Quote:
Originally Posted by TheGame
I completly understand the concept of risk pooling and insurance. If I directly said something that conflicts with this understanding feel free to point it out directly.
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Well, if you completely understand risk pooling and insurance then you are way ahead of me! I only understand the basics of how insurance companies function. They are quite complex organizations, and they fact that they are one of the most regulated industries in the world makes them even more complex to dissect and understand.
That being said, I believe the concept you are missing is that the public option would simply not be able to function as a normal insurance company. This is not speculation. It is a fact. Here is why:
Just to be clear, this is a graph I made for one of my classes last year, which demonstrates the principle of risk pooling. The specific numbers are not important for this example, but simply the principle.
As you can see, the graph converges at 500, the expected value of this risk pool. As you know, the expected value never changes, but rather the probability of that expected value, and therefore the standard deviation, does change. This graph is an example of effective risk pooling, as the expected value has a high probability, and the standard deviation is rather low (there is a low likelihood of a long tail loss).
This model only functions in this manner if those within the risk pool face similar risk exposures, which is, again, why insurance companies are so picky. If the public option will accept any type of consumer, regardless of precondition, as you say it will, then this model will cease to function properly (unless you can come up with a new way to pool risk).
Therefore, the standard deviation will rapidly increase, and in turn the probability of extreme outcomes will increase. With the probability of those extreme outcomes increased, the chance of the collective risk pool's premium being able to handle the group's losses is severely diminished.
With the assertion that the public option will not be able to operate as a normal insurance company, this now begs the question how will the public option be able to make up the extra capital that is required? I see two options: One. Charge an excessively high premium (higher than what one would find on the private market). Two. Force taxpayers to pay the rest through mandated taxation. Option one would not be politically popular, and would defeat the point of the so-called "public option." Option two would further tax citizens in excess of the required premium of citizens who chose to opt-in. Therefore, the program would cost much more, in the long run, than simply the premiums of those citizens who chose to opt-in.
In conclusion, as long as you are fine with taxpayers, who choose not to opt-in to the system, having to bear the brunt (or a significant portion) of this public option, then I have no further issue. But I do hope you find this to be an extremely disturbing prospect at best.