Daily Archives: 14 February 2014

Junk Bonds and Preexisting Conditions

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What do these have in common?  First, a caveat.  Junk bonds are so rated because of the very high likelihood that the bond issuer will default on that debt for any of a number of reasons, including bankruptcy.  Preexisting conditions have no such uncertainty; they exist.  Let’s assume the likelihood of bankruptcy on a junk bond is certain.  That certainly would make the junk bonds more expensive in the bond market than they are presently, but they’d still be marketable.

Now, in the case of a preexisting condition, the risk getting coming down with that condition has been realized, there’s nothing left there to transfer to an insurer in return for a fee or premium.

Notice, though, that the timing of a default on any particular junk bond remains uncertain, even though default itself is certain, and so there are buyers—insurers, if you will—who are willing to buy a pool of junk bonds.  These buyers are willing to assume the risk of default for some subset of the bonds in the pool in return for the likelihood of netting a profit on the aggregation of interest payments from the remaining junk bonds.

In the same way, while having a preexisting condition is certain for the afflicted person, the risk of any particular person’s condition flaring and so requiring medical treatment, remains uncertain.  This risk can be pooled and transferred to an insurer: the expectation here is that the insurer, after paying out on the flareups of some subset of the preexisting conditions in the pool, still can net a profit on the aggregation of premium payments from the preexisting conditions.

Without government’s interference in a (restored) health insurance industry marketplace, insurance products could be developed that would pool those with particular preexisting conditions (or a collection of similar preexisting conditions, or…).  Aggregating the risk of preexisting condition flareups (as opposed to attempting to deal with the preexisting condition itself) into large enough pools would bring premiums into the reach of most folks having the condition.  This is the same risk spreading technique used by junk bond mutual funds: these funds spread default risk across a large enough pool that the cost of buying into the fund comes within reach of ordinary investors.

Of course, in this simple analogy, there are a couple of contaminants.  One is the fact that, in reality, default even on a junk bond isn’t certain; it’s just very likely.  Thus, the price of junk bond pools is lower than tacitly assumed in analogy.  This is balanced to some extent, though, by the fact that while a bond, once defaulted, ceases to exist for all practical purposes, this is not the case with a preexisting condition.  In general, a flareup of a preexisting condition subsides, the condition continues to exist, and the premiums on it would continue to be paid against the next flareup (of uncertain timing).

A Thought on the Contraceptive Mandate

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Notre Dame, et al., finally are getting their day in court concerning the Obamacare Contraceptive Mandate.  Notre Dame’s case centers on the premise that the government’s compromise in formulating the mandate still leaves religious organizations required to be agents authorizing contraceptive coverage, which violates Notre Dame’s (et al.) religious beliefs.

Two things about this case disturb me.  One is the Seventh Circuit’s attitude in hearing the case, as illustrated by this exchange:

Matthew Kairis (representing Notre Dame): The government is requiring Notre Dame to play a role.

Judge Richard Posner: But that role seems so trivial.

The role exists, and it forces the school to violate its fundamental religious tenets.  There’s nothing trivial about that.

The other thing is this argument by the government’s attorney, Mark Stern.  It’s a slippery slope, Stern claims, threatening the heart of the contraception mandate.  This goes along with his distortion of Notre Dame’s position:

It’s not enough that Notre Dame is going to get out of it, they don’t want anyone else to get in.

The first is at the center of the problem with the contraceptive mandate: the mandate forces religious entities and secular entities that try to operate according to their owners’ religious tenets (see, for instance, the Hobby Lobby case) to violate those tenets, and so is a violation of the Establishment Clause.  Of course the mandate should be threatened.  It should be eliminated.

As to the latter, surely Notre Dame has an opinion on the morality of other organizations providing contraceptives and abortifacients.  However, Notre Dame is not presuming to speak for them or about their legal right to provide these things, nor is Notre Dame arguing that health plan providers should be barred from offering coverage that provides these things.  Notre Dame and its fellow plaintiffs are merely arguing that they ought not be forced to be parties to the transactions.