This Motley Fool series examines things that just aren't right in the world of finance and investing. Here's what's got us riled up this week. If something's bugging you, too -- and we suspect it is -- go ahead and unload in the comments section below.
Today's subject: The full health-care reform bill doesn't kick in until 2014, but some parts start at different points over the next four years. Starting last week -- six months after the law became effective -- new insurance plans weren't allowed to deny health insurance for children under the age of 19 if they have preexisting conditions.
The change led WellPoint (NYSE: WLP ) , UnitedHealth Group (NYSE: UNH ) , Aetna (NYSE: AET ) , Cigna (NYSE: CI ) , and Humana (NYSE: HUM ) to announce that they would no longer offer new kids-only plans because of the added risk.
No longer issuing new policies upset Health and Human Services Secretary Kathleen Sebelius, who wrote a letter to the industry last week expressing her concern, and accusing the insurers of acting in bad faith.
Why you should be indignant: I'm no lover of health insurers -- my family has been turned down for insurance because of a preexisting condition -- but what did Sebelius expect to happen? You can't expect health insurers to act against their best interests.
Insurance is simply a risk-sharing system. Insurers just add up the estimated medical costs for all the people in the risk pool, add a little to cover their costs and profits, and divide by the total number of people in the pool.
When you allow people with preexisting conditions into the pool, the estimated medical costs go up, requiring the policy premiums to go up. That, in turn, causes those least likely to rack up medical expenses to drop coverage, because the insurance isn't worth the higher cost, which shifts the price even higher.
It gets worse, because the practice allows people to wait to buy health insurance for their children until they're actually sick. People can take from the system without ever paying into it. That's not how insurance is supposed to work. Insurers aren't charities; they're publicly traded companies and shouldn't be chastised for making sound business decisions that protect their shareholders.
The sum of the parts might be worth it, but there are a few aspects of the health-reform bill that don't seem to have been well-thought-out. Next year, insurers will be required to spend at least 80% -- and in some cases 85% -- of their premium revenue on medical costs.
That sounds like a good idea to avoid wasteful spending and greedy insurance companies pocketing profits -- even if it's redundant, given that the free market also does a pretty good job at inspiring competition, which drives down both of those.
But the problem is that one size usually doesn't fit all. McDonald's (NYSE: MCD ) has high turnover amongst its hourly workers, which drives up the administrative costs of its health plan. Those costs are already a big factor because of the maximum benefits offered by the plan; the insurance is considered a "mini-med" plan, which is fairly low-cost but caps the annual maximum benefits.
Without some kind of waiver, the company might have to drop its coverage for its burger flippers. Alternatively, it could move the insurance in-house, like Wal-Mart (NYSE: WMT ) has done -- collecting the premiums and paying out the claims itself -- but then McDonald's would be assuming all the risk.
There's not much to do but wait. When the full bill goes into effect in 2014, many of these problems will go away.
At that point, everyone will be required to be covered by health insurance. Payments into the pool by the relatively healthy will offset the higher costs of those with preexisting conditions. The problem only arises when you have one without the other.
For McDonald's and other companies that offer mini-med plans, 2014 marks a time when it'll have to offer a full benefits package for workers or face fines. Since these mini-med plans likely don't qualify, the high-administrative-cost argument becomes fairly moot.
Until then, investors will just have to hope the government stops complaining about companies acting in their best interests.
Agree? Think evil insurance companies need to suffer anyway? Let us hear it in the comments box below.