High Prices under ACA: A Feature, not a Bug…

Several friends of mine have been complaining lately about experiencing “sticker shock” when they have shopped for health insurance at http://www.healthcare.gov. Unfortunately, what many of them apparently consider to be a “bug” which needs fixing (along with the website itself) is actually a “feature” of the so-called Affordable Care Act (ACA). According to the American Cancer Society’s summary of federal rating rules (see http://bit.ly/Oyrsii), “Health plans will be allowed to adjust premiums only for the following factors: 1) Self-only or family enrollment; 2) Geographic area; 3) Age (except the rate cannot vary by more than 3 to 1 for adults) and 4) Tobacco use (except the rate cannot vary by more than 1.5 to 1).” By severely limiting risk classification, the ACA is consequently designed from the ground up to make good risks pay too much for coverage and consequently cross-subsidize the premiums paid by bad risks who pay too little.

The problem with this pricing scheme is that it dissuades good risks from buying insurance in the first place. The ACA addresses this problem by imposing an “individual mandate”. Under the individual mandate, if you refrain from purchasing insurance, you are obligated to pay a “penalty” (redefined by the Supreme Court’s 2012 ACA decision as a “tax”). The penalty/tax paid by a single adult for failing to comply with the individual mandate during 2014 will be $95 but will increase within 3-4 years to $695 a year for such an individual and $2,085 a year for a family (or 2.5 percent of household income (whichever is greater); source: http://on.tnr.com/11wWS0i). In many cases (particularly for otherwise healthy individuals and families who don’t qualify for ACA premium subsidies; see http://kff.org/interactive/subsidy-calculator/ to see whether you qualify), people will forego insurance and pay the penalty. With “good risks” dropping out, this implies that average claims costs (and therefore prices that need to be charged to cover these costs) will likely increase over time. As prices increase, expect to see even more (healthier than average) individuals and families drop their insurance coverage and pay the penalty/tax instead. This dynamic process is commonly referred to as “adverse selection” (see my blog posting from a couple days ago entitled “Adverse Selection – a definition, some examples, and some solutions” for more on this topic).

As bad as this all seems, adverse selection also pretty much wreaks havoc upon the business models of insurers participating in the health insurance exchanges. AEI resident fellow Dr. Scott Gottlieb writes in a recent Forbes article that the ACA faces a ‘death spiral’ which turns not only on rising premiums (due to the adverse selection problem described above) but also upon declining participation over time of health insurance plans and doctor networks provided by such plans; see http://onforb.es/1g6zwGL for details).

The Affordable Care Act, adverse selection, and the "insurance death spiral"

in a Forbes article which was published today on the forbes.com website. The author of the article is Dr. Scott Gottlieb, who holds a research appointment with the American Enterprise Institute in Washington, DC. Also see “Adverse Selection – a definition, some examples, and some solutions” and the Wikipedia article about adverse selection (@ http://en.wikipedia.org/wiki/Adverse_selection). Obamacare Faces A ‘Death Spiral’ — But It Turns On The Declining Participation Of Health Plans, Not Just Rising Premiums www.forbes.com

“Given the failed launch of Obamacare, there’s a real chance that the entire scheme falls into an “insurance death spiral” — but not as visibly (or rapidly) as the way these sorts of unsuccessful insurance pools usually unravel. A death spiral happens when only the sickest beneficiaries get into an insurance pool, causing the cost of medical claims to rise, and in turn raising future premiums. These higher premiums, in turn, dissuade healthier beneficiaries from buying coverage. This exacerbates the strains and makes sure the pool continues to attract only the sickest consumers who are most in need of the medical coverage, and willing to pay the rising premiums. This is how the downward spiral ensues.”
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The Affordable Care Act, adverse selection, and the “insurance death spiral”

The so-called Affordable Care Act provides a superb “real world” study of the consequences of adverse selection. This is further analyzed and illustrated in a Forbes article which was published today on the forbes.com website. The author of the article is Dr. Scott Gottlieb, who holds a research appointment with the American Enterprise Institute in Washington, DC. Also see “Adverse Selection – a definition, some examples, and some solutions” and the Wikipedia article about adverse selection (@ http://en.wikipedia.org/wiki/Adverse_selection).


