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Unintended Consequences, Part Two

January 18, 2010

Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

In a recent post I spoke about well intended government mandates and their unintended consequences on insurance pricing. (See Unintended Consequences Part One). As promised, here is part two:

In a recent state legislative session, the Connecticut legislature in an effort to cover young people with health insurance passed a law that would allow young people to be added to their parent’s health insurance policy. The law expanded the eligibility for coverage from the cutoff age of 18, or 23 if you happened to be a full time student, to age 26. It sounds like a great idea, doesn’t it?

The debate as to the right or wrong of this law I will leave to others. My interest is in educating consumers as to the net effect on insurance pricing. If you had a moment to read one of my past blogs entitled  “Cup In”  I spoke to the fact that insurance prices are set based on actuarial science. In other words, prices are based on an estimate of the sum total of claims in a given year. In this case, thousands of people were added to insurance policies yet, there weren’t any premiums collected to cover this new exposure. In simple terms, these unanticipated losses/claims have to be covered by nonexistent premiums. The net effect of course is the need for rate increases the following year. Unfortunately, good intentions are not immune to actuarial math.

Currently there is a great deal of anger pointed at the insurance industry over the inability of millions of Americans to obtain health insurance coverage. Sadly, it’s often characterized as “evil doings” by our industry. The truth is that a business, any business, cannot sell something for one dollar that costs two dollars to make. It appears that the government will no longer allow this practice. The net effect will be thousands of claims for which there has been no premium collected. Regardless of the side of this debate that you find yourself on, it’s safe to say that the end result will be rate increases for everyone. Those rate increases with come in the form of higher premiums, or higher taxes or a reduction of coverage (IE the “Cadillac” tax).

The issue of the uninsured is clearly a real problem that needs to be resolved. However, the proposals that are currently on the table wildly miss the target. In the best case scenario, even if the non insurance math supports the plan in the short term, in the longer term, the claims to doctors and hospitals will still have to be paid. Since there is little to no mandates that lower the actual cost of care, everyone will have to pay.

Have a great day!

Chris Garlasco

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