Thursday, June 18, 2009

Obama on Healthcare – Lies, damned lies, and statistics

The problem I have with President Obama is that he’s too smart to be wrong by accident. I actually thought W. made mistakes because things were over his head. But BHO is a very smart man, so I have to believe he knows when he’s full of crap.

Take his current bugbear, the health insurance industry. Everybody loves to hate them, and not without reason. Their role in life is to make health insurance cheap, and the best way to do that is by making it illusory. Every time a health insurance company denies your neighbor’s claims, your premium goes down. That’s because health insurance is a very competitive business.

Health insurance companies really do compete on price. But only two things affect price: underwriting and administration. Assuming that competitive pressures make the companies substantially equal in administrative cost, the difference in price primarily reflects coverage and benefit decisions. We pay the companies to pay claims, but select them because they deny claims.

Especially claims for preexisting conditions. The issue is what insurance types call “adverse selection,” the tendency of people who need insurance the most to buy the most of it, so that the insured pool represents, in the aggregate, a greater risk than the total population.

Adverse selection comes in two flavors: conscious and unconscious. The unconscious variety is difficult to counteract. People who tend not to be careful about their risks tend to buy more insurance and take more comfort from it. (This is where adverse selection gets confused with another phenomenon called “moral hazard.” Moral hazard is the tendency of insured individuals to take greater risks because the net loss is less if those risks mature. People who are more prone than others to succumb to moral hazard tend to buy more insurance in the first place, and that’s a form of unconscious adverse selection.)

Conscious adverse selection is preventable. People who have been diagnosed with terminal illnesses are denied life insurance, not just because those people are bad risks, but because if people were allowed to wait until they incurred severe illnesses before buying life insurance, the number of people doing so would grow intolerably. Insurance is about sharing risk; if the risks aren’t insured until after they mature, there is no sharing.

In the health insurance business, the exclusion of pre-existing conditions is the key to successful underwriting. Just as a life insurer cannot allow people to wait until they get sick to buy life insurance, a health insurer cannot afford to let people wait until they encounter an expensive illness to buy “insurance” against its costs. A health insurer must exclude pre-existing conditions from coverage unless it adopts some other device to preclude – or pass on to its premium payers – the adverse selection that coverage of those conditions enables.

That’s not to say that there are no such devices available or that we, as a society, ought not to decide that they be used. (Mandatory enrollment at the earliest possible time is one of them. Hillary knew this and said so in the campaign. BHO, I believe, knew it, too, but didn’t say so.) But it does mean that pre-existing condition exclusions do not exist so that, as BHO says, insurance companies can “cherry-pick” the best risks, or “get out of paying” benefits because they “claim” that an illness is a pre-existing condition. Insurance companies cannot cover pre-existing conditions, so the fact that they don’t cover them can hardly be seen as a sign of corruption. The President’s saying so is a lie, and I believe he knows it.

The President is also lying about his public option. He says that we need a public option to “compete” with “the private sector,” to “keep it honest.” This notion so misconceives the nature of the private sector that it would be really scary if our President actually believed it. But he doesn’t. He can’t. Just what are the private companies, who compete tooth and nail with each other to provide the lowest premiums, being so uniformly dishonest about that a public competitor would fix? Would the public competitor cover pre-existing conditions? Not if it’s required not to lose money. What would it do?

My guess is that the public option would simply pour red ink on the fire, undercutting private insurance on price no matter what the cost. The object will not be to make insurance companies “honest,” but to make them unprofitable in the hope they will go away. There is an irony here: Newt Gingrich said that he wanted to create a private scheme to compete with Medicare so that Medicare would wither on the vine as people leave it voluntarily. I suspect that BHO has the same plan for private health insurance, and his claim that his public option is not a “Trojan horse” is true only in the sense that Bill Clinton’s denial of “sex” with Monica Lewinsky was true: technically accurate, but not in any useful sense true. I think it’s a damned lie.

As for statistics, why bother? Everybody knows politicians distort statistics. Like that large number of people who aren’t covered because they choose not to be even though they can afford to be. But statistics are boring, and if Mark Twain hadn’t mentioned them in his effort to supply a title to this post, I wouldn’t mention them either.

Of course, I could be wrong about all of this. President Obama may in fact be so biased against insurance companies because of his mother’s experience with their efforts to keep their premiums down that he actually think they are all evil and actually does not understand the industry at all. He should feel free to offer that explanation.


  1. Ah- where to begin. Lets try some basic premises

    1. I have a basic premise that health care is a RIGHT (and not privilege for 80% of Americans) to be afforded everyone who resides (or even visits) America.

    2. The way in which the vast majority of care is delivered in this country is costly and out of control, largely caused by the concept of a "fee for service" reimbursement methodology. (See Gewande's June 1 article in the New Yorker.

    3. The issue of pre-existing conditions is a bogus one. If there were mandated Universal Coverage (pay or play), then the issue of pre-existing conditions would be a memory.