Obamacare Faces A ‘Death Spiral’ — But It Turns On The Declining Participation Of Health Plans, Not Just Rising Premiums

www.forbes.com

“Given the failed launch of Obamacare, there’s a real chance that the entire scheme falls into an “insurance death spiral” — but not as visibly (or rapidly) as the way these sorts of unsuccessful insurance pools usually unravel. A death spiral happens when only the sickest beneficiaries get into an insurance pool, causing the cost of medical claims to rise, and in turn raising future premiums. These higher premiums, in turn, dissuade healthier beneficiaries from buying coverage. This exacerbates the strains and makes sure the pool continues to attract only the sickest consumers who are most in need of the medical coverage, and willing to pay the rising premiums. This is how the downward spiral ensues.”

Assorted Links (10/21/2013)

Here’s a list of articles that I have been reading and videos that I have been viewing lately:

Q&A: Nate Silver on China and the New FiveThirtyEight

blogs.wsj.com

“FiveThirtyEight Editor-in-Chief Nate Silver talks about how he uses data to eliminate bias, and how data from China can come from unexpected sources.”

New, Improved Obamacare Program Released On 35 Floppy Disks

www.theonion.com

“WASHINGTON—Responding to widespread criticism regarding its health care website, the federal government today unveiled its new, improved Obamacare program, which allows Americans to purchase health insurance after installing a software bundle contained on 35 floppy disks.”

What the New IPCC Global Warming Projections Should Have Looked Like

cato.org

“The top panel shows the projections as portrayed by the IPCC in their Fifth Assessment Report. The lower panel shows what they would have looked like had the climate models better reflected the latest science.”

IPCC Graphs

 Lawyers, beware lawyers

economist.com

“More than half the men who signed the Declaration of Independence had a legal training. But a legalistic approach to politics is no longer serving America well. Today’s budget wars are deeply political. They reflect unresolved debates that divide the country: over equality and redistribution, risk-taking and safety nets, and the role of government itself.”

ABYSSINIAN MASS: A Solo by Wynton Marsalis

OFFERTORY: THE SON Abyssinian: A Gospel Celebration Featuring Wynton Marsalis October 11, 2013 Augusta, Georgia- Good Shepherd Baptist Church

The Charmed Life of the Unbelievers

americanthinker.com

“It’s a charmed life for non-believers, because when you basically believe in nothing, you can watch history pass you by, and chalk up monumental shifts and changes in sociopolitical life to whatever cause you want. All you have to do is find a way to make history, and the ever-shifting tectonic plates of society, spell out the need for the end of religion.”

Foster Campus for Business and Innovation officially approved by Regents

baylor.edu

“While Baylor Regents had previously approved initial funding for design work on the facility, it wasn’t until this past weekend at Homecoming that the Board officially approved construction of the new $99 million Paul L. Foster Campus for Business and Innovation that will house the Hankamer School of Business.”

Unlikely results

economist.com

“Why most published scientific research is probably false. Scientific findings are considered sound if they are unlikely to have happened by chance. But statistical logic shows that errors are rampant.”

unlikely results

Is Obama really talking about a tech ‘surge’ to fix Obamacare? | What we learned about Obamacare today: Oct 21, 2013

www.aei-ideas.org

56% of Americans say Obamacare’s “website problems are part of a broader problem with the law’s implementation,” while 40% view them as an “isolated incident.”

Obamacare’s Website Is Crashing Because It Doesn’t Want You To Know How Costly Its Plans Are

www.forbes.com

“A growing consensus of IT experts, outside and inside the government, have figured out a principal reason why the website for Obamacare’s federally-sponsored insurance exchange is crashing. Healthcare.gov forces you to create an account and enter detailed personal information before you can start shopping.”

How Washington Handcuffs Tax Reformers

online.wsj.com

“Scott A. Hodge and Stephen J. Entin write in the Wall Street Journal that revenue-neutral rules are bad enough. Even worse: the assumption that lower taxes will have no effect on GDP.”

The critique offered here concerning dynamic versus static scoring is of critical importance. Dynamic scoring of tax law changes allows policymakers to consider likely (negative as well as positive) incentive-related effects associated with tax reform. Static scoring ignores incentive effects and instead simplistically treats the analysis more like an accounting problem. See the Wikipedia article entitled “Dynamic scoring” for more details (@ http://en.wikipedia.org/wiki/Dynamic_scoring).

