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Mon Nov 4, 2013, 04:37 PM

Why the ACA's lifting of caps is a big deal

Some weeks ago, I had a discussion with someone on this board, who was complaining because her old insurance, which she considered "good insurance," was being discontinued. As it turned out, this person's old insurance had an annual maximum of $100,000. In other words, the insurance company would not pay her more than $100,000 per year. If she happened to have an accident or a serious medical issue, she would have been out of luck. The person considered this a "calculated gamble" and would much rather have kept her old insurance. I tried to explain that the whole point of insurance is to cover catastrophic events. Thinking about it further on my own, I realized that such caps may have been playing a big part in rising health care costs in the United States.

Under the ACA, health insurance companies can no longer impose annual or lifetime maxima on essential health benefits. To understand why this is a big deal, let's go back to how insurance works.

Suppose I have a 50% chance of being in an accident that will cost me $1000. If I were to purchase insurance to cover me in case of such an accident, the expectation value of what the insurance company would pay me would be $1000 * 0.5 = $500. Since I have more than $1000 in the bank, however, I can weather such an accident. I will therefore not pay more than $500 for this insurance.

Now suppose I have a 0.01% chance of being in an accident that will cost me $1,000,000. Since I don't have anywhere near a million dollars in the bank, such an accident would bankrupt me. I would be willing to pay someone $500 to cover me in case of such an accident. In this case, the expectation value of what the insurance company would have to pay me is $1,000,000 * 0.0001 = $100. I would be willing to pay five times as much for this insurance, as I can't afford to pay $1,000,000 and don't want to risk bankruptcy.

Suppose 100,000 people make the same calculation and pay $500 for this insurance. The insurance company takes in $50M. Since the risk is 0.01%, 10 people have the accident. The company pays $10M. It therefore makes a profit of $40M, minus the cost of implementing the insurance program.

Any insurance system has costs. Insurance only makes sense if people are willing to pay more on average than what they are likely to get back. In other words, the amount you pay the insurance company has to be greater than the expectation value of your loss. People will only pay more if the event they are protecting themselves against is so catastrophic that they can't risk it. That's the whole point of insurance.

Now, let's suppose insurance companies refuse to cover people against catastrophic events. They say they will not pay anyone more than, say, $100,000.

In this case, the entire system falls apart. For one thing, anyone who has $100,000 will not be interested in purchasing this insurance. In fact, the system is no longer "insurance." Since we're no longer talking about truly catastrophic events, we end up with a situation in which "health insurance" covers only ordinary trips to the doctor, and people simply hope to pay into the system less than they get out of it. But insurance can't work if everyone pays less than they get back. The result is that costs spiral out of control. We have gotten to the point where simply going to the doctor is a semi-catastrophic event financially, which is why anyone still buys insurance.

Suppose you're a healthy 25-year-old. Will you buy "health insurance" that doesn't cover catastrophic events, if you rarely go to the doctor to begin with? Of course not. If the health insurance covered catastrophic events, however, you would be much more likely to buy it, since you probably don't want to risk starting your adult life with a bankruptcy.

This is how annual and lifetime maxima, which insurance companies thought were increasing their profits in the short term, were in fact discouraging healthy people from buying health insurance.

I think it was a stroke of brilliance to ban annual and lifetime maxima. While the ACA may not be single-payer health care, it is likely to immediately curb the increase in health care costs. Young and/or healthy people now have a compelling reason to buy health insurance. This will lead to insurance companies taking in more money. Due to the rules limiting the profit insurance companies can make, most of that money will have to go toward actual health care. In the long run, health care costs may actually go down!

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Reply Why the ACA's lifting of caps is a big deal (Original post)
athena Nov 2013 OP
Manifestor_of_Light Nov 2013 #1
athena Nov 2013 #2
frazzled Nov 2013 #3
Manifestor_of_Light Nov 2013 #4
frazzled Nov 2013 #5
Manifestor_of_Light Nov 2013 #6

Response to athena (Original post)

Mon Nov 4, 2013, 04:45 PM

1. I'm paying off a hospital bill.

Eight days in ICU with pulmonary emboli (technically a stroke) and uncontrolled diabetes verging on organ failure.

It's in the hospital's best interest to keep me alive for a hundred more years, because it will take me 100 years to pay it off at the rate I'm going ($25 a month).

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Response to Manifestor_of_Light (Reply #1)

Mon Nov 4, 2013, 04:56 PM

2. I wish you a speedy recovery.

That sounds awful. I'm glad you're well enough to post here. My sister-in-law has been in the hospital four times so far this year, with lung problems. I hope her insurance doesn't have any maxima, because I'm pretty sure she's over $100,000 already.

Take care, and stay well!

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Response to Manifestor_of_Light (Reply #1)

Mon Nov 4, 2013, 05:00 PM

3. I'm glad they didn't remove your sense of humor in that hospital

I'm really sorry that you had these devastating medical problems--and the enormous bill. But I love your wry commentary about them keeping you alive for a hundred years just to pay them off at that rate.

It reminds me of when I'd been out of college for a few years and kept getting bombarded with fundraising appeals from my school. I just wanted the letters to stop, so I thought up the possibility of making a million-dollar pledge: a dollar a year for a million years. I'd set up an account that would generate that much interest each year, and I figured they'd have to endow a chair at the university with my name on it. A toilet stall was the chair I imagined they'd endow.

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Response to frazzled (Reply #3)

Mon Nov 4, 2013, 05:16 PM

4. Ha ha! Excellent!

I graduated from two private schools--a small liberal arts college and a free-standing law school, so I know about the glossy junk mail asking for money. Seems like as they say about churches--every Sunday is Palm Sunday--as in asking for handouts!!

And since you went to their fabulous school, you're obviously rich and successful, so you should be able to donate? Am I right?

That ICU vacation was almost two years ago and I'm fine now. I didn't need to go on insulin and just had to modify my medications a bit which were causing the problem. However, after they did a CAT scan of my lungs, the docs refused to tell me how many clots I had and how big which I think means in medical terms "scarier than hell".

One of my docs said a saddle embolism can make you drop in your tracks and kill you in an instant. I had one of those, where the artery behind your heart splits like a T with curved up ends(hence the name saddle) and goes to your lungs, but it wasn't big enough to kill me. I found a picture on Wikipedia of a saddle embolism and it was scary. Basically I was about 24 hours or less from certain death. I remember the doc standing at the foot of my bed and saying "You are moderately to critically ill". That got my attention. I was alert and awake the whole time.

I'd been cooking Thanksgiving dinner all day, in another state, out of breath and panting violently, so I went to the ER. That was a Thanksgiving to remember. And none of the guests said thank you for cooking dinner.

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Response to Manifestor_of_Light (Reply #4)

Mon Nov 4, 2013, 06:11 PM

5. That is some scary stuff

I'm so glad you're well enough now to tell your tale and cook another Thanksgiving dinner this year. The very word "embolism" scares the heck out of me.

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Response to frazzled (Reply #5)

Mon Nov 4, 2013, 06:15 PM

6. I need to find someone in Houston who will let me use their kitchen.

I have given up on getting my friends in Houston to come see me for Thanksgiving.
Unfortunately, my friends in Houston all seem to have kitchens and houses with multiple problems.

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