Anything Not Required …

Natural regulatory endpoint: Anything not required is forbidden.

Insurance companies take in premiums, and pay out claims and administrative expenses; the difference is profit.  If payouts were perfectly predictable, competition might drive this difference to zero. But since payouts are uncertain, premiums must be set higher, to prevent bankruptcy.  In fact, insurance regulators set minimum allowed levels of such “surpluses.”

The new Obamacare rules create a lot more uncertainty – insurers aren’t sure what exactly how it will change their costs, and the rules make it harder for insurers to raise premiums. The natural response of responsible insurers should be: collect larger surpluses, to insure against these uncertainties.  And in fact non-profit insurers have been doing just that.  Some are not at all happy:

The report released Thursday by the Consumers Union … found that seven of 10 Blue Cross Blue Shield affiliates examined had amassed surpluses that are more than three times the level regulators deemed necessary for them to remain solvent. Sondra Roberto … who co-wrote the report … said the prospect that nonprofit plans may be running unwarranted surpluses was even more troubling, given their mandate as charitable organizations.

Geez.  Why even have private insurers, if you aren’t going to let them choose how to respond to changing conditions?

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  • Leo

    Maybe so that they can blame the failings of regulation on private providers.

  • Why even have private insurers, if you aren’t going to let them choose how to respond to changing conditions?

    If one wanted to get rid of private insurers, regulating them into failure might be more politically savvy than abolishing them outright.

  • Panu Horsmalahti

    If the goal of Obamacare is a universal healthcare system, it can only be viewed as a success.

  • “Obamacare”? What a poor, but more importantly incorrect, and bias revealing word. I think the more correct term might be “The laws of the United States”, or even “US health care regulations”.

    Cheers! RichGriese.NET

    • It’s true that it’s not the official name of the law, but it serves to distinguish it from just any law (and I think Robin has complaints about many of them). Recall also that there used to be “Hillarycare” (not enacted, but drafted) and in Massachussets there is “Romneycare”.

  • RJB

    The first and last sentences of this post seem odd.

    First, the story seems to be one of “everything not prohibited is required,” rather than the epigraph of the post. This is actually pretty common with new law, as uncertainties cause some businesses to shy away from aggressive positions until resolutions are more predictable. (Fewer, with a greater tolerance for risk take very aggressive positions.)

    Second, the BCBS story seems to be one of non-profit organizations exploiting uncertainty by disingenuously claiming that they must build up large reserves — or, to put it another way, they must skirt the intent of non-profit status by including large profit margins in their premiums, rather than returning those costs to their donors or the group they are charitably serving.

    Perhaps then the final sentence should by “why allow tax benefits for non-profit corporations…” Competitors of IKEA (a non-profit) probably wonder this.

    p.s. @ Rick Griese, the right title is The Affordable Care Act.

    • Michael Kirkland

      IKEA is owned by a non-profit, but is a for profit business itself.

    • Tracy W

      Why would a non-profit want to disingenuously claim that it needed more reserves? Remember that companies, non-profits, trusts, etc, are all legal fictions. Convenient legal fictions, but ones that have no desires of their own. People, as shareholders, managers, employees, customers, etc have desires, wants, etc, but not companies/non-profits/trusts. Saying that a legal entity wants something is a short-hand for saying that a person or group of people want someone.

      My understanding is that non-profits don’t have shareholders – they are run by their donors, or management. If the management wants to exploit a non-profit, the options are either to have it pay the managers large salaries or run up massive expenses, why would management want to run up surpluses just for fun? If donors want to get money out of the non-profit, they can just donate less money. Customers might feel more secure if they know that their insurance company has a large level of surpluses as a shelter against future spending (more probably they don’t even know), but if so that strikes me as a good reason to run up surpluses.

      So who are the people you think would benefit from a non-profit disingenously running up surpluses?

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  • Doug S.

    Geez. Why even have private insurers, if you aren’t going to let them choose how to respond to changing conditions?

    I wouldn’t mind doing away with private insurers.

  • I believe what regulators set is something like a reserve ratio, an amount of capital “cushion” that must be kept around in case claims are higher than expected. Once the cushion is built up, if it is not spent by claims, premiums could be reduced to a level that would maintain or even slightly shrink the reserve.

    But why so extreme in your response to comments from regulators? First off, EVERY company operating legally is constrained in how it can respond by the law. Second, how do you imagine we will work out a change in the system if not by a give and take between all interested parties? There is nothing particularly special, or even anti-optimal going on here.