Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Archive for June 2008

How to Eliminate the “Pre-Existing Condition” Problem

with 2 comments

Steve Verdon at Outside the Beltway argues that pre-existing condition exclusions are necessary if health insurance is to be actual insurance.  He concludes:

But when you pool people with pre-existing conditions with those who are healthy, you are basically providing a transfer of income form those who are healthy to those who have pre-existing conditions. So please, call it what it is. You want to give people with pre-existing conditions other people’s money so they can get treatment. Calling [it] insurance is simply a lie.

Although this may be true, this doesn’t mean our current system is working.  There’s a common sense reform that should change this: apply HIPAA’s creditable coverage definition to the individual insurance market.

In the group insurance market, pre-existing condition exclusions are limited to rare circumstances.  The 1996 HIPAA reform stated that they cannot be applied to anyone who has “creditable coverage” — which is essentially everyone who has group insurance coverage sometime in the last 63 days.  Essentially, this is an alternative solution to the same underlying problem:  people who purposefully forego coverage until they are sick.

To extend this definition to the individual market, you’ll have to include an actuarial determination that the original health benefits were sufficiently “rich” (i.e., a limited-benefit plans that only gives you $1,000 of coverage really isn’t insurance).  And there would be a small adminstrative burden on health plans when they enroll new members.  That’s it.  To counter these costs, you also get administrative savings because you no longer waste manpower with as many denied applications which saves money in underwriting, as well.  You also reduce the cost of rescission control.

In the long-run, everyone either buys in or they don’t.  If they don’t, then pre-ex applies, as it should to keep individuals from free-riding.  If they do buy in, however, they’re protected from pre-ex, also as it should be. 

Just by extending creditable coverage definitions to the individual market, you defang much of the problem.  It is such a simple and straight-forward solution to the problem that I’m surely way off base.

Written by Victor

June 12, 2008 at 7:24 pm

Housing and Gas Prices: Calculating the Impact

leave a comment »

James Hamilton’s thoughts on the link between housing and gas prices  reminded me of a rough back-of-the-envelop calculation I did when buying my own home four years ago.

My wife and I bought a home in central Little Rock, with a 10 mile daily (roundtrip) commute.  We paid a premium for the proximity to downtown.  We both place a high value on family time, and likely would have paid this premium regardless.  However, a motivating factor was the possible increase in gas prices.

Little Rock is surrounded by commute communities:  Conway, Sherwood, Cabot, Benton, Maumelle, etc.  I assumed that an alternative housing arrangement would result in an additional 60 miles of driving, for roughly 200 days of work.  Under those assumptions, commuting would add 10,000 miles per year.  Assuming an average of 30 miles per gallon, that’s $333 per year for gasoline alone.

If you further assume an average expected residency of 20 years and a 3% discount rate, then a $1 increase in gas prices translates into more than $5,000 of added cost to the commuters.  That’s $5000 of potential appreciation for homes like mine.

That’s one reason I’m not disappointed by the rise in the price of gas.

Notes on assumptions: 
* The 20 year residency may be too high.  If you assume a 10 year residency, the gain drops to $3,000 in present value.

* The days per year assumption is rather low for a full-time employee; I’m implicitly hedging the assumptions against work-at-home opportunities that may become more of a norm in the future.

* A 3% discount rate is a bit low, but it’s roughly the after-tax interest rate for our fixed-rate mortgage.  A 1% increase in that discount rate reduces the potential price appreciation by about $400 (out of the initial $5000 estimate).

Written by Victor

June 12, 2008 at 2:36 pm

Posted in Economics

Tagged with , , ,

Global Warming v. Social Security

leave a comment »

Global warming and Social Security are both long-run problems.  Both rely on long-run projections fraught with uncertainty.  Can you support reform to address one problem without also supporting the other?

Over the years, Megan McArdle has argued “no”: that if you care about one, you should care about the other: deferral of these sorts of problems is not a good strategy. (see here and here (the recent instigating post from her co-blogger Jon Henke))

Kling argues “yes”, there are differences:

The most important difference is that we can improve the entitlement outlook costlessly. The problem with entitlements is that we are promising more than we can deliver (at least if the economic projections are reasonably correct). Suppose that we raise the age of eligibility for Social Security and Medicare for people under 50 to something like 72, and then we index that age for longevity. This will change what we promise. We still have the option, down the road, of delivering more benefits to people now under 50. But lowering what we promise them helps forestall the situation in which we either renege on our promise or we raise tax rates ginormously to try to keep our promises.

To appease the economic models of entitlements, we don’t have to make any sacrifices today–we just have to make more conservative promises going forward. To appease the global warming models, we have to make rather large sacrifices of output.

Kling is correct in that the Social Security funding deficit can be eliminated strictly through benefit cuts.  Personally, I support a similar proposal and therefore would agree with his analysis.

However, others are concerned with the deeper problem implied by the actuarial forecasts: that it may be almost impossible to simultaneously achieve our pre-defined notions of “fair” benefits and “fair” levels of taxation.  Many of these other people would also presumably argue that Kling’s (and my) position on benefit cuts is not “fair”.  Therefore, they would argue that simply eliminating the funding deficit is not sufficient: you have to solve the funding deficit in a way that is equitable.  This is a much more difficult task.  Indeed, our notions of “fairness” may make it impossible to achieve.

Therefore, it is reasonable for well-educated people to disagree about whether it is consistent to care about one problem but not the other.  There actually isn’t even agreement about what the deep problems truly are, or which solutions are truly “solutions”.

Written by Victor

June 7, 2008 at 3:14 am