Wednesday, February 22, 2012

Why Obamacare's contraception mandate offends a finance professional

The latest controversy associated with the Patient Protection and Affordable Care Act (aka "Obamacare") is the mandatory requirement for employers to provide health insurance for employees that includes coverage for contraception (for example, the birth control pill)

Predictably, there has been outrage in the US, with social conservatives raving about Obama's "War on religion" and even non-religious libertarians being unhappy with the imposition of a state imposed mandate upon people to undertake an activity that conflicts with their values.

But even if you're not outraged, on grounds of either religion or economic and civil liberties, the coverage of contraception by the insurance mandate does not make any sense from the standpoint of conceptual finance

Chicago economist, John Cochrane, explains it well:

" Critics are missing the larger point. Why should the Department of Health and Human Services (HHS) decree that any of us must pay for "insurance" that covers contraceptives?

I put "insurance" in quotes for a reason. Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.

Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn't add $100 per year to your premium and then cover oil changes, and that your health insurance doesn't charge $50 more per year and cover toothpaste. You'd have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you'd end up spending more" 
Read the full article here

As a person who works in financial services, a pet peeve of mine is the use of a financial product for a purpose that is totally divorced from its raison d'etre

The use of insurance for a regular, predictable and small expense is just wrong, wrong, wrong!

As I have outlined elsewhere in this blog, the 2 main purposes of finance is to help deal with intertemporal tradeoffs and "states of the world". Savings, investments and loans are the most common device for intertemporal tradeoffs (if I don't need money today, but need it tomorrow- for example to retire to the Bahamas, I will invest or same the money; if I need it today (for example for a house or a car), but cannot fund it from immediate incomes or savings, I will take a loan)

Insurance is the financial product which finds use in managing different "states of the world". It is a means to manage risk; to deal with uncertainty. Death; accident or personal injury; loss of assets; large unanticipated expenses (such as an operation or chemotherapy) are good candidates

Birth control pills clearly fail this test. They entail a small, regular and entirely predictable expense as Cochrane says. Hence it should be funded purely through current incomes and savings.

So called "insurance" is not just unnecessary, it is counterproductive. All insurance involves paperwork (since to claim the money from the insurance company you need to show invoices) Hence there is a waste of time, money etc. in claims processing which will just push up insurance costs

As a libertarian, I am opposed to Government mandated health insurance in any case. But whether you are a social conservative or liberal; libertarian or socialist; the Obama contraception mandate should be opposed on grounds of its violation of the concepts of finance

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