Similarities between Obama’s healthcare plan and subprime mortgage crisis
I have been indifferent to political discussions about Obama’s healthcare reform … and will continue to do so. Last week NPR made me interested only in the economic aspect of this reform. Just saying a few keywords like “insurance exchange” and “marketplace” was enough for a person who is interested in all kind of markets (stock, options, prediction, you name it) both as a phenomenon and a way to express intelligence of a crowd.
From “The Obama Plan”:
If You Don’t Have Insurance, the Obama Plan:
– Creates a new insurance marketplace – the Exchange – that allows people without insurance and small businesses to compare plans and buy insurance at competitive prices.
Back in April 2007 Sheila C. Bair, the Chairman of the Federal Deposit Insurance Corporation testified before the Committee on Financial Services, U.S. House of Representatives on the subprime mortgage issues. She offered a good overview about debt securitization. In terms of The Obama Plan, I was thinking along the same lines. That is, a health insurance marketplace may create a secondary market where insurance policies could be traded after being securitized similar to CDS. For example, an insurance company (let’s call it Great Shape Insurance) searches for clients having cancer in very early stages and insures them. Of course, the price will be low. Then Great Shape Insurance packages insurance contracts into an investment and sells it as an attractive investment – payments on health insurance events may be still low, while receiving a steady income from insurance payments. When cancer develops in the insured patients, those insurance policies become a toxic asset like it happened with subprime mortgages. There are a couple of caveats. While mortgages are a long term security, a health insurance contract does not last longer then 1 year. But Great Shape Insurance may offer a “great” plan and insure you for 10 years. Would you reject this offer? The second caveat is that insurance companies are required to maintain loss reserves. But to my knowledge those loss reserves are required only for companies that offer life insurance, at least at the federal level. The bottom line is there are many similarities between this aspect of the health care reform and the subprime mortgage crisis. The insurance market place does make sense, but like in any market there should be some rules established to prevent fraud. One example of a rule would be a requirement to disclose all risks and it would apply to all market participants including those who looks for insurance, those who offers insurance, and those who resells insurance. But that market should not be overregulated.