you up to thousands of dollars in out of pocket costs. That looks like a great deal, but where do those thousands of dollars come from, the AARP magic money tree? Perhaps the insurance company, out of the goodness of its heart, is going to make up the difference? – of course not.

The insurance company is going to collect premiums from everyone.  (Since premiums are not out-of-pocket costs in insurance language, maybe they are ignored when counting up the thousands in savings.)  The first thing the insurance company must do if it intends to stay in business is to pay its expenses (including the costs of the “free” brochure and of paying for all the people who work there and of other operating costs).  They also want to make a profit.  So already the total amount paid by everyone must be more than the total amount paid back to everyone (or to their doctor).

There will be winners and losers. The (financial) winners will be the people with high medical expenses for doctor visits, tests, etc. The losers will be the healthy ones. This may fluctuate, so in some years you come out ahead and in other years you may be part of the healthy bunch subsidizing the sickies – paying more in premiums than you receive in return.  Except for people who are chronically ill, this amounts to little more than a smooth-monthly-payment program similar to the installment plans offered by some electric and gas utilities. It is often a good budgeting tool to trade unknown payments for smooth, predictable ones, but you are hardly getting thousands of dollars for nothing as the flyer suggests.

This is a common tactic. It implies that the money is coming from somewhere else - but there is no money except our money. Companies and governments handle it, allocate it, and sometimes waste it, but their only source is to get it from us. Americans must listen to advertisers, news media and politicians with this always in mind to avoid getting tricked by this common something-for-nothing sales pitch that is really a smokescreen to disguise redistribution.

[Note that two and a half years after this posted, Jonathan Gruber, a professor at MIT and an architect of Obamacare said publicly: "And basically, call it the stupidity of the American voter or whatever, but basically [an intentional lack of transparency] was really really critical to get for the thing to pass." According to Snopes, the video footage of his remarks was deleted from the Internet in an attempt to hide it.]

Adverse Selection

When I talk about economic understanding, I mean the ability to trace large economic or business decisions back to how they affect you and me as individual consumers and taxpayers.  There is no free lunch, no magic money tree; every time money is spent, it comes out of someone’s wallet.

This understanding seems especially difficult when it comes to insurance.  People are led to believe that they can pay small insurance premiums and receive larger returns.  AARP advertises that their Medicare supplement insurance “could save you thousands of out-of-pocket costs.”  How likely is that to happen when every insurance company must collect in total more than they pay out just to be able to pay their employees, to buy their office equipment, and to pay their rent and utility bills?  If their average customer saved thousands, where does that money come from?  Sales pitches like that drive the misunderstanding.

To add to the confusion we are led to believe that insurance availability is synonymous with healthcare availability, that insurance quality and affordability are synonymous with healthcare quality and affordability.  When it doesn’t work out that way, politicians and the press join in mutual head scratching.

So when someone comes up with the idea of adding individual choice to healthcare and health insurance, on first blush it sounds like a good idea.  Why would a man or elderly woman want to pay for pregnancy coverage?  Could I sign a contract with my doctor promising not to sue in return for a lower bill?  These and other similar programs could keep my premiums lower and really save me thousands.  Unfortunately the law will not allow this nor would it work in the insurance business because of a concept called adverse selection.

“Adverse selection occurs when a product or service is selected by only a certain group of people who offer the worst return for the company.”  As a simple example, I had a work colleague whose wife became pregnant late in the year, just at the time when everyone at the company was selecting coverage for the following year.  He said that he was dropping the lower-cost high deductible plan and was willing to pay the higher premiums for the next year because of the anticipated expenses.  The next year he intended to switch back – good for him, bad for the insurance carrier.  If many people take similar actions, the insurance company must raise premiums or go out of business.  Likewise, if healthy people are allowed to go without insurance and pay their own doctor bills, insurers would not be able to collect premiums from them.  Since the insurance companies simply cannot afford to pay out more than they collect on a regular basis, there must be enough people paying in more than they are getting out to support the company’s expenses.  Forget about those exorbitant profits for “big insurance”; this is true even for a non-profit company.

For a long time companies would not insure people with pre-existing conditions.  Why?  It was their way to limit the pool of customers who were collecting more than they were paying.  As they are forced to accept them as customers, the increased cost is spread over all their customers.  The insurers can no longer weasel out of paying, but we don’t want them to go out of business either – or no one would be covered.

