Bryan Caplan  

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Can someone help me make heads or tails out of this piece on the Senate bill?  Key claims to reconcile:

1. Demand for health insurance is going way up:
Health insurers get some big presents in the Senate's health overhaul bill -- about 20 million new customers and no competition from a new government plan.
2. But the main customers will be money-losers:
People without insurance would be required to buy it -- in some cases, subsidies will help them pay for it -- or face fines if they don't. Insurers, in turn, would no longer be able to deny coverage based on pre-existing conditions such as diabetes or cancer.

But the proposed fines are too weak and the subsidies too meager to truly motivate people to buy insurance, Laszewski said. This means the people most motivated to buy coverage through these exchanges will be those who already have health problems -- who are money losers for insurers.

3. Insurer stocks are way up:

Shares of the five largest managed care companies have risen more than 120 percent, on average, since they bottomed out in early March. In contrast, the Standard & Poor's 500 index has increased about 63 percent over the same span.
You could say that in March, the industry expected much worse, but is that really credible?  Wasn't the most reasonable guess in March that Obamacare would peter out just like Hillarycare sixteen years earlier?  What's really going on?


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COMMENTS (7 to date)
John Thacker writes:
This means the people most motivated to buy coverage through these exchanges will be those who already have health problems -- who are money losers for insurers.

Reconciling them:

Rates will go up. The new people added will increase insurers costs and make the regulators allow them to increase premiums. The new people added will still be money losers when added to the rolls, but everyone else (healthy) already on the rolls will become more profitable for the insurers than before.

It's possible that guaranteed issue plus a weak mandate tax will lead to a real death spiral of adverse selection.

David C writes:

My impression was that the insurance industry was deeply opposed to health care reform, and the quotes from WellPoint's spokesman would seem to confirm that. I think the very next paragraph after the one quoted in part 3 of your post gave a good reason for all of this.

"Investors had big worries when the debate picked up steam last spring, but stocks started climbing as they realized 'doomsday scenarios' such as a government takeover would not happen, Funtleyder said."

In March, a lot of people had good reason to believe much of the insurance industry would lose a great deal of value in reform. A 60-vote super majority made passage likely. Now the scenario is still bad, but not nearly as bad for insurance as things would be if a strong public option tossed many of them out of business. Insurance stock may have gone up as the chances of passage became unlikely during August, and continued to go up as the public option was made weaker and weaker. News of passage was bad for insurance this week (http://www.fivethirtyeight.com/2009/12/health-insurance-stocks-decline-on-news.html) although it was good on the 21st. (http://www.fivethirtyeight.com/2009/12/insurance-stocks-rise-on-news-of-health.html)

Also, managed care is only one form of health insurance. Other types of insurance stocks may not have done quite as well, and the current form of reform may just happen to favor managed care. An increase in purchases of managed care could be construed as a good thing. (http://econlog.econlib.org/archives/2009/06/hmos_died_becau.html)

Prakhar Goel writes:

If this bill passes, health insurance becomes a quasi-government sector. Like the GSEs (fannie and freddy) but on a whole new scale. Like these GSEs, these companies will get massive subsidies, either explicit, or more likely implicit from the US govt.

The only question here was whether the share holders would be included in the loot like with Fannie and Freddy before (say, 2000-2005) or whether they (the shareholders) would get shafted like what happened to Fannie and Freddy when the crisis hits.

The current vote implies that the shareholders will get to cash in so naturally, they are ecstatic.

Milton Recht writes:

The fallacy in the argument is that it does not distinguish between risk avoiders and risk takers.

For instance, studies do not find the existence of adverse selection in the insurance market. See, http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1800.

Risk takers feel invincible, do not buy insurance, do not go to doctors, deny sickness, etc. Risk avoiders have healthier lifestyles, are less ill and are more likely to buy insurance. Risk takers also have a higher mortality rate than others, e.g, car drivers who excessively speed, or excessively drink and drive, and many other high risk/high mortality life style choices.

Many of the uninsured are the 21-35 year olds, who are greater risk takers than the overall population, and other people who have a higher risk tolerance and also do not buy insurance. The behavior is independent of affordability. Many of these people do not go to doctors for check ups to find diseases and even if they are ill they avoid doctors.

Penalties and subsidies will not push these risk takers to get insurance and they will not go to doctors to discover diseases that need extensive medical care. By the time symptoms appear in this group, it is too late for medical care, e.g., they have a heart attack and die, or cancer has spread to a point beyond any treatment.

Insurance companies will never provide insurance for many of these medically expensive people because insurance coverage is voluntary with a penalty and not automatic. The default is not insured for this group. They needed to read Nudge.

Since Medicare, Medicaid, CHIP existed for the poor already, the uninsured in these groups most likely voluntarily chose not to seek medical care.
Insurance affordability was never an issue with these groups. making it more affordable does not increase the insurance in this group.

Additionally, seniors are the most expensive medical group and Medicare already covers them. There is no increase private insurance cost to insurance companies under the legislation for the old.

The stock market is expecting insurance companies to be much more profitable under the health care legislation than originally expected. It is not expecting a lot of adverse selection and not a lot of new insureds who need expensive medical care. It is expecting more income for new insurance from the healthier segment of the uninsured. It is also probably expecting some rationing and capping of medical costs under the new legislation insured.

All of the above leads to higher stock prices.

Colorado writes:

How about the old rule "Buy on the rumor, sell on the fact." Maybe its time to short insurance stocks.

John writes:

This bill will prevent high-deductible cheap catastrophic plans that give young healthy people the option of being covered for serious health problems while taking care of smaller health needs with their own money. Premiums are going to skyrocket. Maybe people who don't have insurance now would rather pay the piddly fine, but people who want health insurance will have to pay more because their choice is between nothing and high-cost coverage. Insurance companies make up for taking on higher risk customers because they won't have to attempt to compete in a market for lower-cost plans.

Granite26 writes:

I think Thacker has got the point. Insurance companies will keep the same profit (per customer) by raising premiums (and this getting subsidized somewhere along the way). More customers = more profit.

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