Wall Street Billionaire Stanley Druckenmiller Is Blowing the Whistle on Generational Theft

online.wsj.com

“In The Wall Street Journal, James Freeman interviews renowned money manager Stanley Druckenmiller about the debt limit, entitlement reform and why the young should be demanding action… One of the great ironies of the Obama presidency is that it has been a disaster for the young people who form the core of his political coalition. High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.”

Assorted Links (10/20/2013)

Here’s a list of articles that I have been reading and videos that I have been watching lately:

How Washington Really Redistributes Income

online.wsj.com

“In The Wall Street Journal, James Freeman interviews renowned money manager Stanley Druckenmiller about the debt limit, entitlement reform and why the young should be demanding action.”

Sebelius on the run: The HHS Secretary refuses to testify about ObamaCare’s rollout.

online.wsj.com

“The Wall Street Journal reports that the HHS Secretary refuses to testify about ObamaCare’s rollout.”

A New Map of How the Human Brain Works

online.wsj.com

“Forget dated ideas about the left and right hemispheres. New research provides a more nuanced view of how we plan our lives and experience the world. Which cognitive mode best describes you?”

More on Racial Preferences at UT-Austin

www.cato.org

“The government has to have a very good reason — a “strong basis in evidence” — to be able to use race in its policies.”

Budget Battles Highlight Importance of Federalism

www.cato.org

“The ongoing political dysfunction at the federal level should be a warning to avoid any further centralization of American government in Washington.”

ObamaCare’s Black Box

online.wsj.com

“The Wall Street Journal on why the exchanges are worse than even the critics imagined.”

The Abysmal, Pathetic Obamacare Rollout

www.thedailybeast.com

“It’s a colossal, expensive failure that projects a 1970s-era DMV experience into cyberspace. Welcome to Healthcare.gov, the lame website of Obama’s lame reform, writes Nick Gillespie.”

Shutdown Ended, Credit Limit Increased! See You Again in 90 Days!

reason.com

“So the government shutdown is over and the debt limit has been increased. President Obama bestrides the Capital City now like a colossus, flanked by Senate Majority Harry Reid and once-and-future Speaker Nancy Pelosi.”

What the Great Fama-Shiller Debate Has Taught Us

blogs.hbr.org

“A short version of what their Nobel Prize-winning work means and why it’s important.”

Government “Shutdown” Shuts Down Beer

www.cato.org

“Beer enthusiasts of a partisan stripe might be tempted to point the finger at Republicans or Democrats for the shutdown-induced disruption, but they should blame the federal government itself.”

Niall Ferguson: Why Paul Krugman should never be taken seriously again

blogs.spectator.co.uk

“In his widely read New York Times column and blog, Krugman regularly boasts that he has been ‘right’ about the crisis and its consequences. As he wrote in June last year: ‘I (and those of like mind) have been right about everything.’”

Economists: Breaching the Debt Ceiling “Uncharted,” But “Not…a Catastrophe”

reason.com

“Apocalyptic talk flies around about the consequences of breaching the debt ceiling—that is, letting the federal government run out its borrowing authority and failing to let it run up the credit cards any further… But, is it true? Does every economist out there see doom if the debt ceiling isn’t raised?”

Winston on Transportation | EconTalk

www.econtalk.org

“Cliff Winston of the Brookings Institution talks with EconTalk host Russ Roberts about his recent article in the Journal of Economic Literature on the U.S. transportation system.” This podcast should be “required listening” to city councils not only in Austin but also worldwide.

ObamaCare’s Serious Complications: For the IRS alone, implementing the law involves 47 different statutory provisions

online.wsj.com

Gordon Crovitz makes many of the same points in his WSJ op-ed today that I made in an August 2009 blog posting entitled “My preferred approach for reforming health care…” (see http://blog.garven.com/2009/08/27/my-preferred-approach-for-reforming-health-care). I have always thought that the U.S. health-care financing system could be much better designed, and that if you were to design such a system from scratch, you definitely would not want to tie the provision of health insurance to employment. As Mr. Crovitz points out in this article, the original sin in health care goes back to the wage and price controls in effect during World War II. The federal government let employers avoid wage controls by adding health insurance as an untaxed benefit for employees. Employer-provided insurance has since insulated most Americans from the cost of care. The predictable result is endless demand for increasingly inefficient services. Unfortunately, Obamacare essentially doubles down upon an already broken system. 

Obamacare enrollees become urban legend

www.miamiherald.com

“It’s so difficult to find people who have actually been able to sign up for a health insurance plan on the federal government’s glitch-haunted website that one man who was able to do so in Georgia has become a cause célèbre.”

