Understanding Insurance and the Affordable Care Act (Obamacare)

Last Monday, while reading a Q&A piece on Obamacare over lunch, one of the comments struck me:

How do I ensure that my current employer-provided plan’s rate does not go up? And if it does, how to I get back to paying my current rate? I refuse to allow my hard-earned money go to pay for other people’s “free” coverage.

Today, while skimming an article about how some people in California are upset at Obamacare over lunch, another line jumped out at me:

“It doesn’t seem right to make the middle class pay so much more in order to give health insurance to everybody else,” she said, in the report. “This increase is simply not affordable.”

Further, I’ve seen numbers of articles where people have complained that the President promised they could keep their old insurance, and that hasn’t turned out to be the case. All of these demonstrate, to me, that people do not understand how insurance works and that people do not understand what Obamacare does (demonstrating again a common complaint: Obamacare has never been explained well). So, without debating the merits or demerits of the law itself, I would like to clarify these misunderstandings.

First, there are many people out in the world who seem to view insurance as a savings account: they put money in for a catastrophic occurrence, and they get their money back if it happens. In reality, insurance is legalized gambling with really odd bets (and if you haven’t read the Art Buchwald piece in that link, read it). Insurance is a bet with the insurance company. If you get really sick, you win, because they pay you out more than you paid in (and thus, you get money from other people). If you are healthy, you lose. Same thing with life insurance: if you die, you win (so to speak, because your family gets money).

Insurance is pooled transfer of risk. Money for catastrophic events is collected by insurance companies from people that might be subject to those events; the amount they charge is based upon the risk that the event might happen (if that can be figured out). The insurance company invests the money (growing it some), and collects a percentage for their costs/profits. What’s left is paid out when events occur.

So when you object that your hard earned money is paying for other’s free coverage, remember there is no such thing as a free lunch. First, the hard earned money of others is paying for your medical coverage when it is above what you pay in premiums. If the other person is paying premiums, their coverage isn’t free. If they are receiving some level of subsidy through the ACA, then the government is supporting paying the premium — but not necessarily you personally, for it could be coming from the various surcharges built into the scheme to cover the subsidies. The ACA was designed to be self-supporting, so these surcharges should cover the subsidies / medicaid expansion.

Let’s now turn to the question about why some people are being moved to pricier polices. The answer is not because they are middle-class, per se. As with anything, there are multiple reasons.

First, the ACA mandates a certain minimal level of coverage, with some minimal level of deductables. It also mandates that certain preventative care options have no co-pays to encourage their use (saving money down the line), that children be covered on their parents policy until they are 26, and that there be no maximum payout caps. Policies that do not meet these minimums (unless they are grandfathered employer policies) have to be withdrawn, and the consumer steered towards policies that meet the minimums. As these policies do more, they cost more. It is these cases where consumers cannot keep their old insurance — in other words, you can’t keep it if it didn’t provide the minimum coverage.

Secondly, in California (and likely other states), the government didn’t want to permit insurance companies to segregate the healthier people from the new people apply for plans (remember what I said before about pooling of risk — they wanted the pool to be greater). Specifically, the state didn’t want to give insurance companies the opportunity to hold on to the healthiest patients for up to a year, keeping them out of the larger risk pool that will influence future rates.

These factors are expressed by the director of Covered California when he states: “People could have kept their cheaper, bad coverage, and those people wouldn’t have been part of the common risk pool.  We are better off all being in this together. We are transforming the individual market and making it better.”  Additionally, the higher rates are partially offset by smaller deductibles, lower limits on out-of-pocket medical expenses in the new plans, and increased no-cost preventative coverage.

Lastly, as for keeping your insurance, that is generally true if it is employer-provided (although employer-provided policies need to meet the same minimums, and some employers are opting for better deals in the individual marketplace). The discussion above is for individual policies. Note that employer-provided polices are seeing premium changes as well for a number of reasons, including the minimum coverage changes as well as the need to avoid being classified as “cadillac” plans for being too expensive.

Now, this post (and any comments with it) is not the place to discuss whether having a minimum level of coverage is right, whether there should be subsidies, or whether the approach taken to fund those subsidies is correct. Suffice it to say that any new law will have problems and require adjustments, and Congress should move past “repeal / defund” and on to keeping what is good and fixing what needs to be fixed. Comments attempting to get into the political debate may be deleted. However, if you have additional examples of people not understanding the ACA (and can post them non-pejoratively), I welcome them.