By David Skinner
WARNING: There is a high probability that you will be part of an Insurance Death Spiral. "Please place your seat backs and tray tables in their upright positions!"
I'm referring to the Affordable Health Care Act - aka Obama Care. It likely will partially or in entirety fail to reach escape velocity resulting in a tangled mess of abandonments, cost overruns and bail outs.
Escape Velocity
In rocketry, escape velocity is the speed necessary to break free of the gravitational forces that would cause a rocket to fall back to earth. In more common terms escape velocity is 34 times the speed of sound or several times the muzzle velocity of a rifle bullet. In business terms - it's the speed necessary for a startup to expand, survive and avoid failure!
According to the talking heads on TV news, the initial enrollment numbers for Obama Care are far short of what is needed in both 'quantity and kind' to reach escape velocity and avert a "death spiral." We'll talk about death spirals in a moment, but first an important insurance term - "actuarial tables."
Actuarial Tables - What Are They?
If you've avoided the Obama Care controversy thus far or didn't care to think about those wonky insurance terms, you're not to blame. Actuarial tables are boring sets of statistical data based upon past activity and intended to be predictive of future behavior. The data are usually collected upon certain population sectors, their lives, their health and their eventual demise. They are estimates based upon a range of experiences and activities. They are a not infallible!
An insurance company sets their rates, i.e., Premiums, deductibles and certainly their profits from this data. When events happen outside expectations, such as an epidemic or natural disaster, they can drastically alter the assumptions. In such cases, the company must first payout to the claimants from available cash, then dip into reserves set aside for such purposes and hopefully stay afloat thereafter. Insurance company failures are rare, but as recently as 2008 during the subprime mortgage crisis the American International Group Inc., (AIG) went bust requiring an $85 billion bailout. Ouch!
States in the past tightly controlled health insurance sold in their states. But this is about to change. In Obama Care the insurance companies are acting as 'middle men" between the public and the US Secretary of Health and Human Services. There are grave concerns that low enrollment and a suspected skew in population types - more older, few younger -- will not cover health care needs. Those most in need will be Baby Boomers of which there are 78 million between the ages of 49 and 67. Ten thousand cross that threshold daily.
Death Spiral
This gripping term is first found in the academic literature of Cutler and Zeckhauser's 1998 paper called "Adverse Selection in Health Insurance." They describe a "risk pool" of individuals who share insurance policy coverage and in so doing the risks and the costs. Cutler and Zeckhauser predict that when an imbalance occurs between the risk pool and the actuarial tables a death spiral is likely to occur. The current risk pools in the Obama Care insurance plans, project a homogenous and diversified compliment of cohorts - young, old, male, female.
Here's the concern: the older - less healthy are joining. The number of youthful "Invincibles" are not. There is a major imbalance. Health care payouts will likely exceed available funds and insurance companies will scramble to raise the annual premiums. The young and healthy sensing the disaster will begin to flee, then bail in droves leaving fewer insured to carry higher premiums until even the wealthiest throw in the towel.
What Might Happen?
A likely scenario since the government is not a private company, they will simply print money and raise taxes to cover the program's shortfalls attempting a soft landing. This is no joke when one sixth of the US economy is involved in health care. Scary indeed!
Even The Foxes Are Fleeing
We will have to wait to see how all this turns out. Meanwhile it was recently announced that the Health and Human Services, to make Obama Care more accessible have extended the payment due dates and reduced the risk pool requirements. If that weren't enough 4 Directors of State Health Program have announced their resignations. I wonder if they have parachutes.
To download the PDF of Cutler and Zeckhauser's paper called "Adverse Selection in Health Insurance" click here.
David Skinner has over 25 years experience in business, management and marketing. He is an often quoted author and sought after public speaker. More examples of David's work, his bio and contact information may be found on his web site http://www.davidskinner.com
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