Saturday, 18 January, 2003

The Fallacy of Affordable Health Insurance

The idea behind insurance is simple.  A group of people agree to pool their funds to protect individuals in the group from financial ruin in the case of a catastrophic loss.  The group's premium payments are invested, ideally at a profit, and any excess funds over what is reserved for future losses is paid back to the group members (in the case of a mutual insurance company), or distributed to the company's stock holders.  This works quite well in many situations because catastrophic losses are relatively rare.  Life insurance works slightly differently in that everybody dies at some point.  Insurance companies use well-researched statistics to project the insured's life expectancy and then structure a payment plan so that the insured's premiums, when invested at a reasonable rate, will return more than the policy's face value before the insured person dies.  The reason you buy life insurance isn't to insure that your estate will have $100,000 (or whatever sum) when you die at age 80, but rather that if you kick the bucket in your 50's, your dependents will have something to fall back on.  If you could guarantee that you'd live to be 80, there would be no need for life insurance.  No, you can do much better by investing the money yourself.

One other thing.  Insurers base the price of the premiums (what individuals must pay) on two things:  the computed probability of a loss, and the cost to fund the loss should it happen.  That is, a 22-year-old with a drunk driving conviction and an $80,000 Porsche will pay a higher premium than a 40-year-old mother of three with a minivan and a clean driving record.

Okay, that's how insurance works.  So what's my point?

My point is that "health insurance" as we've come to know it can't possibly work.  It's a huge Ponzi scheme that at some time has to crumble in on itself.  Remember, insurance works by spreading the cost of infrequent catastrophic losses over a large group of individuals.  Critical care insurance can work in this way.  But you can't fund day-to-day health care, which is what today's "health insurance" has become, using any kind of insurance scheme.  The theory is that younger members of the group, who are supposedly in better health and need less medical care, help subsidize the payment of care for older members of the group.  This all works fine as long as health care costs remain relatively fixed.  But several things happen:  better and more expensive medical technology (tests, treatments, drugs) becomes available, younger members insist on more coverage (lower deductibles, lower co-payments, wider coverage of services), life expectancies get longer, and an increased scrutiny by an ever more litigious society requires that every possible test be run in every possible circumstance.  Oh, and insurance companies don't have free reign to adjust their premiums based on an individual's health history, age, or habits.  (Yes, smokers pay the same premiums as non-smokers.)  Prices increase, soar, and then skyrocket.

Until relatively recently, employers have been picking up most of the increasing costs of health care "insurance."  But employers are starting to realize that they can't continue to pay the ever-increasing premiums, and they're expecting employees to pay a little more out of their own pockets.  This will work for a short while, but individual employees won't be able to afford it for long.  At some point, government will step in and take over the whole health insurance Ponzi scheme.  But even the Federal government has finite resources, which soon will be overwhelmed by the cost of everybody insisting on the absolute best possible care right now.

Do I have an answer?  Of course I do.  Scale back expectations, insist that people take responsibility for their own health (that is, eat right, exercise, cease self-destructive behaviors), shoulder the costs of your own day-to-day medical care, and use insurance as it's intended—to cover catastrophic losses like broken legs and serious diseases.  It's a workable plan, in theory.  Sadly, it requires more restraint and personal responsibility than most people today can manage.