A century ago, New York City had a thriving industry which centered in an area of Manhattan known as the Garment District. This was, of course, long before we exported the manufacture of clothing to Sri Lanka and Pakistan, Mexico and the Far East Asia.
There were two men, Abe and Irving who had grown up together in Brooklyn and had gone to work in the business as button salesmen. They worked for competitors. But Abe was the toast of his company and his reputation as a top notch salesman was well known throughout the district. Irving struggled to meet his quotas and worked twice as hard as his childhood friend now turned competitor. This went on for years – and poor Irving became so frustrated with his situation that one day, when he encountered Abe on the street he asked him for some advice.
“Abe, we’ve known each other since we played stick ball. You’re a success – no one can deny that. But I don’t understand how you can sell your A307P button for only two cents. It has to cost your company at least five cents to make it. So how do you do it?”
To this Abe responded, “I’ll tell you Irving it’s very simple. What I lose on each button, I make up for in volume.”
A few years later, Abe left his button company and accepted a nice desk job in government.
Let’s look at one claim that is intended to justify the President’s mis-statement, “If you like your health care plan, you’ll be able to keep your plan.” In this particular ploy, the defenders of the President claim that it is not Obamacare which is causing insurance companies to cancel existing policies (which they characterize as sub-standard), but this is a volitional and conscious choice made by the insurance companies themselves. Estimates suggest that as many as 14 million people who pay for their own insurance will be affected by these cancellations.
Let’s assume that the administration is correct, that is to say that these policies are sub-standard (the term “crappy” has also been used to describe them). Well, what makes them sub-standard? The fact that they charge more for coverage than is actuarially required and they pay only limited amounts in the way of benefits. Let’s set aside the fact that might actually be what the consumer realized he or she was buying and was satisfied with these limited policies.
So now let’s put ourselves in the place of the insurers. If these policies overcharge and in fact under-deliver, that suggests that these would be highly profitable. Why would any rational executive at an insurance company voluntarily cancel this highly profitable piece of business? Unlike Abe who claimed to make up the loss on each button by selling more of them, these insurance companies make more money by selling more of these “sub-standard” policies.
But let’s look at the financial model which those who support Obamacare realize must be achieved in order for the law to work economically. One of the goals is to allow those who have serious health issues (pre-existing conditions) to have access to coverage. These people will pay less in premium than the amount of benefits they will receive from their insurance. In order to “make up” this deficit, the system is designed to overcharge younger, healthier people who will pay more for insurance than the benefits they are likely to receive. Some might describe this as a “crappy deal” for the young.
It seems likely that those who have serious health issues will be eager to sign up for Obamacare. As for the young who overwhelmingly supported the president in his two election campaigns, it remains to be seen how many will choose to participate. Perhaps it will depend on how hard and successfully the administration can push their buttons.