Obamacare Prices

In the spirit of the flexible nature of this blog I'm going to use it to speak to something in the political/economic realm in the spirit of explaining something to my friends and readers, the sticker shock everybody, well almost everybody, is getting now that the Obamacare insurance exchanges are open.  Those prices are so high for reasons just about anybody who ever worked in insurance can explain easily enough.  The last jobs I held before I became disabled were as an agent in two different insurance companies.

In order to get that license to sell insurance every agent has to take a licensure exam and one question will always appear on the entry level exams, what is insurance?  The answer is that insurance is spreading the financial risk of injury, loss or damage of property or cost for medical health problems.  Now insurance companies are in the business of spreading that risk for people at a profit for their owners.  The reason behind the increase we all now have in premiums lies in how insurance companies traditionally did that in a manner to maximize their profits.

For decades now the insurance companies had a field day in that respect.  Since the 1940s congress forbade itself from meddling in the insurance market by law.  So the states regulated the insurance industry with the insurance commissioner, who was generally responsible for regulating the industry being an industry insider who allowed practices which maximized profits and seldom interfered with what the companies did.

To start off with, it is a principle that the more people insured the lower the overall risk.  However, that also means lower insurance rates.  Since profit is generally a percentage of the premiums, rates need to go up while risk is driven down.  To strike a happy medium between risks and premiums a number of practices have been allowed.  The first is that when a person buys insurance they are entered into a “pool” of buyers of the same policy.  The pool is limited in size to maximize the premium allowed and the profit derived from the combined premiums in the pool.

However, without further reduction in risk the premiums would be too high to sustain in a competitive environment.  So Insurance companies developed certain ways to further reduce the risk they had to cover.  Prime among those methods was to refuse to cover people with re-existing conditions.  By only insuring the healthiest groups of people costs through the payment of benefits were reduced and insurance companies were able to offer lower premiums while still gaining some of the highest profit margins in the business community.  They further reduced costs by refusing to pay out for certain products or procedures and developed the practice of denying legitimate claims over the years.  They also developed ways to eventually force people who developed chronic health problems off their rolls by moving healthy people into new insurance “pools” as time went by, thus making the premiums rise over time to the point that those left in the original pool could no longer afford their coverage and were forced to leave the pool with nothing.

That is how the insurance industry worked for decades.  Never forget, insurance companies are NOT charitable institutions, they are in the business of making profits for their shareholders.  So they conduct their business in a way to do just that.  One big exception in how the industry was run is in the Progressive State of New York, where for decades the insurance industry ran under a mandated profit margin lower than the rest of the country along with mandated coverage for certain things.  The folks in New York already paid higher premiums than the rest of the country and will actually see their premiums reduced under Obamacare, that’s why the President is pointing to New York as an example of how people will be doing better and paying less, of course they will!

So, now, along comes Obamacare.  It reduces the allowed percentage of profit by mandate.  It also mandates that those with existing health problems be covered.  It also mandates that certain things, such as birth control and abortion must be provided for free, though nothing is ever really free, the cost of providing it is still recovered through the premiums collected.  A bone is thrown to the industry through mandated commissions which will determine what other procedures, etc. will be paid for by the insurance companies with a mandate to reduce costs.  Those are Sarah Palin’s “death panels.”

Although this will be done through a progressive calculus concerning an individual's value to society, the costs under Obamacare will still be high and the insurance companies will still pass them on to customers through their premiums.  And it appears that the companies are still permitted to further maximize their profits, which are still a percentage of the premiums, through the use of smaller “pools” of policy holders based on carving up states into geographical regions or localities instead of using the entire state's population as a pool.  At least that is what it looked like when my wife and I went online to find out how much insurance would cost her if she purchased it through the exchange for our state.

For years those who had insurance benefited from the aforementioned practices and enjoyed relatively low insurance premiums, mostly through work.  Those practices deliberately excluded millions who needed help meeting their medical needs, and that was something which needed fixing.  Medicaid helped many of those people, but more was needed.  Obamacare purports to fix that problem and in doing so ends the free ride folks had over the years.  That, in part, is why the sticker shock.