Thursday, September 25, 2008

Obama's healthcare plan is morally corrupt (or, why medical underwriting is necessary)

Medical underwriting is a fundamental principle which allows health insurance to work properly. Why does Obama think that medical underwriting should be prohibited? [1]

Consider this hypothetical insurance pool of 100 individuals:

  • 10 individuals are extremely high risk and constantly sick. expenses per year: $100,000,000, or $10,000,000 per person

  • 20 individuals are moderately high risk and frequently sick. expenses per year: $20,000,000 per year, or $1,000,000 per person

  • 40 individuals are medium risk and occasionally sick. expenses per year: $4,000,000 per year, or $100,000 per person

  • 20 individuals are moderately low risk and rarely sick. expenses per year: $200,000 per year, or $10,000 per person

  • 10 individuals are extremely low risk and never sick. expenses per year: $10,000 per year, or $1,000 per person

Total healthcare cost: ~$125,000,000 per year.

How does Obama's system of prohibited medical underwriting work?

The premiums paid into the system are equal for all individuals. This is contrasted with a normal insurance situation, where medical underwriting takes into account individuals' risk and adjusts the premium accordingly. Under Obama's plan: premium = THC / #individuals

$125,000,000 / 100 individuals = $1,250,000 premium per person

The extremely-sick individuals receive $10,000,000 in benefits each year, but only pay $1,250,000 in premiums.

The never-sick individuals receive $1,000 in benefits each year, but are forced to pay $1,250,000 in premiums.




Socialism is not fair. It is morally corrupt.


How do you force low-risk individuals to become part of this scheme? Mandates. No person in his right mind would subject himself to paying an enormous amount of money to get very little in return, unless of course the government held a threat of criminal penalty if he refuses to become a part of it.



Next time, I will address why this ponzi-type scheming has worked in the past with socialist programs such as Social Security and Medicare. And why these programs are now bankrupt.

8 comments:

Usama said...

Interesting post. I don't agree with supporting the prohibition of medical underwriting, but I hardly think the issue is as cut and dry as you make it in this post. The alternative isn't any more satiable to me, and I can hardly consider it morally better to do the opposite. To argue that prohibiting underwriting is 'morally corrupt' is a bit much. Charging people more for services the same services (or less) certainly isn't fair, and yes in a sense you are cheating the low-risk population, but it is insurance coverage and I think it is understood that inevitably you may end up paying more into the system than you actually use.

Having high-risk populations pay more would not really work, in my opinion. First of all I will be optimistic and hope that by 'high-risk' individuals we are not including those genetically predisposed to a certain sickness. The general public would hardly be OK with genetically screening and determining rates based on something they have absolutely no control over, not because it is morally wrong (I don't think it's morally wrong) but just because you have no choice in who your parents are and what diseases you're predisposed to. So let's assume by high-risk populations you mean those who smoke when they know they shouldn't, who are obese and either refuse to or don't care to do anything about it, and other such situations which are under a person's control.

The problem I see here, and I guess there's a good chance you will disagree with me on this one, is that a lot of the high-risk individuals come from low socio-economic households where meals may not reflect the USRDA, where individuals need to work two or three jobs to maintain a certain living which prohibits them from taking care of themselves much less others and still their living conditions can be suboptimal. Sure not everyone actually works this hard, there are some people who use and abuse the system, but I don't think it is is morally right to hurt the hard working individuals for the fault of those who abuse the system.

How much money someone pays into a system compared to how much they use is not always the best measure of a system. You're also ignoring that these are business and since their inception a lot of the cost-savings they were able to achieve in health care were taken as pure profits and giant bonuses to CEOs. I think it is morally much better to have a broken system that puts more of a burden on low-risk individuals if it means the system can support more people than to do the opposite and make costs prohibitive for those not able to afford entry into the system.

Your example is extreme but the point is well taken. I think there could be better ways and that is what everyone is looking for. I do look forward to your posts on Social Security and Medicare, because the only way a system like that can actually work (i.e. not hemorrhage money) is by denying coverage to high-risk individuals or ask them to pay much more to account for their share. Again that is not an option for everyone and often the reason only 1% end up account for a majority of the costs of Medicare is because they don't die quickly, and life maintenance ends up costing so much, not because they're at high-risk for a disease.

I also wouldn't use this one issue to decide who I vote for. There are other issues at stake and although medicine is important to me because I am entering the medical field, it will never be the only issue that I use to make my decision. But thanks for this post, it is valuable to have this information about Obama.

We can just talk about this in class sometime ;-)

Peter said...