This is the situation we find ourselves in.  Because everyone is required to have insurance, overall health is a public concern.  Everyone’s health is everybody else’s business.  Those who don’t try to take care of themselves are a financial burden on the rest who are forced to subsidize them.  This is neither good nor bad; it just is the way things are.  People need healthcare, and people get healthcare, but the money doesn’t grow on trees – even if it comes from government subsidies.  We need economic understanding about insurance to see what is happening and to anticipate the benefits and ramifications of future proposals.

The next time you hear those ads for term life insurance that assure you that no physical exam or health questionnaire is necessary, think about what that means in terms of costs.  Such a deal will be especially attractive to those who want to avoid a physical exam.  As a healthy person with an average life expectancy, you would be required to subsidize them through your higher premiums.  You can likely find a cheaper policy to protect you from an unforeseen tragedy, if it is one that protects the company against adverse selection by asking about your health first.  That’s the way it works.

Selfish Seniors

Ask any senior citizen and he or she will most likely tell you that the most meaningful legacy is to leave the world better for our children and grandchildren.  We want them to have a better standard of living, better quality of life and generally a happier life.  A close look at the behaviors of these same people, and the organizations that claim to represent them, the story is somewhat different.  They seem to want all of those things as long as it causes them no inconvenience.

One example is Social Security.  This CBS article gives a fair explanation of the future of Social Security if nothing is done.  It can pay out at the promised level of benefits until the year 2033 when benefits will drop to 77% of current levels.  (CBS numbers closely agree with government estimates.)  However, fixes are available.  On the payout side, “the long-term deficit could be eliminated without raising taxes … by increasing the retirement age, reducing the amount of monthly benefits, slowing increases in the cost of living adjustment.”  On the income side possibilities are to “raise taxes by increasing the tax rate, increasing the limit on the amount of compensation that's subject to taxes.”

Without a change our children and grandchildren would pay the same in FICA taxes but collect less for retirement.  What about the proposed solutions?  Here’s what AARP has to say about increasing the full retirement age (FRA):  "raising the FRA would be a stealth benefit cut that is unnecessary and unwanted.”  Their stance on slowing the cost of living increases is equally rigid:  they are “fighting hard” in opposition to "President Obama and Congress … trying to balance the budget by cutting the yearly cost-of-living adjustment for Social Security.”  If they oppose these cuts in benefits over the long term, it’s not hard to guess their stance on any immediate cut.

With those options eliminated, we are left with the option of taxing the kids to keep the parents whole, and this certainly doesn’t make our loved ones' lives more prosperous.  Seniors' intransigence on this issue, unwilling to compromise in the least, flies in the face of their noble sentiments.

Another issue is long-term care.  As you age, “the odds of you actually needing some form of long-term care are high,” much higher than your house being struck by lightening.  Yet this NPR posting points out that purchase or long term-care insurance does not reflect this fact.  “Out of more than 313 million Americans, only about 8 million have any such protection.”  Who then assumes the cost?  It looks like it again falls on the next generation or on Medicaid when you run out of assets, which likewise indirectly falls on the next generations as the government continues to spend more than they have (or again on Medicaid if you hire a lawyer to “protect your assets” in ways that are legal, but morally questionable).

Related to the long-term care issue is one that is probably the most egregious, that of elderly parents forcing adult children through guilt and manipulation to promise never to send them to a nursing home.  This is no doubt a reaction to feelings of fear and uncertainty, but these parents must not realize that they are implicitly expecting their children to deal with issues beyond their capabilities.  They often lack the training to take on medical issues, the physical strength to meet the needs of an invalid senior and the psychological strength to be burdened with such responsibility.

If seniors want a better life for their children and grandchildren, they must acknowledge that they own some responsibility to contribute to this hope and, by all means, not to work against it.

Social Security Cuts

A few years ago analysts predicted that the Social Security trust fund would run out in 2039.  Then we entered a recession and the prediction changed to 2037.  Then, instead of facing the problem, Washington instituted a temporary reduction in the payroll tax, the source of funding for Social Security.  This reduction caused an additional $112 billion shortfall in funding, so today’s prediction is that the Social Security surplus will run out in 2033.  (I sincerely expect that instead of addressing it again, Washington will argue about extending the tax cut scheduled to expire in January.)

