Sebelius Reveals Administration’s Flawed ObamaCare Concept of Insurance

Kathleen Sebelius

It’s well established by this point that ObamaCare’s full implementation in 2014 will cause premiums to increase significantly.  This cold fact draws a sharp contrast to President Obama’s campaign promise that he would cut the average family’s premium by about $2,500 per year, and Nancy Pelosi’s 2012 pledge that under ObamaCare “everybody will have lower rates.” The Obama administration is now searching for talking points to explain these failures as the looming realities of 2014 begin to confront the administration’s prior platitudes.

The latest theory making its way through the Beltway is that coverage under ObamaCare will be more expensive because it will provide the type of comprehensive coverage that we’ve all been waiting for.  Here is how the AP reported on HHS Secretary Sebelius’s recent comments in response to a study by the Society of Actuaries finding that insurance companies will have to pay out an average of 32% more for medical claims under ObamaCare:

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can’t be compared to the comprehensive coverage available under the law. “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus,” she said. “They’re really mortgage protection, not health insurance.”

The WSJ Blog also reported Secretary Sebelius stating the following:

“These folks will be moving into a really fully insured product for the first time, and so there may be a higher cost associated with getting into that market,” she said. “But we feel pretty strongly that with subsidies available to a lot of that population that they are really going to see much better benefit for the money that they’re spending.”

Let’s put aside the hypocrisy of arguing that ObamaCare provides superior comprehensive coverage when the law is designed to severely punish employers for offering so-called “Cadillac plans” starting 2018.  Instead, let’s try to understand a mentality that promotes ObamaCare coverage as being “fully insured,” and how those who subscribe to this theory fail to understand the proper economic role for insurance.

In response to Vermont being the first state last week to release its ObamaCare exchange premium rates, Ezra Klein wrote a post for The Washington Post’s WonkBlog titled “The confused debate over Obamacare and insurance premiums.”  He argues that insurance policies in states like Vermont (which forced insurers to offer coverage larded with heavy mandate burdens even before ObamaCare) will face less of a cost increase in 2014 because insurers in these states already offer “better” insurance.  He states:

People want better insurance! When they’re able to afford it — either because their employer helps them pay for it, or because they got richer, or because they turned 65 and qualified for Medicare — they don’t wander around lamenting their higher premiums. They celebrate.

When people say that Obamacare will, in certain parts of the country, for certain people, increase premiums, what they mean is that something akin to the switch from Texas Inc. to Vermont LLC. Obamacare will force insurers to upgrade their products to meet a minimum level of comprehensiveness, lay down some rules limiting price discrimination against the sick and the old and the female, and then help people pay for the final product. It’s a lot like what happens if you move to an employer that offers better health insurance and helps you pay for it.

Megan McArdle at The Daily Beast wrote this important post explaining that Secretary Sebelius’s comments demonstrate that she and the Obama administration (and Ezra Klein) are revealing their economic illiteracy when it comes to the concept of insurance.  She explains their misconception in relation to a hypothetical grocery insurance policy:

But insurance does make everyone better off, because it covers very large costs that most people would have trouble paying.  Even most really good savers would have a hard time replacing the value of their house, or paying off a $250,000 judgement for an auto accident.  The expected value of those incidencts is very, very negative—more than just the value of the cash, you have to factor in the horror of being homeless or bankrupt.  When you factor in the homelessness, the bankruptcy, and so forth, the slighly negative expected financial value is more than outweighed by the positive value of being protected against personal catastrophe.  Not to mention the peace of mind one gets from not having to worry about homelessness, etc.

This is the magic of risk pooling.  But notice that it’s the catastrophe which makes insurance a good deal.  You wouldn’t get much value from buying “grocery insurance”.  At best, you’d be paying an extra administrative fee to route your routine expenses through an insurer, rather than paying them directly.  At worst, you’ll end up with bills skyrocketing as all sorts of perverse incentives appear.  After all, if the insurer is paying all your grocery claims, why not load up on filet mignon instead of ground turkey?

McArdle is of course correct.  The purpose of insurance isn’t to pre-pay for anticipated or routine expenses.  It’s to cover the risk of potentially financially disastrous events.  How will we ever control health costs or have a functional medical system if our coverage is “fully insured” to the point where all the financial incentives are aligned to over-utilize and overwhelm health care providers?

Those of us who believe in applying free market principles to the health coverage industry understand that risk corridors are essential to the value of consumer-driven healthcare.  Current tax vehicles in the form of the health FSA, HRA, and the HSA are designed to ensure that patients share some measure of responsibility in the cost for medical items and services.

The incentive is particularly strong with the HSA because not utilizing the account can provide impressive economic benefits.  Furthermore, when paired with the requisite high deductible health plan (HDHP), the coverage also ensures catastrophic coverage with out-of-pocket maximums.  This HSA/HDHP package presents the only feasible concepts for combining an individual’s risk corridor with catastrophic coverage to both provide an appropriate level of insurance and drive down costs.

McArdle concludes with the sad realization that ObamaCare moves us in the opposite direction:

Last week, I was at a health care conference where the subject of catastrophic plans came up.  Obamacare has, unfortunately, sharply curtailed the ability to offer these plans; very high deductible plans are now effectively illegal.  Which is a great shame, because these plans, combined with a dedicated health savings accounts, were showing real promise at controlling costs.

This is an important point.  The role of insurance, it’s coverage structures, and it’s cost-containment incentives should be at the forefront of our continuing message to replace the government-driven ObamaCare behemoth with a system that promotes effective, consumer-driven alternatives.

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