Insurance without underwriting is not insurance: it is wealth redistribution or socialism. The key to insurance is that individuals with a similar risk-stratification would pool their money together to pay for the expenses of each other. This is precisely how auto insurance works, wherein high-risk individuals who are involved in 50 auto accidents per year would pay immense amounts of money in insurance premiums versus individuals who have never gotten into a car accident would pay small amounts of money in insurance premiums. Imagine how incredibly unfair it would be to ask the safe drivers to pay much higher premiums in an Obama-esque fashion in order to pay for the high resource usage of the 50+ auto accident drivers. You could be sure that if given the choice, the low-risk drivers would opt-out of auto insurance if they were not prevented from doing so by threat of criminal penalty.

You know that as part of our school tuition, we pay a certain amount per year in health insurance premiums. I think it is close to $3,000 per year, an amount which is determined through medical underwriting. Our previous classes' resource usage is taken into account along with demographics of our class members. We are a relatively healthy and low-risk (even with the needle-stick risk) subset of the population and so we pay relatively less than most other risk subsets in the country. If Obama's prohibition of medical underwriting goes through, our yearly insurance premiums will skyrocket. I consider the situation where our entire class pays $10,000 more per year in insurance premiums to be incredibly unfair.

It would be great if everyone in this country could be entitled to all the healthcare they could possibly want. It would be great if even the highest risk could be entitled to the most expensive healthcare over a lifetime, racking up hundreds of millions of dollars to treat one individual. The problem is that we simply can not afford to do so. If we attempt to follow through on Obama's healthcare plan of prohibiting medical underwriting, the highest risk will receive the vast majority of healthcare resources leaving the other 90% of the population with the scraps from the table. Creating a system that benefits 10% of the population but screws the other 90%? That is incredibly unfair. Further exacerbating the unfairness is the fact that some high-risk individuals are also extremely well off and the fact that some low-risk individuals are extremely poor. It is incredibly unfair for the poorest of the poor who are low-risk to pay for the medical expenses of the richest of the rich who are high-risk.

The moral corruption that I describe has everything to do with this unfairness; it has to do with his calling his policy an insurance plan when in reality it is socialism; it has to do with his stealing from lower-risk individuals in order to give benefits to the small population of high-risk individuals; it has to do with preventing individuals from opting out of this ponzi-type scheme - individuals who would be gouged with the monthly premiums; it has to do with 10% of the population getting the benefits from the 90% of the population which gets screwed.

The plan could easily be made better by two simple improvements:

• Allow individuals within a particular risk stratum to insure each other and not the health expenses of those outside of their risk category.

• Allow individuals the right to refuse to become a part of the government plan.

My point overall is that Obama's intentions might be in the right place, but the mechanics of implementation are the problem. I don't think that the means will justify the end. Especially if the end is the bankruptcy of our country.

DX said...

Why did you just make up your numbers? Couldn't you have found some real data? Or do they not support your argument?

I can make up numbers as well or better than you can, but I don't. Health care is a real problem in this country, affecting real people, so it only seems fair to keep to the realm of the real when I discuss it. Why you want to go off into candy land is beyond me, but you're not helping real people make any sense of the problem.

DX said...

And, in fact, the real numbers do not support your argument. I did that part for you at duncancross.net .

Peter said...

Duncan,

According to the Kaiser data:

the top 10% of spenders account for 64% of total healthcare expenditures
the bottom 10% of spenders account for less than 0.5% of total healthcare expenditures
the top 50% of spenders account for 96.6% of total healthcare expenditures
the bottom 50% of spenders account for 3.4% of total healthcare expenditures

My hypothetical breakdown assumes that:

the top 10% of spenders account for 80% of total healthcare expenditures
the bottom 10% of spenders account for .008% of total healthcare expenditures
the top 50% of spenders account for 97.6% of total healthcare expenditures
the bottom 50% of spenders account for 1.8% of total healthcare expenditures.

Granted, my hypothetical situation was off by a certain amount: 16% points for the top 10%, 0.492% for bottom 10%, 1% for the top 50%, 1.6% for the bottom 50%. But, the numbers were approximate to illustrate a point, namely that the top 10% of spenders account for the vast, vast majority of healthcare expenditures. In fact, the Kaiser data validate my claims as I have originally laid them out in my blog post, especially the data for the top 1% of healthcare spenders accounting for one quarter of total healthcare expenditures and the data for the bottom 50% of spenders accounting for only 3.4% of total healthcare expenditures.

Finally, the point is poignantly made that the bottom half of spenders in healthcare resources are utterly screwed when compared to the top 50% of spenders. Without medical underwriting, the bottom 50% of spenders will suffer the immense burden of having to pay for the benefits (96.6% specifically) of the other 50% of the population.

That is why it is truly morally corrupt to promote such a lopsided socialist program, which in the end, will hurt those who are careful about their health and unwilling to waste economic resources. Moral hazard is exacerbated, and healthcare costs will skyrocket to astronomical proportions far greater than we have seen so far.

