Friday, September 11, 2009

Insurance's Dirty Little Secret (It's gambling...)

I find it really fascinating that most people really don't understand the nature of insurance. Most people just think they pay premiums and get free stuff if bad things happen. Kinda neat a cuddly, don't you think?

Insurance is really just gambling. It really doesn't matter what type of insurance, it's still just gambling. You are making a wager that your expenses will be higher then your premiums. You are also betting that you don't have the discipline to save the money needed to cover rainy days. The last part of the bet, is probably a sure thing for most people, but it always strikes me as odd that people just don't think about it this way.

Over the course of your lifetime, you pay premiums for all kinds of insurance. Car, health, home owners, travel, extended warranties. Why do you do it? I think most people do it out of fear.

What if the bad thing happens? I'll be screwed!
Maybe. Maybe not, but it makes you feel better knowing if it does, you win the bet.

Most consumers have become better shoppers when it comes to extended warranties. These are really nothing more then a wager on the quality of the item you bought. You are betting the price of the extended warranty that the item will break at an expense higher then what you paid for the warranty. Sometimes this is a stupid bet because the house is already offering a comp if it breaks under the normal warranty. You just made a bet you can't win.

Health insurance is no different then other insurances. A risk pool is everyone that pays into an insurance system. These people are making a wager that their expenses will be more then the sum of their premiums. Hopefully, by now, you are starting to see the problem. In order for insurance to work, the risk pool needs to take in more then the sum of the expenses paid by the policies associated with the risk pool. It really doesn't matter if this is private or public. This is just how it works.

I tweeted this morning about something that has always bothered me. The pundits are exposing statistics about the number of people that are not covered by health insurance. It is assumed that EVERYONE NEEDS health insurance. Like it's impossible to go through life without it. What these statistics don't tell you is that there are a number of people that chose not to play this game. The could have health insurance but chose not to buy it.

Why would people not buy it?

Let's say I'm 25 years old, a male, and rich. I'm rich enough to pay for most medical bills with cash out of my pocket. Why on earth would I pay good money for something that just a bad bet?

Sure, but what happens when he gets hit by a bus?

Good question. How many people actually get hit by a bus? What is the likelihood that a 25 year old male is gonna suffer a horribly expensive traumatic health incident? To the 25 year old, this looks to be a truly stupid way to spend their money. A bad bet.

Why do we care? The reason that most of us care is that if we added more people to the insurance system, it would lower the costs of premiums because we'd have more fish, um, I mean, more people whose premiums are higher then their expenses to our little ponzi, I mean, risk pool.

Fixing health care isn't just about forcing lower premiums. That's just stupid. The money to pay for health care has to come from somewhere. Adding laws that force insurance companies to take bad risks, people with preexisting conditions, is kind of a weird idea. You are telling the operators of the risk pool that they should add people that have a statistical likelihood to be a drain on the resources. A bad bet for the risk pool and the insurance company since their premiums will be far less then their expenses. Some of these people will not lead to higher expenses, but some will. Let's hope most are fish, damn it, I mean people that pay more then the spend.

What we, as a nation, need to figure out, is how we lower the cost of the entire industry. Health care is consuming a lot of our resources that we would like to use for other purposes. Insurance costs aren't the only problem. Turning the entire health care insurance into a government run risk pool isn't the answer either. We need to make hard decisions about what we spend our money on and what we get in return.

This country spends money on health care like crazy. Our poor, sit in emergency rooms for hours waiting to see a doctor to get asprin. They can't pay, so the rest of us do. Billions of dollars are spent doing amazing and heroic things to keep people alive. Costs be damned. DNR (Do not resuscitate) orders are ignored by people thinking they are doing the right thing, only to prolong the inevitable. Countless x-rays and tests are performed who's costs don't make it worth the information they get. The biggest problems we have are in the details.

Let's take a step back and look at this problem rationally. Premiums aren't too high because premiums are too high. Premiums are too high because expenses paid by risk pools are too high relative to their income and the value they recieve on that expense. This is a big problem and needs more then just a quick fix. It needs the right fix.


Rian said...

Great post Tim. It makes me nuts when people seem to think that health insurance equals unlimited care. And if you mandate that the entire country be the 'pool' you're punishing healthy people.

WeaselMomma said...

Wow, That was well written. Not that your other posts aren't'

The Microblogologist said...

Very well said, and I agree with your analogy. So many factors are driving up the cost of health care and those need to be dealt with before the problem can be really fixed. Nationalizing health care scares the crap out of me. People don't realize that the government does not give, it only takes. I hope we don't have to go through what the former soviet union did to prove once again that the nanny state thing does not work!

seashore subjects said...

Very true, but what we fail to see is that the majority of 25 yo males that then have a tragedy or trauma occur do not pay their bill. The hospital is screwed and so is the consumer because the price just continues to rise to cover these "write-offs" and though it may be a bad bet for many - there are plenty of young men and women using the ER as a doctor's office because they don't have the money to see a Dr. and they know the bill will just sit on their already questionable credit. Hmmmm. what to do about that?

Rian said...

I don't think 25-year-olds with unexpected medical bills are what has broken the system. People not questioning charges because insurance 'covers' it, and Medicare setting pay rates below going rates have more to do with it.

There's no give and take. If you break a window on your house, do you make an insurance claim? Not if your deductible is more than or close to the cost of the window, you just pay out of pocket and move on, because you know that will happen next year- your rates will go up because you made a claim.

I could even get behind national funding for a certain level of care...wound triage, immunizations, antibiotics...the real Red Cross basics...then create insurance coverage plans for over-and-above.

I also don't get the left claiming that 'Big Pharma' is behind the uproar. If suddenly 50 million more Americans have insurance, don't you think prescription usage will go UP? Even if they're forced to reduce prices, they'd make up for it in volume! They're the endorsed drug dealers of the USA!