Of numerous health-care plans, none gets it quite right

BY JUSTIN SUGG | MAY 14, 2009 7:26 AM

Leaders from the pantheon of America’s health-care industry sent President Obama a two-page letter Monday, pledging a series of reforms to reduce America’s health-care costs by — insert raised pinky in corner of maniacal smirk — $2 trillion! These paragons of special interest provided a few statistics and percentages that they said would lead to the promised land of fiscal restraint, but because these leaders represent special interests and not specific companies, they provided no detail on how or even if the health-care industry will actual carry out cost cutting measures.

The Obama administration fleshed the proposal with a few statistics but left out the meaty details of how to carry out the reforms. The rhetoric in the Obama statement and the industry letter were eerily similar. That’s probably because most of the rhetoric the letter authors use was probably lifted from various Obama campaign speeches — the ones where he discussed the need to restructure America’s health care system.

That is very telling. This letter wasn’t so much a proposal about what the health-care industry could do to help the Obama agenda as much as it was a reaction to the rumblings and mumblings going on in the nation’s capital about health care. Right now, there are at least two to three different bills up for debate calling for a change in the way government provides health care. If you were old enough to follow the news in the early ’90s, then this scenario should sound familiar. The same things happened during the early years of the Clinton administration. Then President Bill Clinton proposed creating a national health-care system resembling Canadian and European health-care plans — the kind that sends conservative lawmakers into epileptic fits and causes Rush Limbaugh to go on tirades about the ever-creeping arm of Euro-socialism.

Just like today, talk of universal health care prompted the health-care gods to come down from their Mount Olympus and pledge undying cooperation with Clinton and his new national health care plan. They backed away, though, after Republicans were able to mount successful opposition and killed the bill.

While there are differences in how lawmakers propose to pay for expanded health care, Obama prefers a plan which would call for a tax-funded reserve to pay insurance claims. That worries me. I don’t like the idea of a single fund, paid for by everyone’s taxes and managed by the Department of Health.

Here’s why: Most insurance companies we see today employ some form of the mutual insurance model. Grinnell Mutual, Mutual of Omaha, and Nationwide Mutual Insurance — all those names mean something. They refer to how they pool premiums and payout claims. A mutual company collects the premiums you pay and lumps them together with other policyholder premiums in a fund called a Loss Reserve. When the time comes to file a claim, the insurance company takes money from that reserve and pays it to the claimant. Sound familiar? It’s a similar model the government uses to fund Social Security, Medicare, and Medicaid — the same programs that government officials say will eventually become insolvent. In my experience in the insurance industry (I’m a licensed broker and experienced underwriter), I’ve noticed two things wrong with this model: It puts immense inflationary pressure on whatever market it interacts with, and it must have the right combination of low-risk and high-risk policyholders for it to not become insolvent.

The same problems will exist in Obama’s plan, only a greater scale. Obama said on the campaign trail he wants to make sure everyone in America had health care. That’s an admirable goal, and I don’t criticize him a bit for it; however he also said that he would provide coverage for those who couldn’t afford coverage while letting the rest of the population stay on their own plan. This poses a problem, because people who tend not to be able to afford coverage are people who are usually too expensive of a risk for companies to insure. That wouldn’t change under a government plan. If this plan were to only attract those who were higher risk, that could lead to an imbalance in the loss reserve, leading to potential insolvency. Another problem with the program is that even if the government successfully maintains the loss reserve, it would still create massive inflationary pressure in the market. A loss reserve fund is like one big hand pressing down on the market, and the federal government would be the biggest hand of all.

At this point, I want to point out that I’m not against a national health-care plan. While I don’t believe the current private system is broken just yet, it still has the same impact as I predict the federal government’s plan will. That’s because there’s still one fund paying for all risk. The risk must be spread out, and that is possible to do. The mutual model is not the only insurance model in the world. In fact, the ideal model for this nation’s health-care plan lies in Britain’s private sector. It’s called Lloyd’s of London. Lloyd’s of London issues insurance policies, usually for high-risk and expensive items and collects a premium. Instead of lumping that premium into one loss reserve account, Lloyd’s of London issue securities to various parties with the promise of premium payment in exchange for the party paying a share of the claim based on the amount of premium they collect. The federal government could adopt this model by issuing similar securities either through the Federal Reserve or through the U.S. Treasury. Health-insurance companies could be a valuable customer in this, so they wouldn’t be left out of the program. The federal government could even stagger the rates based on income since it’s not lumping risks together. It’s a nice thought, but the odds of it happening are about as good as a Clash reunion.

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