Healthcare and the Insurance Principle

Amidst all the talk about signing up for mandatory insurance (or failing to do so) through healthcare.gov, we have probably lost sight of what is really going on. I suspect that you, like a majority of Americans, think you buy health insurance so it will pay for your health care services and products. If so, I regret to tell you that is not what insurance is for… at all.

You purchase homeowner’s insurance to protect you (your investment actually) if your house burns down or is destroyed by flood. You do not expect insurance to pay for lawn maintenance or replacing old, clogged plumbing pipes.

You buy auto insurance to protect you — another investment — if your vehicle is stolen, taken for a joy ride, and trashed (this happened to me). You do not expect your insurance carrier to pay for oil changes or buy new tires to replace ones you put 40,000 miles on.

Medical malpractice insurance doesn’t prevent the doctor from making a mistake. Nor does it protect the patient from having an adverse outcome. It only protects the insured physician from losing his or her life savings in a lawsuit.

Insurance of any kind is a betting pool, one where the “winner,” is actually the loser. When you collect insurance money, i.e., when you win the bet, your house burned down; your car was totaled; or a patient was badly injured and sued the doctor successfully. “Winning” an insurance betting pool means you get something you really don’t want and then receive money to compensate for your bad luck.

All insurance is based on a principle that I learned from my next-door neighbor who is an insurance agent. The many contribute small amounts to pay the large expenses of an unlucky few. Insurance does not work if the many contribute small amounts and expect the resulting pool of dollars to pay for all of their medical expenses.

Take Medicare as an example. If you have Medicare insurance, you probably expect it to pay for your health care needs after you retire. After all, you paid into the Medicare fund for your entire working career. The average American pays in around $130,000 while working and spends over $350,000 in medical bills during the Golden Years, most of that spent in the last six months of life.

That is why Medicare is going broke. The “many” are not paying just for a “few.” The “many” are taking more out than what is coming in.* Medicare is an insurance betting pool that is being progressively drained dry. Medicare does not follow the insurance principle. There is no healthy “many” to support the expenses of the unhealthy “many.”

*It was anticipated that the funds you paid in to Medicare over forty years would grow substantially, but because Congress replaced your real dollars with their I.O.U.s, equity growth became impossible.

The insurance principle does not apply to Medicaid because it is a free entitlement. Recipients pay nothing. They are not putting their money into a betting pool, and have no skin in the game.

Remember that the insurance principle only works if: (a) there is a large continuous inflow of dollars (from the many); and (b) the outflow taken by the few is less than the inflow. If (b) is greater than (a), the pool runs dry.

The last sentence is what is happening to Medicare. That is why it is going broke. What about private insurance? What about Obamacare insurance? Are they following the insurance principle? Are they viable?

For private insurance, both (a) and (b) above used to be true. However, PPAHCA has increased insurance carriers’ costs dramatically both by mandating more benefits and increasing administrative expenses. That is why Aetna and Anthem have given up selling health insurance in California, and why Florida Blue as well as Kaiser Permanente sent cancellation notices to almost half a million individuals they had previously insured.

For Obamacare insurance, both (a) and (b) are false. Start with (a). The young invincibles — age 18-35, usually healthy and rarely needing health care — are the “many” of the insurance principle. Trouble is, they aren’t buying what Obama is selling.

First, PPAHCA-mandated insurance contains benefits they do not need or want and therefore don’t want to pay for. Second, they know that it is much cheaper simply to pay the penalty. Even better, don’t pay the penalty, as the IRS is not allowed to go after you if you refuse to pay.

Principle (b) is also false in Obamacare. Assuming that PPAHCA does in fact increase the number of insured Americans and recognizing the massive (not hyperbole) administrative, bureaucratic, and regulatory costs, healthcare spending — the outflow of dollars or (b) above — is much, much greater than any inflow. The only reason this works temporarily is that the federal government can print money.

Economics 101 will tell you that Obamacare insurance is long-term economic suicide. And that does not even consider the more important reality that access to medical care is going down, not up. Thus, PPAHCA is a long-term public health as well as fiscal time bomb. If you know the insurance principle works in healthcare, rethink what you “know.”