Why Health Insurance Isn’t

Last week I wrote about the success of Obamacare in driving people from the private insurance market towards a national healthcare system. Clearly, I touched a nerve when I look at the tone of the responses received. Although I don’t discuss big-picture issues in this space nearly as much as I do day-to-day business operations, there is one more item about the health care market that we should visit.

Did you ever think about the concept of health insurance? First, just to be curmudgeonly, we don’t insure against health, but rather illness. So it should be illness insurance. But I digress…

What is insurance? It is a form of gambling. Like the office Super Bowl pool. Everybody puts a little money in (they don’t call the participant base an insurance pool for nothing), and the “lucky” winner gets his or her bills paid. That’s how it works for cars, homes and property liability.

arab accidentIt’s for that reason that insurance is against the law in Moslem countries. It is considered gambling, even though winning a “prize” requires an unhappy accident. It is still a large number of contributors putting a little money in, so that one of them can get a large sum out.

What would happen to the office Super Bowl pool if it paid off equally on every single box that was purchased? Of course, everyone would only get out what he or she put in. That’s why health insurance isn’t really insurance at all.

Health insurance became a tax-deductible employee benefit after WWII, and grew widely in the 1960s and 1970s. I will beat my demographic drum once again. In the 60s and 70s the workforce was expanding at a record rate with young, relatively healthy Baby Boomers. Just as they did for Social Security, they carried the sick and accident victims in the insurance pools easily.

Today in the US, as in most of the developed world, the three major causes of death are Heart Disease, Diabetes and Cancer. I laugh at those health experts that point out how our unhealthy lifestyles make those the major killers. It is true that obesity, red meat and lack of exercise are contributors. But the biggest factor is age.

Let’s face it, in countries like Somalia or Myanmar, the biggest killers are communicable diseases from polluted drinking water, starvation and bullets. It isn’t hard to figure out why so few people die from diabetes. They don’t live long enough, or have enough food, to contract diseases from unhealthy eating habits.

No shared risk pool functions when everyone expects to take out as much as they put in. In a society where the vast majority will live long enough to require extensive and extended health care, insurance struggles just to maintain a zero-sum outcome.

Health insurance is no longer insurance. It is a lifetime prepayment program for the medical needs that each participant is statistically almost certain to need. About 30% of all Medicare claims are paid in the last 6 months of a patient’s life. Some use that as an argument against extending life, but I bring it up here just to make the financial point. Clearly 30% of recipients don’t pass away every year.

I can’t find any hard dollar figures past the mid-1990s for that end-of-life spending, but judging by my own and others’ recent hospital bills, I would consider $200,000 to be a very realistic number. If you work for 40 years, that means you’d have to save $5,000 a year net over your current health needs to build up enough to come out even. (I’m ignoring both interest on the contributions and medical cost inflation. Just making a point here.)

Of course, for the vast number who can’t pay in that much, someone else has to make up the difference.

There is no simple solution, but first we have to realize that our “insurance” is that in name only. It only works when each participant pays in as much as he or she is going to get back out.

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5 Responses to Why Health Insurance Isn’t

  1. Jim Marshall says:

    I had a great uncle who practiced medicine from the turn of the century until the mid 20th century. In the last chapter of his book “Doctor Do Tell” dealing mostly with his experience delivering medical care to the people of rural Wisconsin……he warned of the evils of “socialized medicine”. Much has changed since the time he practiced….including the willingness of health care providers to be “paid in pickles”. The evils of non “socialized medicine” have become crystal and painfully clear.
    The present health care system based on the idea that competition brings about the best result is a failure if for no other reason that there is and will not be true competition. Nationalized health care can minimize system costs….if design and operation remained focused on the goal of efficient, results oriented care measured by and paying for results. A single payer system that assures and pays for results oriented care (as opposed to pay per procedure) is probably the only way that a nation can bring about maximum care per dollar expended. The only logical single payer is government. If a clear goal (as mentioned above) was the standard to which any plan was held….much better product (our health care) could be brought about for all.

  2. Jim Marshall says:

    I neglected to mention his book was written in 1945.

  3. David Basri says:

    Except that not everyone is going to use all they did (or should have) put in. My mother will turn 99 early next year. She is in an assisted living center that costs thousands monthly, but uses just a small fraction of the services the price is meant to cover. This is good thing. Others use much, much more than they ever did (or could have) put in.

    The only solution is something based on the underlying concept of insurance. Many put in
    X and a fewer number take out Y. Even in countries where there is universal government provided healthcare, the concept is the same with taxes substituted for the bulk of premiums.

    The problem in the US is that the insurance paradigm is private and discretionary. Not everyone has to pay in, so healthier lower cost people opt out at a disproportionately high rate. The insurance companies are profit driven, so left to their own they simply do not want to cover those who represent a higher risk.

    Average life span in the US is into the 70s. That means both individuals and companies have to think very long term to justify the equation. In a system where participation is discretionary, and the actuarial pool is private and focused on making shareholders and executives happy the following quarter, the actuarial numbers will not to add up.

    Human nature simply does not work well in multi-decade time frames. Only an external entity can make the health care actuarial equation work. The ACA is bending the curve, but it is a poor mishmash trying to influence an inherently unworkable model based on private insurance and discretionary participation.

  4. Mike Weaver says:

    I have always thought it strange that people expect routine doctor visits and long term prescription medications to be covered under a health insurance plan. When you buy car insurance your tires and oil changes are not covered are they?

  5. David Basri says:

    It is only strange if you try to equate health care with consumer goods. Same basic problem as trying to force market principles to “control” health care costs. It is not a market or a consumer good, and should not be.

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