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Bob Meade - Actuarially speaking

How many readers would like to buy their auto, home, health, or life insurance from a company that does not make a profit? Probably not many. What if that unprofitable company offered better rates than anyone else? While some might be tempted to accept the lower rate offer, good judgment would probably lead most people to purchase their policy from a more stable, and profitable, company.

The first rule of insurability is that the insured's risk cannot cause loss to the multitude simultaneously. By pooling large numbers of people across a broad base into insurable risk categories, no one, or many, individual losses can cause loss "to the multitude, simultaneously". It's the work of the insurance company actuaries to determine the odds on how many of the insured in their pool will suffer loss at any given time.

The reason for mentioning actuaries, and their importance, is to highlight how those actuarial functions change, or cease to exist, in the Affordable Care Act, aka "Obamacare". Some examples.

— Under Obamacare, no one can be denied insurance based on a pre-existing condition. Without question, no one wants to deny insurance to someone who needs it. However, without question, the increased cost to the insurance companies will result in increasing the premium cost to other, more healthy people.

Another issue is, what if a young healthy person decides to pay the "fine" rather than purchase insurance? Later, that individual becomes seriously ill and requires very costly surgery or other medical care. It appears that under Obamacare, that person cannot be denied coverage on demand. If that's the case, the insurance companies will have to include that potential into their actuarial calculations, thereby forcing those who do comply with the law to essentially pay for those who don't.

— The president has told us that under the Affordable Care Act, insurance companies must pay out in benefits, a minimum of 80 percent of what monies are collected in premiums. This presidential edict that insurance company overhead cannot exceed 20 percent of the premiums collected sounds good, but is it really? Years ago I took some insurance courses. One of the things I learned was that (at that time) 65 percent of the first year's premium went to underwriting, policy issuance, claim processing, and sales commissions, etc. While there may be some difference in today's numbers, the only way the insurance companies can comply with the edict is to have a relatively low turnover in policy holders. If a business seeking health insurance for their employees has a high personnel turnover rate, an insurance company simply cannot provide insurance without substantially increasing premium costs. It is for this reason that MacDonald's was given a presidential waiver, early on.

— Another much talked about issue is to be able to buy insurance "across state lines". This "sounds good" solution is a nightmare and kills off any semblance of actuarial input. Under Obamacare, no mention is made of "tort reform". However, without such reform the rising costs of malpractice insurance will continue to grow. For example, a number of OB-GYN physicians have decided to retire because, depending on the state and location, the cost of malpractice insurance is excessively high.

For example, (using 2009 numbers) internal medicine physicians in Minnesota would pay about $4,000 a year for malpractice insurance but in Florida, their cost would be $56,000. For general surgeons in Minnesota, malpractice insurance would be in the $10,000 range, but in Florida, $90,000. One of the most costly coverage is for OB-GYNs. In Minnesota they paid about $17,000, while in Florida, the annual premiums were upwards of $200,000. Of course the physicians have no choice but to set their prices to their patients to cover these costs.

In these examples, if Florida's doctor's (or Florida's citizens) rushed to buy their insurance across state lines in Minnesota, actuarially, Minnesota's insurers would have to raise their premium rates to reflect the Florida realities, which would thereby increase the rates paid by the Minnesota (and other state's) physicians. Of course these increases would be imposed on the patients in those other states.

— This leads to the need for "tort reform", which been totally ignored. Litigation costs are a healthy part of medical expenses. The examples cited above are not fairy tales, they are reality. While the federal government has ignored the litigation problems, the State of Pennsylvania enacted some fairly simple tort reform laws that have caused malpractice lawsuits to drop over 40 percent yearly. These two measures weren't draconian, they were common sense. The first rule change was that attorneys had to obtain a certificate of merit showing that medical procedures in a case didn't meet accepted standards before they could file their case. The second was that they could only file the lawsuit in the county in which the alleged malpractice took place; ergo, no "venue shopping". Can you imagine the impact on malpractice insurance costs if those two simple rule changes were made across all the states?

The choice becomes, do we let insurance companies continue to make actuarially sound judgments, or do we let the government simply raise taxes to cover their naively poor judgments?

(Bob Meade is a Laconia resident.)

 
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