Saturday, December 26, 2009

Why Insurance Company Share Prices Rose Despite Costly Health Care Reform

Despite new health reform legislative prospects that appear to increase insurance company costs and decrease insurance company profits, insurance company stocks are rising in value more than the S&P.

A comment I posted on, "What Just Happened?" by Bryan Caplan to his question on his blog about the price rise in insurance company shares.
The fallacy in the argument is that it does not distinguish between risk avoiders and risk takers.

For instance, studies do not find the existence of adverse selection in the insurance market. See,

Risk takers feel invincible, do not buy insurance, do not go to doctors, deny sickness, etc. Risk avoiders have healthier lifestyles, are less ill and are more likely to buy insurance. Risk takers also have a higher mortality rate than others, e.g, car drivers who excessively speed, or excessively drink and drive, and many other high risk/high mortality life style choices.

Many of the uninsured are the 21-35 year olds, who are greater risk takers than the overall population, and other people who have a higher risk tolerance and also do not buy insurance. The behavior is independent of affordability. Many of these people do not go to doctors for check ups to find diseases and even if they are ill they avoid doctors.

Penalties and subsidies will not push these risk takers to get insurance and they will not go to doctors to discover diseases that need extensive medical care. By the time symptoms appear in this group, it is too late for medical care, e.g., they have a heart attack and die, or cancer has spread to a point beyond any treatment.

Insurance companies will never provide insurance for many of these medically expensive people because insurance coverage is voluntary with a penalty and not automatic. The default is not insured for this group. They needed to read Nudge.

Since Medicare, Medicaid, CHIP existed for the poor already, the uninsured in these groups most likely voluntarily chose not to seek medical care. Insurance affordability was never an issue with these groups. Making it more affordable does not increase the insurance in this group.

Additionally, seniors are the most expensive medical group and Medicare already covers them. There is no increase private insurance cost to insurance companies under the legislation for the old.

The stock market is expecting insurance companies to be much more profitable under the health care legislation than originally expected. It is not expecting a lot of adverse selection and not a lot of new insureds who need expensive medical care. It is expecting more income for new insurance from the healthier segment of the uninsured. It is also probably expecting some rationing and capping of medical costs under the new legislation insured.

All of the above leads to higher stock prices.

1 comment :

  1. the above point are right and yes most of youngsters are risk takers and do not prefer buying an insurance but i think every one should buy insurance as why to take risk if it can be avoided?what will you do in case of mis-happening if we think this then surely we will be in risk avoider category