There are two industries that rely on statistics for their business models more than any other: the insurance industry and the casino industry. Both of these industries use statistics to predict the costs of their products so they can ensure that their revenue is going to be higher than their costs, and thus, be profitable. But what happens when an industry can no longer guarantee profits?
In Las Vegas, the roulette wheel pays out $35 dollars for every one dollar that is successfully bet on an individual number. Why $35 to 1 odds? Because there are 36 numbers on the roulette wheel and statistics tells us the odds of winning are 36 to 1, which means that the Vegas payout will produce profits in the long run. Insurance companies are very similar. Insurance companies use actuarial tables to predict the cost of their product and then set their rates to make sure that they will make profit.
What do you think would happen to roulette in Las Vegas if the state of Nevada passed a law that required all roulette wheels pay out $37 to 1 rather than $35 to 1? You wouldn't be able to find a roulette wheel if your life depended on it. The casinos would convert those tables to other games or find alternate sources of profit. No one (in their right mind) in Las Vegas would continue a business model that was guaranteed to produces losses. The same goes for the health insurance industry. The health insurance industry is now facing a very real threat. The health care reform legislation that was signed into law this year includes provisions that may very well guarantee that the health insurance will be unprofitable. And now, we are starting to see the signs of how the insurance companies are going to react. Let me point out a few recent examples in the news.
Blue Cross Blue Shield of North Carolina recently announced plans to cut their administrative costs by 20%. What is most disturbing about this article is that the insurance giant's CEO commented that they are "reviewing opportunities to expand into life insurance, workers compensation coverage and payroll services" and that the goal was to have up to 25% of the Blue Cross operating income from non-health related businesses by 2014. (i.e. moving away from the soon-to-be unprofitable business of health care insurance.)
United Health Care recently announced a similar approach to Blue Cross Blue Shield of North Carolina. They are so serious about this effort that they moved the CEO of their Medicaid business to head up a newly formed "Emerging Businesses Group." So United Health Care is reassigning the head of their Medicaid business unit right before health care reform expands the size of the Medicaid population by over 16 million possible new customers for United. Again, this sounds like an insurer that has realized the post health insurance world won't be very hospitable for insurance companies.
A recent AP story reports that in several states, insurance companies will stop issuing new policies that cover children as individuals. The reason is reported as an "unintended consequence of President Barak Obama's health care overhaul law." Randy Kramer, a VP for Blue Cross and Blue Shield of Florida who issues about 9,000 to 10,000 of these policies a year, was quoted as saying, "We believe that the majority of people who would buy this policy were going to use it immediately, probably for high cost claims."
The Boston Globe recently reported a showdown between the state's insurance companies and state regulators after Insurance Commissioner Joseph Murphy decided to reject requests by insurance companies for rate increases. This action by the Commissioner was the first time in the state's history that the Department of Insurance had rejected a rate increase request. An attorney who represents the insurance companies was recently quoted as saying, "As a result of the commissioner's action, the insurance companies will experience substantial and, in some cases, staggering losses. We estimate the collective loss among all of the insurers will run into the hundreds of millions of dollars just for 2010. There are some numbers that will face near-term solvency problems."
The examples above indicate a disturbing reality; the insurance companies are sizing up their futures and have now realized that, because the government has changed the odds, their business model may no longer be profitable. So what will be the end result of all of this? No one really knows at this point. Some people are cheerful and overjoyed that the evil insurance industry is finally getting what it deserves. Regardless of your opinion of insurance companies, however, what happens if all of the insurance companies pack up their toys and leave the sand box? What will we be left with? The only option that will remain will be a government run, single payer system.
When you consider a single payer system, consider the following:
The only example we have of government-financed health care is Medicare. I wouldn't exactly hold this up as a shining example of efficiency. Medicare is currently predicted to go bankrupt within the next decade. A recent report from the Chief Actuary at CMS had this to say about the impact of health care reform on Medicare and the cuts that are planned in the law: "Providers for whom Medicare constitutes a substantive portion of their business could find it difficult to remain profitable and might end their participation in the program." The report went on to say that the Medicare cost savings projected in the new legislation are "unrealistic."
The only example we have of government-run delivery of health care is the VA system and I don't know anyone who would hold that system up as the beacon of quality health care.
The US Postal Service, another government-run program, had to borrow almost $4 billion dollars from the US government last year to cover its losses. UPS, which is a private company that pays corporate taxes, made $3.8 billion in operating income and in my opinion, does the same service as the USPS but better, cheaper and faster.
Amtrak as a mode of mass transportation is subsidized by the Federal government to the tune of about $1.5 billion dollars per year for the past several years. That being said, it's difficult to understand why a round trip ticket from Raleigh to New York on Amtrak (which takes over 10 hours of transit time each way) is more expensive than a round trip non-stop airline ticket from any one of several airlines to any one of the New York airports (which only takes 1.5 hours of transit time).
The bottom line is this: the insurance companies know that health care reform has changed the odds in such a way that they may not be able to afford to participate in that business any more. While I understand that this news will probably produce cheers from physicians and consumers alike, I would simply say be careful what you wish for because you just might get it! With the potential for a single-payer system looming ahead, this could give a whole new meaning to the phrase out of the frying pan and into the fire.
