Industrial giant 3M announced it will no longer offer group health insurance to retirees not old enough for Medicare, beginning in 2015. Instead, 3M will offer some financial support for such retirees to purchase their own insurance.
The reality of ObamaCare is making a mockery of President Obama's claim that people can keep their current insurance policies if they want: the government has changed the health insurance marketplace, making it difficult or impossible for companies and health insurers to continue with existing insurance plans.
While this may be an "unintended consequence", I believe it is exactly intended - with the goal of driving more people to government provided health insurance, since if ObamaCare destroys wide swaths of the private market, the government will expand its role in healthcare.
Showing posts with label That Was Fast. Show all posts
Showing posts with label That Was Fast. Show all posts
Wednesday, October 6, 2010
Friday, October 1, 2010
That Was Fast III
McDonald's has announced it may drop health insurance for 30,000 of its restaurant workers if certain changes are made to ObamaCare.
The specific provision that is causing a problem for McDonald's is the requirement that health insurance spend at least 80-85% of its premiums on medical expenses. Because of high turnover and low premiums for its health insurance for restaurant workers, administrative costs are higher than 15-20% of the total premiums.
McDonalds has requested that regulators waive the requirement so it can continue to offer health insurance to its restaurant workers.
Barack Obama said people could keep their existing health insurance policies if they wanted under his "reform". But ObamaCare has made it impossible for some health insurance, and uneconomic for other plans, to continue.
Thursday, September 30, 2010
That Was Fast II
As I wrote in July, the Democrats' policies are so bad that in some instances the deleterious effects occur very quickly and clearly.
This isn't so with many government policies, where the negative consequences can take to manifest themselves and can be obscured due to the passage of time and the complexities of many economic issues.
So a policy whose negative effect is so clear and quick must really be bad to so qualify.
And Obama's healthcare debacle does so. This week, new regulations took effect requiring insurance companies to issue insurance for children without considering pre-existing conditions, known as guaranteed issue.
While that sounds nice, the result has been that most of the major insurers this week stopped issuing children's only health insurance policies.
Why would the insurers do this? Because if a person is guaranteed to be issued a health insurance policy without taking into account pre-existing conditions, nothing stops the person from getting the policy until a medical condition arises. So insurance tends to be bought only by sick people, with those needing the most expensive coverage most likely to buy, driving up medical claims costs per customer. The insurance companies then have to increase premiums to cover the cost, which provides greater incentives for people to wait until a medical condition arises worth paying the increasing premiums. This is a vicious cycle, and leads to the destruction of the market.
And it just did for children's only policies.
To make this point more clear, let's use a very simplified example. Health insurance in reality is more complicated than my example, since there are many possible outcomes beyond two that I use for this illustration, and there are co-pays and deductibles. But this demonstrates the essence of the problem.
Imagine there are two outcomes for consumers regarding their medical costs for the next year: they either have no medical costs for the year or they have a major medical condition that costs $100,000. And let's say for the overall population that there is a 10% chance the catastrophic problem occurs and 90% chance there is no cost. And let's add that there is no way to test or screen to see if customers have this medical condition before they buy insurance - in other words, you only know you have this condition when symptoms develop.
If the insurance company can sell insurance to a broad, representative sample of the population, on average it will incur $10,000 of medical costs per customer, since $10,000 is the expected outcome (10% chance of paying $100,000 and 90% chance of paying $0).
Let's also assume the insurance company needs to add 20% to its medical costs to cover its overhead and earn a profit. So in this case, the insurance company would charge $12,000 for an insurance policy. Customers would have a strong incentive to buy insurance, since if they went without insurance they would have a 10% chance of facing a huge medical bill of $100,000. So insurance serves its fundamental purpose, which is to protect against large, uncertain risks.
But now imagine that the law requires guaranteed coverage and prevents insurers from using pre-existing conditions to deny coverage.
Smart customers will realize they can avoid paying $12,000 when they have no major medical problem and can instead wait until the condition develops - and then buy insurance for $12,000 to pay $100,000 of medical bills. That's a great deal for the savvy customer.
So after some period of time, the behavior of savvy customers will change the sample of people buying insurance - healthy customers tend not to buy insurance and those who develop symptoms rush to buy insurance - so now 20% of the insured population develops the major medical problem. The insurer's expected medical cost per customer is now $20,000, and now charges $24,000 for insurance coverage - up from $12,000.
