Fibonacci Financial

Archive for July 23rd, 2009

Obamacare!

Executive Summary

1. Our current health insurance model massively violates the basic fundamentals of risk management.

2. This violation of prudent risk management concepts grossly enriches health insurance companies & greatly increases the cost of health care to all of us.

3. When you combine the violation of risk management principles with the bureaucratic red tape of medicare and medicaid the costs to society become outrageously expensive.

4. This is not the only reason that health care costs are out of control, but it is a primary reason.

Now the Proof

Risk Management 101

To understand why America’s health care costs are expensive and how to fix the current system you must first understand the fundamentals of risk management.

There are four fundamental choices when considering how to manage risk.

You can do the following:

1. Retain the Risk – You pay for it on a pay-as-you-go basis.

2. Reduce the Risk – Examine the nature of the risk and engage in actions that reduce the risk.

3. Transfer the Risk – Insurance -join with others who are exposed to the same risk and pool your resources to spread the risk out.

4. Avoid the Risk – Just don’t engage in activities of this nature!  Don’t jump of cliffs without parachutes.

Now let’s apply these risk management choices to Health Care Risks.

Let’s start by examing quadrant #1.  This quadrant includes health risks that don’t happen that often and don’t cost very much.  Timmy scrapes his knee when he falls off his bike.  What do we do? Run to the doctor? No, we wash his knee with hot soapy water, spray disinfectant on it, cover it with a bandaide then send him back out to play.  We Retain this risk and pay the small costs as we go.

Next let’s consider risks that fall into quadrant # 2.  This quadrant includes health risks that are relatively infrequent by also relatively expensive.  A good example is the risk of getting gall stones.  OOOOUUUCCCHH – OMG !  This, thank heavens, doesn’t happen to all of us and can be relatively expensive as well as tremendously painful.  Given it’s infrequency but expensive nature, it is an ideal candidate for pooling of risks through insurance.  Those actuaries are able to nail down the minimal shared expense of this health risk fairly easily.  This risk should be Transfered.   Another well recognized health risk in this category is death.  OK, I know we all die; so the frequency is rather high. .  But it does not make sense to insure against death at 98.  But for a young father who is 35 with family financial obligations it make a great deal of sense.  Can the actuaries estimate the frequency of death amongst 35 year old males.  Can this group insure against this health risk relatively inexpensively?  Yes.

Now the problem area.

Now let’s examine quadrant # 3.  These are the relative low cost but more frequent health risks.  They consist of risks such as strep throat and broken arms.  We can also throw in the ubiquitous maladies such as acid reflux and high blood pressure.  We should be retaining and managing these risks.  Because of their relatively high frequency and low cost , if they are run through a health insurance bureaucracy they become very expensive.  This is an area that we should self insure and manage.  The costs to administer these high frequency low cost events is very very high.  But the health insurance companies make bank off each of these transactions. This is equivalent to instituting grocery care insurance.  Imagine the cost!!!

Stupid!  Stupid!  Stupid!

So how did we begin to expose ourselves to this insane insurance industry money machine?

Well as all good economic stories begin – It started with the government interfering with our market choices.  During WWII the government froze wages.  Now businesses could no longer compete for talent by offering higher wages.  But they could offer benefits without restriction.  So they decided that instead of paying people more money they would straight out pay for health care costs through health insurance programs.  This was another story of the unintended consequences of inappropriate government intervention.  They should have also instituted grocery care insurance.  My goodness it costs thousands of dollars a year to eat, why don’t we have food insurance?  By including these risks in health insurance plans we also open a Pandora’s box of behavioral finance risks.  When we don’t pay directly for these frequent relatively low cost health risks, we tend to over use the health care system.  We also don’t have the immediacy of the cost to incent us to modify our poor health behaviours.

Now add into the third quadrant mix medicare and medicaid red tape and you have a health care cost disaster.

Insert Obamacare into Quadrant #3 ?

So, I ask you, is the way to solve two failed government interventions the institutionalization of these errors with a third massive government intervention called Obamacare?   The health “insurance” industry (and its lobbyists) is licking its fat fingers!

What we need to do is to return to sound risk management principles.

Get the Health Insurance Industry Out of Quadrant #3!

This will greatly reduce health care costs to all of us.

Properly understood and used HSA plans were a giant step in the right direction.