The Health Insurance Virus

The health insurance reform legislation before Congress is like a computer virus: It appears innocuous on the outside, but once activated, it will destroy the private health care insurance system from within. The mechanism it will use is the actuarial unsustainability.

It doesn’t take a Nobel Prize in economics to see that the health insurance proposals working their way through Congress will bring about the end of private health insurance. It’s a matter of third-grade math.

By contract, health insurance companies must pay any and all qualified claims by the insured. To pay these claims, the company must raise enough revenue to cover these claims plus overhead and operations. To keep premiums competitive, the health insurance company must accurately forecast its probable claim costs. To do so, it uses actuarial models that factor in such things as the client’s age, weight, and general health.

As I pointed out in my last post, President Obama’s health insurance reform proposals ignore actuarial reality by mandating coverage of everyone regardless of their physical condition. In addition, the health insurance companies will not be able to cap annual or lifetime benefits. Forcing health insurance companies to cover everyone with pre-existing medical conditions without limits is like forcing a life insurance companies to write policies of any amount for people with terminal illnesses. Both are actuarial folly.

This is especially true since the government will limit how much the insurance companies can charge. Consequently, the premiums collected will never cover the costs of coverage.

This is the virus that will cause the private health insurance system to crash.