Now the initially unsavvy customers - people who are representative of the overall population in terms of having a 10% chance of developing this major medical problem - buy less insurance, since the cost is now $24,000 but there chances of paying $100,000 are still the same 10%.
As these customers drop insurance, the percentage of actual customers who have the major medical problem further increases. If the pool is now comprised 40% of those have or develop the medical problem, the expected medical bills are now $40,000 per customer. This leads to higher prices for insurance, which then provides more reason for customers to only buy insurance when the medical condition arises.
The result? The insurance company stops selling guaranteed issue policies since the market breaks down.
And this is why the health insurers stopped selling children's insurance this week.
We can thank ObamaCare for this and many more gifts to come.
This isn't so with many government policies, where the negative consequences can take to manifest themselves and can be obscured due to the passage of time and the complexities of many economic issues.
So a policy whose negative effect is so clear and quick must really be bad to so qualify.
And Obama's healthcare debacle does so. This week, new regulations took effect requiring insurance companies to issue insurance for children without considering pre-existing conditions, known as guaranteed issue.
While that sounds nice, the result has been that most of the major insurers this week stopped issuing children's only health insurance policies.
Why would the insurers do this? Because if a person is guaranteed to be issued a health insurance policy without taking into account pre-existing conditions, nothing stops the person from getting the policy until a medical condition arises. So insurance tends to be bought only by sick people, with those needing the most expensive coverage most likely to buy, driving up medical claims costs per customer. The insurance companies then have to increase premiums to cover the cost, which provides greater incentives for people to wait until a medical condition arises worth paying the increasing premiums. This is a vicious cycle, and leads to the destruction of the market.
And it just did for children's only policies.
To make this point more clear, let's use a very simplified example. Health insurance in reality is more complicated than my example, since there are many possible outcomes beyond two that I use for this illustration, and there are co-pays and deductibles. But this demonstrates the essence of the problem.
Imagine there are two outcomes for consumers regarding their medical costs for the next year: they either have no medical costs for the year or they have a major medical condition that costs $100,000. And let's say for the overall population that there is a 10% chance the catastrophic problem occurs and 90% chance there is no cost. And let's add that there is no way to test or screen to see if customers have this medical condition before they buy insurance - in other words, you only know you have this condition when symptoms develop.
If the insurance company can sell insurance to a broad, representative sample of the population, on average it will incur $10,000 of medical costs per customer, since $10,000 is the expected outcome (10% chance of paying $100,000 and 90% chance of paying $0).
Let's also assume the insurance company needs to add 20% to its medical costs to cover its overhead and earn a profit. So in this case, the insurance company would charge $12,000 for an insurance policy. Customers would have a strong incentive to buy insurance, since if they went without insurance they would have a 10% chance of facing a huge medical bill of $100,000. So insurance serves its fundamental purpose, which is to protect against large, uncertain risks.
But now imagine that the law requires guaranteed coverage and prevents insurers from using pre-existing conditions to deny coverage.
Smart customers will realize they can avoid paying $12,000 when they have no major medical problem and can instead wait until the condition develops - and then buy insurance for $12,000 to pay $100,000 of medical bills. That's a great deal for the savvy customer.
So after some period of time, the behavior of savvy customers will change the sample of people buying insurance - healthy customers tend not to buy insurance and those who develop symptoms rush to buy insurance - so now 20% of the insured population develops the major medical problem. The insurer's expected medical cost per customer is now $20,000, and now charges $24,000 for insurance coverage - up from $12,000.
Now the initially unsavvy customers - people who are representative of the overall population in terms of having a 10% chance of developing this major medical problem - buy less insurance, since the cost is now $24,000 but there chances of paying $100,000 are still the same 10%.
As these customers drop insurance, the percentage of actual customers who have the major medical problem further increases. If the pool is now comprised 40% of those have or develop the medical problem, the expected medical bills are now $40,000 per customer. This leads to higher prices for insurance, which then provides more reason for customers to only buy insurance when the medical condition arises.
The result? The insurance company stops selling guaranteed issue policies since the market breaks down.
And this is why the health insurers stopped selling children's insurance this week.
We can thank ObamaCare for this and many more gifts to come.