Most rational people, who understand basic third-grade arithmetic (critical thinking) and know that there's no magic money tree to satisfy all our needs (economic understanding), agree that something must be done to sustain Social Security and avoid disaster.  It could be raising (not cutting) the payroll tax, extending the retirement age, reducing the rate of increase in benefits, eliminating the salary cap on payroll taxes, even reducing benefits, or some combination of these.  Recommendations along these lines have been made and ignored for the past 30 years.  We have seen the problem coming for a long time.  When the trust fund runs out, in only 20 years or sooner, current taxes will support only about 75% of the need and, unless another scheme is proposed, every recipient will take an immediate 25% cut!  That would be stunning.  Look at the turmoil in Greece that resulted from letting these problems go until the last minute.

Unfortunately, organizations like National Committee to Preserve Social Security and Medicare and AARP, who apparently don’t understand third-grade arithmetic and believe in that magic money tree, use scare tactics, sentiment and a sense of indignation to rally seniors against any change.  They tell them that Social Security is a solemn promise, their right, and the return on their contributions.  Although I have never heard a proposal that would cut current benefits, opponents of change imply that possibility, and seniors are urged not to give up anything.  “Give them an inch, and who knows what will follow.”  But worded another way, “Grandparents, stick to your guns.  Don’t worry that your grandchildren and great grandchildren, whom you claim to love so much, will someday be called on to pay the piper and may never be able to have a decent retirement of their own because you have been so selfish and intractable.”  No one would ever say such a thing.  It’s too harsh – and honest!

Perspective on the AARP

It’s my 63^rd birthday, and I want to tell you how embarrassed I am when I see that television ad with the threatening-looking senior citizen warning politicians to keep their hands off Social Security.  There are lots of seniors out there, and most of us vote!

Aren’t these the same seniors who want only the best for their grandchildren?  Aren’t these the same seniors who want the Congress to move forward and compromise for the good of the country?  But ask them to even consider compromising Social Security or Medicare for the good of the country and you will have a fight on your hands.  Their answer suddenly becomes the equivalent of:  “Don’t touch our benefits, even if it means saddling our grandchildren with the accumulated debt.”  (Of course, some of the well-to-do seniors intend to protect their grandchildren’s inheritance by having a lawyer set up a scheme to shield their wealth, requiring the government to pay their final expenses.  Another good deal for your average taxpayer!)

I resigned my AARP membership many years ago, but they continue to embarrass me with their lack of perspective and magic-money-tree concept of government spending.  Actions have consequences, and just because you won’t be around to suffer those consequences is no excuse to be selfish and belligerent today.

Economic Understanding and Health Insurance

A flyer in the newspaper today reminded me how naive consumers are about understanding the economic process, business and insurance, or at least how naïve advertisers think we are.

An ad from AARP promoting their Medicare supplemental insurance plan states that Medicare pays only about 80% of Part B (non-hospital) expenses and the other 20% is up to you.  (True.)  Right below is the statement that a supplemental insurance plan could save you up to thousands of dollars in out of pocket costs.  That looks like a great deal, but where do those thousands of dollars come from, the AARP magic money tree?  Perhaps the insurance company, out of the goodness of its heart, is going to make up the difference – of course not.

The insurance company is going to collect premiums from everyone.  (Since premiums are not out of pocket costs in insurance language, maybe they are ignored when counting up the thousands in savings.)  The first thing the insurance company must do if it intends to stay in business is to pay its expenses (including the cost of the “free” brochure the ad offers to send you).  They also want a little left over for profit.  So already the total amount paid by everyone must be more than the total amount paid back to everyone (or to their doctor).  There will be winners and losers.  The (financial) winners will be the people with high medical expenses for doctor visits, tests, etc.  The losers will be the healthy ones.  This may fluctuate, so in some years you come out ahead and in other years you may be a part of the healthy bunch subsidizing the sickies – paying more in premiums than you receive in return.  Except for people who are chronically ill, this amounts to little more than a smooth-monthly-payment program similar to the one your electric company may offer.  (Actually, it’s a little worse, because you are paying in even installments the same amount you would pay plus those insurance company expenses.)  It is often a good budgeting tool to trade unknown payments for smooth, predictable payments, but you are hardly getting something for nothing as the flyer suggests.

This is a common tactic.  It implies that the money is coming from somewhere else - but there is no money except our money.  Companies and governments handle it, allocate it, and sometimes waste it, but their only source is to get it from us.  Americans must listen to advertisers, news media and politicians with this always in mind to avoid getting tricked by this common something-for-nothing sales pitch.