Risk vs. Reward for Health Insurance

By Dr. John Hilston

June 5, 2012 - In the next few weeks the U.S. Supreme Court is expected issue its decision on the constitutionality of the Affordable Care Act of 2010, also known as Obamacare.

The law has been controversial from the start.

Supporters say it’s necessary to provide coverage to tens of millions of Americans without insurance and control exploding health care costs. Opponents say the individual mandate, which requires everyone to purchase insurance or pay a fine, is an onerous burden.

Since the lawyers have already argued the legal issues, let’s explore a few of the impacts on small business and the economy.

We must first examine the nature of health insurance, which is essentially a legal gamble. Who knew that paying your monthly premium was kind of like sliding a few chips forward in Las Vegas? However, calculated risk is what insurance is all about.

If you are an insurance customer, you’re betting it’s more valuable to pay your monthly premium than to risk going without the potential financial protection that insurance provides.

Likewise, the insurance company is betting it will be more valuable for them to collect your monthly premium and provide coverage than it would be to not offer coverage.

In other words, you are selling your risk to an insurance company in exchange for an assurance they will pay for the care stipulated in the contract. This is, of course, only up to the limits stated by the policy contract. Without these contractual limits, insurance would probably not be affordable for most of us.
As more coverage is mandated by the government, the health insurance premium price necessarily rises because the risk increases. This added risk is essentially another product that you are required to purchase.

Since health coverage is often part of one’s compensation package, you and your employer probably end up splitting the price increase. That said, the law of demand tell us that as prices increase, quantity demanded decreases.

In the case of health insurance, more expensive coverage may lead to some businesses reducing or eliminating coverage. This is the systemic risk associated with government mandates for increased coverage.

Another risk present in the national health care law is that businesses will opt to pay a fine for not offering health insurance coverage rather than offering coverage.

While it is possible that President Obama and Congress might agree to increase the fine such that it would not make sense for businesses to drop coverage, this alternative would simply force businesses to strain to offer coverage.

A strained business is a business that has difficulty sustaining growth and hiring more workers, things that we need in this fragile recovery.

Dr. John Hilton is an associate professor of economics on the Brevard Community College Palm Bay campus. His column also appears in Florida Today.