Dropping the Bomb on Health
Dec 23, 2009
As business owners undergo the yearly
ritual of passing through eye-popping health insurance premium
increases to their employees, it's easy to understand why any
attempt at health insurance reform would be met with some degree
of hope. Unfortunately, President Obama and his Democratic allies
in Congress are about to take a very bad system and make it unimaginably
While ramming their new legislation through Congress, the Democrats
have taken great pains to point out that they do not intend to
"socialize medicine." But make no mistake, that's
where we're headed. Even if some naïve centrists believe
that their efforts have denied the Left a total victory, the
practical implications of the current legislation sow the seeds
for complete capitulation.
This first round of reform could be labeled as the 'neutron bomb'
of the insurance industry: it leaves some of the private apparatus
standing, but it irradiates whatever remains of the industry's
The bill's centerpiece is a clause prohibiting insurers from
denying coverage based on a pre-existing medical condition. However
noble and marketable an idea, this proscription removes the very
basis upon which any insurance model operates profitably.
A system of insurance requires that premiums be collected from
a pool of low-risk people so that funds are available in case
a high-risk event befalls a particular person. In that way, premiums
can be low and coverage can be widely available, even if the
benefits offered are hypothetically unlimited.
For example, homeowners buy fire insurance even though their
houses are very unlikely to burn down. Recognizing that a fire
could wipe them out financially, most homeowners endure the cost
of coverage even if they never expect to collect. The same model
applies to health insurance in a free market.
However, the health care bill removes the need for healthy individuals
to carry insurance. Knowing that they could always find
coverage if it were eventually needed, people would simply forgo
paying expensive premiums while they are healthy, and then sign
on when they need it. But insurance companies cannot survive
if all of their policyholders are filing claims!
Correctly anticipating this incentive, the Senate bill imposes
an annual fine which gradually escalates to $750 for those who
fail to buy coverage. So what? I would gladly pay
$750 in order to avoid the $8,000 per year I pay now for personal
health insurance. Currently, I'm relatively healthy for a 46
year old and I don't anticipate making a big claim. But if I
do, under the new rules I can always get 'insurance' after the
fact. Heck, if I can stay healthy for the next couple of
decades, I'll save a fortune. Think about how much easier the
decision would be if I were 20 years younger! Since most people
are capable of figuring this out, the entire insurance industry
would collapse under such a system.
There can be no question that $750 annual maximum penalty is
a mere placeholder. It is the camel's nose under the tent.
When the non-discrimination provision kicks in, the only way
these companies could remain solvent would be for Congress to
raise the fine to the point where the penalty is greater than
the gain of skipping coverage.
For me, that would have to be roughly $8,000 per year. Introducing
such a fine right now would have surely killed the bill. So,
the wily wonks in Washington have chosen to move slower, knowing
that once the first step is taken, the second becomes inevitable.
However, there is another, more devious possibility. Perhaps
our elected officials actually intend to bite the hands that
feed them. They could double-cross insurance companies by
not raising the fine in five years, thereby forcing the industry
into bankruptcy as millions of healthy people opt-out. During
the ensuing 'insurance crisis,' our courageous leaders could
ride to the rescue with a nationalized, single-payer system.
The real tragedy is that the current bill does nothing to restrain
the forces that are propelling healthcare costs into the stratosphere,
namely: regulatory bans of insurance competition, the out-of-control
medical malpractice industry, federal programs and subsidies,
and a tax code that favors a third-party payment system - which
alienates the patient from the cost of his care.
To consider that many in Washington have the nerve to market
this multi-trillion dollar monstrosity as a "deficit reduction
bill" is to realize that our representatives have lost all
touch with reality. For those keeping score, the government
made similarly rosy projections in the mid-1960's when Medicare
was first introduced. The inflation-adjusted cost of that program
already exceeds the original estimate by a factor of ten. That's
probably where we are headed this time around.
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Dec 23, 2009
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.