Insurance Pool Problem

Creasy: The gunshot holds no fear. Say it.
Pita: The gunshot holds no fear.
Creasy: You welcome the sound. In fact, it's the sound that sets you free. You are a prisoner on this block until that sound sets you free.
--Man on Fire

Peter Schiff reminds us that the Obamacare website problems are the tip of the iceberg. While the website problems are fixable, the design of the program is fundamentally flawed.

Schiff focuses on what might be called the insurance pool problem. One objective of Obamacare is to provide approximately 30 million Americans who currently do not have health insurance with policies that permit them to consume health care resources like everyone else. Meanwhile, those who already have health insurance policies are supposed to be able to consume pre-Obamacare quantities of health care resources with no increase in cost.

Anyone with a modicum of economic sense quickly recognizes the folly of this design. Health care resources for 30 million people must be paid for. If those 30 million people do not have the ability to pay, then those costs must be borne by those who can pay. Health care costs for those who can pay must go up--directly thru insurance premium increases or indirectly by higher taxes--to support those who do not pay.

And, quite predictably, we are already witnessing those rising costs.

The problem does not stop there. Think of health care insurance as a pool of actual health care resources--doctors, medicine, hospitals, etc. Those with insurance policies dip into the pool and consume some of those resources. At any point in time the quantity of health care resources in the pool can support only so much consumption. If enough people simultaneously claim large quantities of resources, then the pool runs dry.

Insurers cope with this problem in various ways. One way is simply to raise the price of a policy either thru higher premiums or higher deductibles. Higher premiums add more healthcare resources to the pool and higher deductibles require policyholders to purchase some quantity of healthcare resources out-of-pocket before dipping into the pool.

Another coping mechanism is risk pooling. Because it is deemed unlikely that a) all people will demand high quantities of healthcare resources at the same time, and that b) people who possess certain characteristics (young age, healthy lifestyle, etc.) are less likely to draw large quantities of healthcare resources from the pool, insurers might try to reduce the cost of policies by attracting healthier policyholders to offset the risk of a small fraction of very unhealthy policyholders emptying the pool of resources.

Stated differently, if an insurance plan is to work, then many, perhaps even most, policyholders must pay more health care resources into the pool than they take out. These policyholders subsidize those who draw out more resources than they pay in.

In the context of the ACA, Obamacare needs young, healthy low risk people to enroll into the risk pool. They need to pay much higher premiums than they would otherwise to support a) the 30 million new health care consumers in the pool, and b) all of the sick and elderly who will draw more healthcare resources from the system than they will pay in.

Currently for the young and healthy, the fines associated with not enrolling in Obamacare are much smaller than cost of an Obamacare-sanctioned health insurance policy.

If the young and health opt out, electing instead to pay the fine and either self-insure or buy some minimal catastrophic coverage (which is what they would likely do anyway), then the pool of Obamacare health care resources runs dry.