DX said...

Your data may have been close-ish, but your distribution was wrong and your conclusions were way off - and you're still missing the fact that these are not static categories; some years a given person will be a low risk, and some years a high risk. That’s the problem that health insurance and universal health care programs are both designed to solve, albeit in similar but somewhat different ways. You may well think that one way is immoral, but that’s not a question of data: any health insurance scheme is going to have an degree of risk-sharing. You need to explain why what’s truly morally corrupt regarding government organized health care is not truly morally corrupt in regards to employer-based insurance.

Your concerns about cost are entirely legitimate, but you don’t seem aware that our non-socialized system is by far the biggest spender on health care compared to other countries, nor that our system really doesn’t reward people who are careful about their health and economic resources. And, in fact, the Obama plan has some elements designed to address these aspects - not enough, but some. It would be helpful if you could use your blog to speak specifically to that plan, instead of conjuring Socialist boogeymen.

Peter said...

Allow me to address your points:

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By definition, high risk means high likelihood of an individual receiving benefits from the insurance pool; conversely, low risk means low likelihood of an individual receiving benefits from the insurance pool. Insurance depends on the fundamental principle of risk adjustment in order to properly assess how much individuals within a certain risk stratum must pay in premiums in order to guarantee (insure) that there will be enough resources within that risk stratum to pay for benefits paid out within that risk stratum. When properly adjusted for risk, the resources pooled together through the monthly premiums of a low-risk stratum should cover, based on prior statistics and future predictions, the precise amount of benefits that need to be paid out. In other words, risk adjustment through medical underwriting allows all benefits which are required to be paid out, to be paid out.

Those who are high-risk tend to remain high-risk, and those who are low-risk tend to remain low-risk. This is not a function of yearly benefits fluctuating among individuals. Frequent fliers who require 65% of healthcare resources in one year do not magically become healed so that the next year that group requires only 1% of the resources. Though there is indeed some fluctuation, typically those who require immense amounts of resources in the past will likely require similarly immense amounts of resources in the future. (The same is true for high-risk automobile drivers.) It is not like the ones who receive the most benefits will pay back their dues in the future once they're healed, and it is not like the ones who receive very little benefits will suddenly get a windfall benefit package down the road to recoup the amount of money paid into the system in premiums. It is a very one-sided system where the few benefit from the redistributed resources of the many.

So what Obama is proposing is not an insurance plan at all. When medical underwriting is prohibited, insurance is transformed into a wealth redistribution system. Regarding opinions on wealth redistribution or socialism you may not agree with me: some praise Obama's system precisely because it ushers in socialized medicine through the backdoor, others decry Obama's system precisely because it simply is socialized medicine. I am of the persuasion that a systematic policy of depriving someone of resources in socialism (stealing) to give to someone else is morally corrupt, especially when the proponents of such a plan are not forthcoming with the true nature of the plan. Since Obama is essentially proposing socializing medicine, he should just come out and take the political risk and tell the truth rather than using politically-expedient euphemisms of "universal healthcare" or "mandated health insurance".

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Firefighting and police are not services provided by the federal government, so I do not know why you are bringing that up in a discussion about federally-provided healthcare. National defense is a constitutional duty for the federal government to maintain and to provide for through federal revenue. Socialized healthcare, or healthcare in general, is not a constitutional duty for the federal government. The states should feel free to enact such plans since that is in their purview. Regarding Obama's plan being morally corrupt in light of federally-provided programs, I hold Obama's plan in the same contempt as I would any other socialist program which deprives individuals of their hard-earned resources in order to give it to a select group of others.

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Insurance, by its very nature of having a benefits-recipient disconnected from the true cost of a good or service by way of a third party payor, introduces the economic principle of moral hazard. Obama's plan is the worst possible solution to moral hazard because the true cost of a good or service is completely disconnected from the recipient. You can be sure that any rational person is willing to use the maximum amount of resources that he can because he knows that it will not have an effect on his future premium rate. Coming full-circle, this is precisely because medical underwriting prevents the premium from increasing for abusers of the system. Rather than retarding healthcare expenditures, costs will skyrocket under Obama's plan due to the very nature of moral hazard.

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Employer-provided insurance is not a panacea. It is a broken system. Those who lose their jobs lose their insurance coverage. Employers are getting squeezed by increasing premiums and are likely to drop insurance all together. That is not fair. A methodical way to break free from the terrible employer-provided system is worthy of a second-look.

DX said...

Peter - thanks for your comments here and on my blog. Given their extent, I took them into a new post of their own, so that I could quote and link more easily. You can find it here:

http://duncancross.net/2008/10/peter-responds/