I went to bed early last night...

and as a result, I awoke at 5:30 this morning and could not go back to sleep.  The good news is my leg feels better.  But I'm going to wait two more mornings before walking.  Tomorrow I have to eat breakfast early and get to my 9 a.m. class, and since it will be the first morning of class I plan to arrive early.  The odds are very good I will be walking again Tuesday morning.

Okay, as promised yesterday, a hopefully quick primer on health insurance. This is the 4th time I've tried to do this and the first 3 times it went too long.  You're now the owner of the Acme Health Insurance Company and you just signed a new client, the ABC Widget company.  They have 100 employees and based on their claims payouts from their last plan year, you've offered then coverage at the rate of $400.00 per month per employee.  That's $480,000 in annual premiums.  We're going to pretend that administrative costs like enrollment/unenrollment, claims processing, billing, customer service, sales, and the like run 10% of premiums.  It may be higher or lower in actuality, depending on the size of the insurance company and market conditions, but that number works for this example.

So of the $480,000 in premiums paid, $440,000 is available to pay claims submitted during this plan year, which runs from 9/1/2012 through 8/31/2013.  The plan's terms are simple.  This is an employee only plan.  Dependent coverage is available separately for employees through Acme, but it is provided on a separate policy, paid for by the employees themselves, so dependent claims don't factor into this plan's calculations.  The plan pays for 80% of covered expenses and offers a "network" of "preferred providers" who are obligated by contract to accept the plan's payment levels and not  "balance-bill" for non-covered amounts except for the 20% copayment and deductibles.  This contract also requires these plan providers to bill the insurance first and collect copayments afterward, with the exception of network pharmacies and doctor-visit copayments where the copayment for an office visit is $20.00 flat.  Those flat copayments don't provide credit toward meeting the deductible.  Prescription medications are covered at $15.00 for generic drugs, $25.00 for brand name drugs and $50.00 for what are called non-formulary medications.

Now we're going to look at three employees.  #1 is a 47 year old male.  He has hypertension and diabetes.  He takes four prescription medications daily.  Two for blood pressure, one for cholesterol and one for his diabetes.  He does not require insulin yet.  He sees his doctor quarterly to have his blood pressure and sugar monitored, and over the course of the plan year he will have two other doctor visits because he was not feeling good.  He had two expensive tests to check for coronary artery disease during the plan year. 

The medications all cost $50.00 per month per drug.  He pays $15 of that since they are all generic.  So Acme pays $35 x 4 x 12 = $1,580 for the year in medications.  His six office visits were $80 of which he paid $20 so that's another $360.  The two medical tests were $1,300 of which #1 paid the $500 deductible and then 20% of the remaining $800 or $160.  Acme paid the remaining $640, and so spent a total of $2,220 on #1.

Acme did better on #2.  She's a 28 year old female who went to the doctor only once in 2012/2013.  That was her annual OB/Gyn Check.  The bill was $200 and her copayment was $20, so Acme spent only $180 covering her claims.

#3 is a 26 year old male.  A health freak who hasn't seen a doctor in four years.  But, on April 7th, while he was crossing the street, an uninsured driver ran him over, causing serious injuries.  He was in the Intensive Care Unit for 24 days, at a cost of $3,000 per day.  He spent all of May and June in a regular hospital bed, at a cost of $2,000 per day.  Those are just hospital bills for the hospital and medications.  Doctor bills for that 84 day period were another $800 per day.  Then in July he was transferred to a sub-acute facility.  Ordinarily that would have been only $1,000 per day, but he is getting double the normal amount of physical therapy, so it's actually running $1,200 per day.

24 days @ $3,000 per day = $72,000.  60 days @ $2,000 per day = $120,000.  84 days @ $800 = $67,200.  60 days @ $1,200 per day, $72,000.  That's $331,200.

So, with 97 employees left to cover the claims for a whole year for, there is only $440,000 - $332,200 = $108,000.  Another big claim and Acme will lose money.  Even with only average claims in this case, Acme will lose money.

How can Acme afford to do this, multiplied across hundreds of companies each year?  Because the odds are good that not every company will have a "shock" claim like this.  It's called "risk-pooling".  Risk pooling gets more and more difficult when things like "pre-existing condition limitations" are eliminated.  Insurance companies are in the business of insuring unknown and known risk.  When the risks are unknown, they can estimate and make intelligent guesses.  When the risks are known, they can forecast more accurately and adjust premiums accordingly.  When they're forced to cover pre-existing conditions without being allow to exclude any treatment, how else can they afford to provide this coverage, without increasing the premiums for everyone to cover these known and predictable expenses?

So let's go back to Acme and ABC Widget for the plan year 9/1/2013 through 8/31/2014.  A new employee has joined ABC in May of 2013.  She suffers from paroxysymal nocturnal hemoglobinuria a rare condition where the blood cells break down too quickly, releasing hemoglobin into the blood and urine.  It can lead to aplastic anemia, leukemia and death.  There is a promising, fairly new medication for treatming paroxysymal nocturnal hemoglobinuria but it costs over $400,000 per year.

What is Acme to do?  Double the premiums paid by ABC Widget company for the new plan year to ensure that they won't lose money by paying for this medication?  Accept a loss on this group?  What should they do?

Yes, I deliberately picked a condition and medication that are very rare and very expensive.  But I'm trying to make a point.  There's no magic pot of money that insurers will continue to have under these new rules where pre-existing conditions can't be excluded or be given limited coverage.  The trend, as the media is  reporting, is that every covered individual is going to be asked to pay more of the cost of their own care, to allow insurance to continue to operate.

Obamacare isn't a horrible idea.  It has some workable concepts.  But the truth is, if a better solution doesn't come along, and that better solution may require a component of socializing healthcare, the system will ultimately explode.  The cost of care is exploding annually, as technology improves, the average life expectancy lengthens and survivability of illnesses continues to increase.  The pot of money available to pay for healthcare is not increasing at the same rate as the cost is.