In Las Vegas, the roulette wheel pays out $35 dollars for every one dollar that is successfully bet on an individual number. Why $35 to 1 odds? Because there are 36 numbers on the roulette wheel and statistics tells us the odds of winning are 36 to 1, which means that the Vegas payout will produce profits in the long run. Insurance companies are very similar. Insurance companies use actuarial tables to predict the cost of their product and then set their rates to make sure that they will make profit.
What do you think would happen to roulette in Las Vegas if the state of Nevada passed a law that required all roulette wheels pay out $37 to 1 rather than $35 to 1? You wouldn't be able to find a roulette wheel if your life depended on it. The casinos would convert those tables to other games or find alternate sources of profit. No one (in their right mind) in Las Vegas would continue a business model that was guaranteed to produces losses. The same goes for the health insurance industry. The health insurance industry is now facing a very real threat. The health care reform legislation that was signed into law this year includes provisions that may very well guarantee that the health insurance will be unprofitable. And now, we are starting to see the signs of how the insurance companies are going to react. Let me point out a few recent examples in the news.
Blue Cross Blue Shield of North Carolina recently announced plans to cut their administrative costs by 20%. What is most disturbing about this article is that the insurance giant's CEO commented that they are "reviewing opportunities to expand into life insurance, workers compensation coverage and payroll services" and that the goal was to have up to 25% of the Blue Cross operating income from non-health related businesses by 2014. (i.e. moving away from the soon-to-be unprofitable business of health care insurance.)
United Health Care recently announced a similar approach to Blue Cross Blue Shield of North Carolina. They are so serious about this effort that they moved the CEO of their Medicaid business to head up a newly formed "Emerging Businesses Group." So United Health Care is reassigning the head of their Medicaid business unit right before health care reform expands the size of the Medicaid population by over 16 million possible new customers for United. Again, this sounds like an insurer that has realized the post health insurance world won't be very hospitable for insurance companies.
A recent AP story reports that in several states, insurance companies will stop issuing new policies that cover children as individuals. The reason is reported as an "unintended consequence of President Barak Obama's health care overhaul law." Randy Kramer, a VP for Blue Cross and Blue Shield of Florida who issues about 9,000 to 10,000 of these policies a year, was quoted as saying, "We believe that the majority of people who would buy this policy were going to use it immediately, probably for high cost claims."
The Boston Globe recently reported a showdown between the state's insurance companies and state regulators after Insurance Commissioner Joseph Murphy decided to reject requests by insurance companies for rate increases. This action by the Commissioner was the first time in the state's history that the Department of Insurance had rejected a rate increase request. An attorney who represents the insurance companies was recently quoted as saying, "As a result of the commissioner's action, the insurance companies will experience substantial and, in some cases, staggering losses. We estimate the collective loss among all of the insurers will run into the hundreds of millions of dollars just for 2010. There are some numbers that will face near-term solvency problems."
The examples above indicate a disturbing reality; the insurance companies are sizing up their futures and have now realized that, because the government has changed the odds, their business model may no longer be profitable. So what will be the end result of all of this? No one really knows at this point. Some people are cheerful and overjoyed that the evil insurance industry is finally getting what it deserves. Regardless of your opinion of insurance companies, however, what happens if all of the insurance companies pack up their toys and leave the sand box? What will we be left with? The only option that will remain will be a government run, single payer system.
When you consider a single payer system, consider the following:
The only example we have of government-financed health care is Medicare. I wouldn't exactly hold this up as a shining example of efficiency. Medicare is currently predicted to go bankrupt within the next decade. A recent report from the Chief Actuary at CMS had this to say about the impact of health care reform on Medicare and the cuts that are planned in the law: "Providers for whom Medicare constitutes a substantive portion of their business could find it difficult to remain profitable and might end their participation in the program." The report went on to say that the Medicare cost savings projected in the new legislation are "unrealistic."
The only example we have of government-run delivery of health care is the VA system and I don't know anyone who would hold that system up as the beacon of quality health care.
The US Postal Service, another government-run program, had to borrow almost $4 billion dollars from the US government last year to cover its losses. UPS, which is a private company that pays corporate taxes, made $3.8 billion in operating income and in my opinion, does the same service as the USPS but better, cheaper and faster.
Amtrak as a mode of mass transportation is subsidized by the Federal government to the tune of about $1.5 billion dollars per year for the past several years. That being said, it's difficult to understand why a round trip ticket from Raleigh to New York on Amtrak (which takes over 10 hours of transit time each way) is more expensive than a round trip non-stop airline ticket from any one of several airlines to any one of the New York airports (which only takes 1.5 hours of transit time).
The bottom line is this: the insurance companies know that health care reform has changed the odds in such a way that they may not be able to afford to participate in that business any more. While I understand that this news will probably produce cheers from physicians and consumers alike, I would simply say be careful what you wish for because you just might get it! With the potential for a single-payer system looming ahead, this could give a whole new meaning to the phrase out of the frying pan and into the fire.
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