WEA Trust's Red Herring

From the Journal Sentinel:

In freeing school boards from bargaining with employees over anything but inflation-capped wage increases, Wisconsin lawmakers might have opened the floodgates for districts seeking to drop coverage by the state's dominant - and highly controversial - health insurance provider for teachers.

WEA Trust, the nonprofit company started 40 years ago by the state's largest teachers union, currently insures employees in about two-thirds of Wisconsin school districts. The company's market dominance has dropped in recent years, although not as much as some school officials who complain about the company's costs would like.

This has only been a minor issue in the coverage of Wisconsin lately so many people may not even know that  many teachers are covered by an insurance company run by the teacher's union and that this particula insurance coverage is negotiated into contracts by the union.  It is not clear whether or not the insurance provided is competitively priced.  This article gives a good, short account of the situation with reaction from both sides, but it also includes this ridiculous piece of obfuscation:

But Steve Lyons, director of public affairs for WEA Trust,... also said in an e-mail that the insurer returns 93 cents out of every health care premium dollar back to the districts in health care coverage, while "some of our for-profit competitors keep more than 20 cents out of every dollar."

How much an insurance company spends on claims (also known as the medical loss ratio) may be good to know, but by itself doesn't tell you whether or not the insurance premiums are priced too high or too low, compared to the competition.

Imagine an insurance company that just paid every claim without checking it's veracity.  It would likely have low administrative costs since it didn't bother to check if any of the claims are real, meaning it would pay out much of every dollar it took in as a claim.  At some point it would have to raise premiums, since it would likely attract a higher percentage of phony claims once it developed a reputation for paying them no matter what.

If you think my example of the all-trusting insurance company is too ridiculous to shed any light on the matter, consider Medicare.  There is debate about exactly how much it costs to run Medicare, but many on the left argue that Medicare spends more than 93 cents of every dollar on claims, and yet high Medicare spending is one of the major items driving our large long-term deficits.

School districts purchasing insurance from the WEA Trust may or may not be getting the best possible price on insurance.  But don't be fooled by the quote above, knowing that they spend 93cents of every dollar on claims doesn't automatically make WEA Trust a good deal.

NPR & GOP Freshman Confused by Health Insurance

Rich Nugent, a freshman GOP congressman from Florida, was featured in an NPR news story yesterday about members of congress who have declined the federal health care that comes with their jobs.

It is revealed that Mr. Nugent is now paying almost $1,300 per month for insurance. The story is framed as if he is going out to buy his own insurance in the private market, but it's clear that this is not exactly what is going on here:

SIEGEL: But isn't the essence of your problem right now that you're in the individual insurance market and that if we could find some way for you and the other people who have retired from the sheriff's office to be part of a group buy, a massive group buy, you could do a lot better than $1,200 to $1,300 a month?

Rep. NUGENT: Well, actually, that is part of the group buy. But we pay 100 percent of it. The government doesn't subsidize any portion of it. So that's why it's so expensive.

So when Nugent is talking about the $1,300 per month, he is talking about the full cost of the insurance that someone in the federal employee group pays. He is NOT talking about an individual policy. And the subsidy he mentions:

Rep. NUGENT: ...when you look at what they were going to charge me for family coverage, it was subsidized to the tune of almost 75 percent. And that's the actual cost that the federal government is paying for an elected official's health care.

What the Representative is describing here, is the fact that the federal government typically pays about 75% of the annual premium to cover a member of Congress. Where I come from that is not a subsidy, that is called compensation. Perhaps Mr. Nugent also thinks his congressional paycheck is a subsidy for his lawmaking activity, but to me that sounds like a salary.

Given this, the entire thrust of the story simply falls apart. That thrust being most folks can't afford $1,300 per month premiums on their current salary. What this leaves out is that the portion of a premium paid by an employer is also part of total compensation.

It's true most people can't afford to go from paying $1,000 a year to $15,000 a year for health insurance on their current salary. But if their salary increases by $14,000 a year, just like their insurance premiums, they are in exactly the same position!

It's a basic rule of economics, focus on the unseen as well as the seen. In this case no one seems to notice the part of Nugent's compensation that goes toward health insurance. They only account for his current cash salary and the fact that he has chosen to pay the full amount of his insurance premiums himself. This guy hasn't opted out of federal health care so much as he has engineered a pay cut for himself.

The fact that a member of Congress and an elite media institution can't appreciate these simple facts does not bode well for a successful transformation of the health insurance industry in this country any time in the near future.