Wednesday, July 21, 2010
That Was Fast
Often the negative consequences of the government's intervention in the market takes some time to become apparent. But the egregiousness of Barack Obama's assault on the free enterprise system is so pervasive that we often see the impact in remarkably, and sadly, short order.
As example, a couple weeks after the passage of the healthcare bill, a number of prominent companies reported large write-offs due to the increased costs the healthcare bill will impose on them. When Congressmen claimed this was false, because "everyone knows the healthcare bill will reduce costs and not increase them", Congress began an investigation.
As example, a couple weeks after the passage of the healthcare bill, a number of prominent companies reported large write-offs due to the increased costs the healthcare bill will impose on them. When Congressmen claimed this was false, because "everyone knows the healthcare bill will reduce costs and not increase them", Congress began an investigation.
That investigation was quietly and quickly shelved when corporate documents submitted in response to the investigation revealed that many companies had done analyses that showed they could save money by terminating their health benefits for employees, paying the penalties in the healthcare bill for doing so, and letting employees get government-provided health insurance.
Now we have immediate consequences from the recently passed legislation imposing new regulations on the financial services industry.
The new law makes credit rating firms, such as S&P and Moody's, liable for the quality of their ratings decisions. Previously, such ratings were considered opinions, and since the ratings are estimates of what may happen in the future, an opinion is what they are. But now, if investors lose money on a bond which was rated by a credit rating agency, the credit rating agency could be sued by investors and win damages. Since there are trillions of dollars in bonds issued each year, credit rating agencies could go bankrupt based on the vagaries of the economy and markets.
In response to this risk imposed by the new law, the credit rating agencies are prohibiting the use of their ratings in the offering materials given to potential investors for new bond issuances. But some bonds, particularly those related to consumer loans such as mortgages, auto loans, student loans, and credit card debt, are required by law to include such ratings in their offering documents.
The predictable result?
A number of bond offerings have been put on hold, as participants digest the implications of the new law. The firms are investigating if there are ways to get around the rules through the issuance of private bonds, at the price of lower liquidity for new investors and higher borrowing costs for issuers of debt.
This will reduce the capital available to expand the economy, increasing borrowing costs, impairing job creation, and reducing economic growth.
But it is good deal for trial lawyers, who must be salivating at the opportunity for new revenue streams from litigating future bond defaults.
You might think, in a world of thoughtful and honest government, such an important part of the financial services law was heavily debated, so its consequences were well understood. But if you thought that, you haven't been paying attention to government policy the past two years. This provision was added to bill on June 30, when the law passed.
Such is how our freedom is being eroded, in last minute deals to pay off favored constituents that impose dramatic costs to the economy.
Now we have immediate consequences from the recently passed legislation imposing new regulations on the financial services industry.
The new law makes credit rating firms, such as S&P and Moody's, liable for the quality of their ratings decisions. Previously, such ratings were considered opinions, and since the ratings are estimates of what may happen in the future, an opinion is what they are. But now, if investors lose money on a bond which was rated by a credit rating agency, the credit rating agency could be sued by investors and win damages. Since there are trillions of dollars in bonds issued each year, credit rating agencies could go bankrupt based on the vagaries of the economy and markets.
In response to this risk imposed by the new law, the credit rating agencies are prohibiting the use of their ratings in the offering materials given to potential investors for new bond issuances. But some bonds, particularly those related to consumer loans such as mortgages, auto loans, student loans, and credit card debt, are required by law to include such ratings in their offering documents.
The predictable result?
A number of bond offerings have been put on hold, as participants digest the implications of the new law. The firms are investigating if there are ways to get around the rules through the issuance of private bonds, at the price of lower liquidity for new investors and higher borrowing costs for issuers of debt.
This will reduce the capital available to expand the economy, increasing borrowing costs, impairing job creation, and reducing economic growth.
But it is good deal for trial lawyers, who must be salivating at the opportunity for new revenue streams from litigating future bond defaults.
You might think, in a world of thoughtful and honest government, such an important part of the financial services law was heavily debated, so its consequences were well understood. But if you thought that, you haven't been paying attention to government policy the past two years. This provision was added to bill on June 30, when the law passed.
Such is how our freedom is being eroded, in last minute deals to pay off favored constituents that impose dramatic costs to the economy.
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