Universal Health Care P3 (health insurance)

In the last post we looked at how life insurance helps us mitigate risk.  Let's take a look at health insurance.

Health insurance works in a similar way.  We have premiums that we pay the insurance company to get the insurance and then depending on the terms of the insurance we either split the bill with the insurance company (coinsurance) up to a certain amount (out-of-pocket maximum), make a fixed payment per visit/service (co-pay), or pay the whole bill till we've payed a certain amount (deductible).  Your co-pay may also go toward the deductible.

Here's an example.  Bob goes to the doctor.  The doctor charges $200 dollars for the visit.  Bob's co-pay for doctor visits is $20, so he pays $20 and the insurance company picks up the rest.  The doctor tells Bob that he needs surgery, so they schedule it.  The surgeon charges $4000 for the surgery and the hospital charges $2000 for his recovery, a real bargain (I'm simply making these numbers up for illustration sake).  Bob's deductible is $500 and after that he pays 20% up to $2000 for a given year. So breaking out the calculator, the entire bill from the surgery was $7000, Bob pays the first $500, then he pays 20% of what's left ($6500) which is $1300.  So with this doctor appointment and surgery, Bob has payed a total of $1820, bringing him $180 shy of his maximum out-of-pocket.  So he only needs to spend $180 dollars more until everything will be covered by the insurance company.

If you were Bob what would you do?  If you had any medical expenses already planned, of course you'd proceed with them.  If there was anything you were on the fence about, you'd probably go ahead with those too.  After you'd reached the limit, might you be less price sensitive?  It would be completely logical if you were.  This essentially distorts the price signal.  This is the problem with using insurance to pay for things that should be handled as regular transactions.  Even with paying 20% there's a price distortion. 

Remember, insurance is a tool to help us manage risk.  What if we purchased all our groceries with insurance?  You had some deductible and then some maximum out-of-pocket.  When you reached your maximum out-of-pocket, what would you do?  Oh yeah, it would be steak and lobster every night!  Your price sensitivity would be greatly reduced and it would affect your choices in food.  Suppose a bunch of people reached the max out-of-pocket and were buying up the steak and lobster.  What do you think would happen to the price of steak and lobster?  Those people buying steak and lobster aren't directly paying for it, but someone is.  What does the insurance company do to cover the increased cost?  The money doesn't come from the Tooth Fairy or Santa Claus (thanks Dr. Williams), they have to adjust the different costs of the insurance.  What's the up shot of all of this?  When insurance isn't used to manage risk but part of regular transactions, things don't "work right" in the market.  Would you be surprised if food and food insurance cost a lot more or if you couldn't even purchase some things at the store because demand completely outpaces the supply?

This is part of the problem with our health care system.  Health insurance definitely has a place in our system because of the catastrophic things that can happen to us, but I think eliminating it from the day to day medical interactions would help a lot.  We definitely DON'T need MORE insurance in the form of government insurance where everything is covered.  Worse would be "free" health care for everyone because it isn't really free.  The money has to come from somewhere and you'll have the problems outlined above.

Universal Health Care P2 (risk and insurance)

We talked about some of the costs of health care in my previous post. But there are still more. Some of them are related to insurance so maybe we should take another look at what insurance really is.

In life there are risks. Everyday you take many risks, calculated ones and impulsive ones. Sometimes the risk is part of making a decision and sometimes the risk is part of just being alive. Some risks are so large that if things go wrong you could end up with a disaster on your hands. Insurance is a financial tool used to manage risk.

Let's take life insurance as an example. I have a small family. My wife stays home to take care of the kids. We rely on the income I bring home to sustain our family. If I died, apart from emotional concerns, my wife would have a problem. How would she obtain the money necessary to support our family? She could go to work, but then someone else would have to take care of the kids. She could try to find work that would allow her to stay home; that might be hard. She could turn to relatives or friends for help. She might even turn to the government and go onto welfare. Personally, I don't like any of those solutions. That's where life insurance comes in. There is some risk that someday, before our kids are grown, I may kick the bucket. For that reason we purchase 8-10 times my salary in life insurance so that if I die, my wife can invest the money and live off the interest. We pay some money now hoping that we'll never need the insurance, but the colossal risk has been managed (and term life insurance is relatively cheap).

How does this work from the insurance company's point of view? I've shifted the risk to them, they assume the risk of me checking out early, and then spread that risk out over lots of other people that also sign up for life insurance. The idea is the company needs to take in more money than they pay out in benefits when people die. So they set the premium (what I pay) to some level that they calculated will keep them from losing money.  There's a lot of information that goes into that calculation and for the insurance company to be viable they have to be good at it.  I don't want them to lose money. If they lose money long enough they'll go out of business and my insurance won't be effective anymore.  I want them to stay in business.

In summary I've transferred the risk of a catastrophe and by spreading that risk over lots of people the insurance company makes money. "That's all well and good" you say. "But what about the person that can't get insurance?" Someone that can't get insurance needs to make a different plan. They need to work toward being self-insured. They should make their decisions in life through the prism of the risk they're taking. Say my twin couldn't get insurance and did die, leaving a family...they would need to make those hard decisions about finding work versus staying with the kids. Hopefully they prepared in a way to make it less of a disaster.

But before all that I would ask why can't they get insurance? Did they procrastinate getting insurance until it was too late? Do they have an occupation or play a sport that makes them uninsurable? Is it because they say they can't afford it? Given the risk of not insuring shouldn't you work out a way to afford it? Do you need to live cheaper? Do you need to get your income up? I believe there is a lot we can do for ourselves before looking for a solution from someone else.  But they should also be free to say, "We want to take the risk ourselves.  We're not going to buy insurance."

In part three we'll look at health insurance.