Tags: Fannie | Freddie | health | insurers

Obamacare Turns Health Insurers Into Fannie and Freddie

By    |   Friday, 16 May 2014 07:46 AM

Less than 10 years ago, Fannie Mae and Freddie Mac were darlings of Wall Street and favorites of income investors.

Their business model was foolproof. Homebuyers need mortgages. Fannie and Freddie provided money for mortgages and a government guarantee transferred risks to taxpayers. Profits were split between management and investors. With risk-free profits, Fannie and Freddie were simply cash cows.

Because they didn't need to respond to market risks, Fannie and Freddie focused on growth at any cost. Eventually, that business model collapsed.

In a perfect world, we would have learned a lesson when the housing market collapsed.

Instead, Obamacare is recreating that risk-free business model for health insurers.

Government subsidies help customers pay for insurance policies. Those policies further socially desirable goals rather than meet the needs of customers. Without subsidies, consumers would revolt, but with subsidies consumers are insensitive to price or quality.

Risk is not a factor insurers consider, and in fact it is now illegal to consider the health status of a consumer when underwriting a policy. In other words, health insurance is now equivalent to a no-documentation mortgage.

Products like this can only be sold if the private company gets a guarantee from the government that there is no risk of loss. Fortunately for insurers, Obamacare includes risk corridors that will reimburse them for losses on the no-doc policies they write.

Government intervention in the mortgage markets ended badly, and if history repeats, as it almost always does in economics, the health insurance market will also implode now that free market profit motives have been removed.

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MichaelCarr
Less than 10 years ago, Fannie Mae and Freddie Mac were darlings of Wall Street and favorites of income investors.
Fannie, Freddie, health, insurers
261
2014-46-16
Friday, 16 May 2014 07:46 AM
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