Government Waste, From Arts Funding to Education and Defense – Room for Debate

www.nytimes.com

“The $1.8 billion in arts funding? We’re better off without it. Ditto the $40 billion Department of Education. And Pentagon waste dwarfs both. By Nick Gillespie.”

A Step Toward Facebook.gov?

reason.com

“Get ready for the government to determine what bullying online is (and therefore, what free speech isn’t).”

An introduction to the debt limit

keithhennessey.com

Excellent tutorial on the debt limit by Stanford professor Keith Hennessey, aimed at “fiscal policy novices”.

2008 Nobel laureate Paul Krugman’s back-handed compliment of the newly minted Nobel laureate Gene Fama…

Only Princeton economist/New York Times columnist and 2008 Nobel Laureate Paul Krugman can stoop so low as to refer to Fama’s Nobel prize as “the long-expected honor” and then insinuate that Fama is completely out of touch with everything going on around him – see “The Nobel” @ http://krugman.blogs.nytimes.com/2013/10/14/the-nobel/.

The Nobel Prize in Economics goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University)

This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (AKA the Nobel Prize in Economics) goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University) for “…their empirical analysis of asset prices”.  In retrospect, it has never been a question of whether Fama would receive the Nobel Prize; it has always been a question of when, and when is now.

In a nutshell, Fama is famous for his “efficient market hypothesis” as well as a number of important empirical asset pricing contributions. Fama’s Chicago colleague Lars Hansen is famous for his work in financial econometrics, and Shiller provides an important behavioral counterpoint to the efficient market theory.

Here are articles worth reading about this prize:

1. The “official” announcement posted at Nobelprize.org: “The Prize in Economic Sciences 2013″. Nobelprize.org. Nobel Media AB 2013. Web. 14 Oct 2013. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/

2. Wall Street Journal (10/14/2013): U.S. Trio Wins Nobel Economics Prize

3. Also, a trio of postings this morning by University of Chicago finance professor John Cochrane (10/14/2013)

a. Fama, Hansen, and Shiller Nobel

b. Gene Fama’s Nobel

c. Understanding Asset Prices (this is the Nobel Committee’s “scientific background” paper which explains why the Fama, Hansen, and Shiller received this award)

Assorted Links (10/12/2013)

Here’s a list of articles that I have been reading and videos that I have been viewing lately:

3 Reasons We Need a Dirty Deal on Debt Ceiling

“President Barack Obama has been outspoken that he wants a “clean,” no-strings-attached bill to raise the federal government’s borrowing ability.

How Often Do Gamblers Win?

How often do gamblers really win? New data provide an answer

on.wsj.com

“New data provide some answers on the real odds on gambling.”

What’s Scott Adams’ secret to success? ‘Goals are for losers’

on.wsj.com

“Forget passion. Goals are for losers. Dilbert creator Scott Adams reveals his secret to climbing to the top: Fail. A lot.”

How to Raise Money Without Killing a Kitten

“Americans are extraordinarily charitable people: from 1971 to 2011, our giving rates have gone up twelvefold.”

Facebook Makes It Harder to Hide

on.wsj.com

“Users have said they use the setting to avoid feeling pressured to accept friend requests from people they don’t want to friend.”

The Real Dysfunction: A $17 Trillion National Debt

“The real dysfunction in Washington is not shutdowns and stand-offs, it’s the relentless rise in government spending that has driven the national debt from $1 trillion to $17 trillion in 33 years… Our debt as a percentage of GDP is now higher than at any point except World War II.

Obamacare’s Financial Unraveling: Predictable, and Predicted

www.realclearmarkets.com

“Advocates marketed the Affordable Care Act (ACA), known colloquially as “Obamacare,” to the American public as a way to “bend the cost curve” of soaring health care costs downward. But despite its supporters’ hopes, the 2010 legislation was fiscally reckless, markedly increasing the government’s already-unsustainable health spending commitments at a time of record deficits.”

Default Calendar: Which Payments Are Due When

blogs.wsj.com

“The Treasury Department says it could start defaulting on U.S. obligations after Oct. 17. Other estimates suggest it could be weeks until the U.S. reaches that point. Here are key dates that investors and policy makers are watching.”

Deeply troubling trends on attitudes toward government, AEI Political Report, October 2013

www.aei.org

“It is hardly news that almost everyone is dissatisfied with Washington these days. But just how bad are the numbers? The editors of AEI’s Political Report look at the polls and find some deeply troubling trends.”

