No CLASS

Obamacare just had a limb amputated, but the infection is still raging. CLASS, the Community Living Assistance Services and Supports program, was finally recognized by Kathleen Sebelius to be financially unsustainable.

This comes as no surprise to those of us who can add and subtract, a skill Democrats have long since abandoned. In their 2009 Christmas Eve jubilation after passing the health care bill, Dems failed to notice, or refused to acknowledge, that the promise of universal health care was a fantasy. It literally could not work.

Sebelius must have been in a hard spot to admit this outright. This self-inflicted radical treatment comes at an awkward time, as President Obama’s every breath marks new heights of incompetence. It was he who insisted that CLASS should be a part of the bill even though he was warned that it could not be sustained.

Mitch McConnell got it right when he said that this portion of the health care bill was a budget gimmick all along. It promised to reduce the deficit by $80 billion over the next ten years, mainly because beneficiaries would have to pay in for five years before being able to claim benefits. Because of “adverse selection,” a phrase roughly translated as “robbing Peter to pay Paul,” premiums could go as high as $3000 a year–all for a possible $50 a day in payments when needed.

The lesson here is as clear as it is impenetrable to the Democratic mind. Government literally cannot design programs like this that actually work. Why? Because they are not privy to the wisdom of markets, which resides in the separate decisions of millions of people.

Insurance spreads risk out over a pool of people who agree that it is better to pay a little more than the calculated odds of experiencing a bad event than to go it alone. For example, the chances of me getting hit by a bus are small, but if such were to happen, my medical bills would be devastating. If I get together with 10,000 other people who feel the same way, we could pool our money and dole it out only when these nasty things actually happened.

If I don’t get hit by a bus, I lose. That is, I lose the “extra” money I paid in. You see, to make this work, some entity has to administer the program, do the calculations that determine premiums, and keep track of the finances. That costs money. This role is usually filled by an insurance company, but if we were to pay one of our own to do all that, the same principle would apply.

If I do get hit by a bus, I win–I take a lot more out than I put in. This is another reason that participating in insurance requires paying in “extra” money. The people who did not get hit by a bus lose out in the strictly financial sense. The “extra” money paid in by them represents the value of their reassurance that they are covered if fate turns ugly.

In some cases, insurance is not worth it. I’ll bet that every time you buy a computer, the clerk asks you if you want to cover it against damage. Don’t buy it if you could afford to buy another one after dropping yours down the stairs. The reason is simple–you pay a premium for the luxury of peace of mind. If this scenario were to occur thousands and thousands of times, you would pay more in premiums over the long haul than you would in buying a new computer yourself every once in a while.

In cases where you could not cover the loss, insurance is absolutely worth it, but only if the math works. Actuaries spend their time figuring this kind of thing out. They don’t always get it right, but the market quickly weeds out those who don’t. If an insurance company initially underestimates the premiums, it soon pays out more than it takes in and has to raise premiums. If it initially sets premiums too high, competitors get more customers. In the tension between these two forces lies the wisdom that no government can acquire.

The best solution is for government to get out of the way completely. Short of that, though, there are some ways to bring health care “insurance” back from the edge of insanity. One is to allow unlimited Medical Savings Accounts that can be used to pay medical expenses. Contributions would be tax-deductible. Better yet, allow anyone to contribute his/her savings to the medical expenses of anyone he/she chooses. The pooled decisions of millions beat the daffy logic of Congress every time.

Another is to allow the sale of insurance across state lines. Part of the reason premiums are so high is that within-state cronyism shields insurance companies from competition. Eliminate that element and the magic of the market will soon get premiums into line.

The death of CLASS, then, should be celebrated. The Administration has had to admit outright that at least one part of the disaster called Obamacare cannot work. Hopefully, they will apply the same logic to the rest of it.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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