Waking Up From the Public Option Dream

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

Waking Up From The Public Option Dream

July 20, 2016Last week, President Obama called for Congress to revisit the healthcare “Public Option”.

A public option would mean a government run health insurance plan.

Whether you support a public option, a private one or a hybrid of both – it’s important to understand that the 6 principles of properly financing risk are required to float all of them.

This week I review another two of the principles largely challenged under the ACA and what it means for those who support the public option.

The Loss Must Be Due To Chance

This principle ensures that any loss you suffer is random or a mishap, in other words, something out of your control.

There are two types of risk – pure risk, where there is only a chance of loss, such as death, disability, illness, or accident. These risks are pure in that they do not mix both profits and losses. Alternatively, speculative risk exists where you stand to lose or gain, such as the risk that occurs with gambling or investing in the stock market.

Insurance is concerned with the economic problems created by pure loss. Pure risk is the only kind of loss that can be insured.

Pure Risk = Possibility of Loss
Insurance = Probability of Loss

The Loss Must Be Randomly Selected

In solving the economic problems associated with loss for their customers, this principle protects insurers from what is referred to as “adverse selection”. Adverse selection is a concept in economics, insurance, and risk management, which captures the idea of a “rigged” trade. In short, it is said to have occurred when buyers have better information than sellers. Insider trading is a form of adverse selection as is purchasing a life insurance policy a day after you have been diagnosed with a terminal illness, or buying a health insurance policy on the way to the Emergency Room (ER).

Prior to the Affordable Care Act (ACA) insurers could ask medical questions of individuals to flush out attempts at adverse selection. However the ACA outlawed the use of such risk evaluation tactics. The Feds had to offer up an alternative that would protect insurers from adverse selection. Their answer was the Federal Open Enrollment period – a window of time that starts in November each year that requires all risk good and bad to purchase insurance. This arrangement was designed to protect insurers from adverse selection. However, it failed under the ACA because the majority of first-time buyers also had an immediate need for services which caused the program to go broke.

You see the principle of random selection works when a large population pays into a pool of funds but not everyone is accessing it at the same time. The losses are happening at “random”. This risk management concept is not unique to insurers. It’s at play with government run programs such as Medicare and Social Security in the United States or the healthcare system in Canada. Everyone using it is required to pay into it.

The concept of everyone having to pay has failed so far and yet a public option cannot exist without it.

Wait, what?? The eyes of Millennials in my office grow wide when, drawing on my Canadian experience, I explain that a public option does not mean that when your new tattoo becomes infected your doctor visit is “free”.

Canadians pay for their healthcare via a combination of payroll deductions and/or taxes depending on the province in which they reside. That part Canada got right in my opinion. You use it, you pay for it. Unlike Cuba which I have also visited, prescriptions, vision, and dental are not covered in the Canadian system. In Canada the amount of money required to support the healthcare needs of the country, and the efficacy with which the government manages those funds is constantly being debated. The “haves” want the right to pay more in order to buy a better healthcare experience and argue this would take pressure off a system designed for the “have-nots”.

We have the opposite problem in the U.S. Everyone is accessing the system, but not everyone is paying to do so and therefore the insured population is paying for the uninsured by way of annual increases in premiums.

So while I believe in the humane idea that everyone should have access to affordable healthcare, I am quick to educate public option supporters that there is no such thing as “free” healthcare just like there is no such thing as “free” Medicare or “free” Social Security. That unicorn doesn’t roam free in Canada any more than here in the United States.

Explaining this to a demographic more likely to leave the house for Pokemon than to exercise their right to vote is a challenge. Convincing policy makers of same, who address our obesity problem by imposing a “sugar tax” on soda manufacturers is equally difficult. The increasing lack of accountability placed on individuals is the 800 pound elephant in the room that needs to be addressed politically and financially to sustain any long-term plan for healthcare, whether it be private or public.

Even socialized medicine models require everyone to pay SOMETHING. That is a tough pill to swallow for the chewable gummy generation.

The Argument for Bureaucrats or Businessmen

So let’s assume that we CAN coerce an entire generation to spend their forgiven student loan money on health insurance. The ongoing debate in all industrialized countries is whether bureaucrats or businessmen are the best people to oversee the task of building up reserves to financially sustain social programs that rely on random selection.

There are plenty of reasons to worry that government regulators struggle with fiscal management. High school social studies teaches us that bureaucrats lack incentives for fiscal responsibility to the same extent as private sector. They are better disciplined by career concerns or by the political process than they are markets. Government agencies generally lack access to advanced tools to assist in the acquisition, aggregation, and prediction of valuable information. Combined, all of these factors put government at risk for fraud and abuse, which ultimately costs “we, the people”.

As an example, in July, 2015, the Government Accountability Office (GAO) released a report estimating that $60 billion of American taxpayer money, or more than 10 percent of Medicare’s total budget, was lost to fraud, waste, abuse and improper payments.

So it raises the question: Who can perform regulation of taxpayer funded programs better than the government?

Next week’s principle in review: The Loss Must Be Definite and Measurable.