    4. The issue with the public/private option is an issue about money. The Federal Government runs the Medicare' and Mediciaid at a cost of 3%, and spends 97% on benficiaries. The private insurance sector cost of administration and Profit runs between 20- 30m % and spends 70-80% on their insureds. Having some competition between the public and private sector will only lower the cost of any program, and keep the private insurers honest. (The only thing I agfreed with Ronald reagan was that "competition lowers prices")

    4. I think it is too early to measure the effectiveness of BHO, in the National health debate. He should be measured by the effectiveness of the bill that he is able to negotiate with Congress. He is saying all the right things (almost), but can he get Congress to go along will be the test.

    5. Unless we deal with the fee for service payment issue and thereby create an effective way to control the growth in health care costs, nothing else will really matter in the National Health reform.

  2. I pretty much agree with you. I wouldn't go all the way to "right," but I think universal healh insurance should be a goal if we can afford it.

    I completely agree that pre-existing conditions is a bogus issue. But that's why I wrote the post. Obama riffs on the concept to vilify and demonize the insurance industry when, as you say, all we need is mandated coverage. But as I said, that was Hillary's point during the campaign, and BHO rejected it. My only question is whether he did so out of ignorance or guile. I lean toward the latter, but am willing to be disabused. What do you think?

  3. Larry- My recollection of the campaign rhetoric is that it once Hillary stacked out her position on universall coverage, her had to take a different position. So my conclusion to your question is that it was guile.

  4. Universal healthcare only works in other countries because we foot the bill. I do not believe in sacrificing quality to make this happen. It takes 45 days in Canada to get an appointment for an MRI. The fact that there are more MRI machines in one county in PA, than the entire country of Canada may have something to do with why.
    Universal healthcare in america would kill our pharmaceutical companies and the insurance industry.
    I feel that BHO and Hillary are focused on the wrong areas, perhaps we should improve our current programs to meet the same goal. For example, in NC illegal immigrants receive welfare and Medicaid. Illegal immigrants don't pay taxes here and don't contribute to the system, so how is it fair that they receive the benefits of our system? Perhaps make it impossible for them to get anything without some form of legal residency.
    Insurance wasn't always seen as a necessity, and it wasn't always for the cost of normal day to day doctor's visits. It was for catastrophic events, car accidents, cancer, unexpected emergency surgeries.
    The problem is that people think that they need health insurance for all health care. It costs more for one month premium than it actually costs for my healthcare visits for the whole year. People think that they cant afford to pay for their own healthcare, but the cost is most times much lower than what they ever pay for insurance.
    Maybe looking at lawsuits against hospitals for ridiculous things like not keeping an ice bucket full should be evaluated. Increasing medical malpractice lawsuits bring up the cost of medical malpractice insurance, which brings up the cost of healthcare.

  5. Heather -

    Thanks for joining and posting. I really agree with your first point. I know I've written something somewhere about how the entire socialistic project in Western Europe (including Canada) is made possible by their not having to invent anything. We take the entrepreneurial risk, and our failed start-ups die for their sins.

    Some of the other issues you raise are thornier. Woody Allen has this joke in "Radio Days" about a guy who tells a shrink "My brother thinks he's a chicken." The doc says "Why don't you tell him he's not?" "Because we need the eggs." Ditto illegal immigrants. We can't kick them out because their low wages make things cheap. So we pay higher taxes to provide their healthcare instead of higher prices to cover the cost of benefits. And meanwhile, management has a job because labor is available.

    There's a lesson here: the employer-paid model hurts our competitiveness by putting the cost of healthcare on the customer, who can avoid it by buying something else, rather than on the taxpayer, who has no such option.

    I don't believe universal care will necessarily destroy our pharmaceutical and insurance industries, but you may well be right that it will destroy them, and that, of course, is what counts.

    For reasons you can guess, I steer clear of malpractice questions.

  6. I am not opposed to foreigners coming into our country to make a living, what i have a problem with is that they come here illegally and use our resources without contribution. And for the most part they do help some businesses (roofing companies, landscapers, construction) thrive because of the cheap labor and no benefits. Not to mention they dont have to provide worker's compensation insurance on them either. The fact still remains that they soak up a lot of our welfare benefit money. Guilford County's welfare recipients are made up of about 72% minorities, a healthy portion of that illegal immigrants.

    Another issue I am curious to see you post about: Income tax. :p

  7. Heather -

    People who sneak in solely to collect welfare are no better than thieves, and I have no argument to make in their defense. But I wouldn't want to throw the baby out with the bathwater by labeling all illegal immigrants as parasites.

    BTW, specifically what about the income tax are you curious about?

  8. Well I am curious to see a well thought out blog on income tax. I am personally against the whole idea of an "income" based tax system and would love to see a reform. And as a huge Neil Boortz fan, I have a huge faith in the "Fair Tax" idea.


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