Dirty Debt, Done Dirt Cheap

www.thedailybeast.com

Reason.com’s Nick Gillespie provides historical context for the current Beltway debt default drama and invokes Reinhart, Rogoff and Taleb in explaining why “debt overhang” is a serious problem for the future of the American economy.

Younger Americans Fare Poorly on Skills Against International Peers

online.wsj.com

“A new study ranks Americans 16 out of 23 industrialized countries in literacy and 21 out of 23 in numeracy.  The results also show U.S. baby boomers held their own against workers’ skills in other industrial nations but younger Americans fell behind their peers.”

Kathleen Sebelius’s Daily Show Disaster: Jon Stewart Slams Obamacare Rules

www.thedailybeast.com

The Daily Show’s Jon Stewart tells Kathleen Sebelius (HHS secretary who is responsible for implementing Obamacare) “I’m gonna try and download every movie ever made, and you’re gonna try and sign up for Obamacare—and we’ll see which happens first.” 

Close Washington to Dismantle the Welfare-Warfare State

www.cato.org

“The GOP is attempting to defund ObamaCare by holding the federal government hostage. Congressional Republicans say: Cut the spending or Uncle Sam will have to stay home.”

Excellent essay by Hoover Institution senior fellow Dr. Victor Davis Hanson. His latest book is The Savior Generals (see http://amzn.to/19g0R4t)… (Hat tip to Tom Butler for pointing this article out to me)…

Medieval Liberals

www.nationalreview.com

“Unlike classical liberals, the liberals of today hew to doctrine in the face of the evidence.”

The Real Dysfunction: A $17 Trillion National Debt

www.cato.org

“The real dysfunction in Washington is not shutdowns and stand-offs, it’s the relentless rise in government spending that has driven the national debt from $1 trillion to $17 trillion in 33 years.”

Is the Administration Misleading People on Obamacare’s Web Failures, Or Is It Just Incompetent?

reason.com

“When Obamacare’s health exchanges rolled out on October 1 to myriad glitches and, in the 36 federally facilitated exchanges, widespread inaccessibility, the Obama administration had a ready excuse: too much traffic. But the too-much-traffic story, along with repeated promises to fix online enrollment problems, hasn’t held up.”

The government acknowledged for the first time Sunday it needed to fix design and software…

online.wsj.com

This is THE page 1 story in the October 7th issue of the Wall Street Journal. It provides a fascinating case study which corroborates historian John Steele Gordon’s essay from May 2009 entitled “Why Government Can’t Run a Business” (available from http://on.wsj.com/BZpZW); in that essay, Gordon notes (among other things) that “Politicians need headlines. Executives need profits.”

The Shutdown Is a Sideshow. Debt Is the Threat

online.wsj.com

“Niall Ferguson writes that an entitlement-driven disaster looms for America, yet Washington persists with its game of Russian roulette.”

Interesting book reviews by the famous skepticist Micheal Shermer, who is publisher of Skeptic magazine and a columnist for Scientific American…

Don’t Count on It—Michael Shermer on population doom-mongering

online.wsj.com

Interesting reviews (of Ten Billion, by Stephen Emmott, and Countdown: Our Last, Best Hope for a Future on Earth, by Alan Weisman) by the famous skeptic Micheal Shermer, who is publisher of Skeptic Magazine and a columnist for Scientific American

How ObamaCare Wrecks the Work Ethic

online.wsj.com

University of Chicago economist Casey Mulligan writes that the structure of premium subsidies under Obamacare effectively impose high marginal tax rates upon non-elderly household heads and spouses with median earnings potential, which in turn clobbers labor market resiliency and mobility…

The Shutdown Is a Sideshow. Debt Is the Threat

online.wsj.com

“Niall Ferguson writes that an entitlement-driven disaster looms for America, yet Washington persists with its game of Russian roulette.”

Analysis: IT experts question architecture of Obamacare website

reuters.com

“Days after the launch of the federal government’s Obamacare website, millions of Americans looking for information on new health insurance plans were still locked out of the system even though its designers scrambled to add capacity.”

Obama Rewrites Debt-Limit History

online.wsj.com

In The Wall Street Journal, Kevin Hassett and Abby McCloskey write that Congresses run by both parties have used the borrowing limit as political leverage with a president.