Friday, July 29, 2011
Economic Understanding and Health Insurance
A flyer in the newspaper today reminded me how naive consumers are about understanding the economic process, business and insurance, or at least how naïve advertisers think we are.
An ad from AARP promoting their Medicare supplemental insurance plan states that Medicare pays only about 80% of Part B (non-hospital) expenses and the other 20% is up to you. (True.) Right below is the statement that a supplemental insurance plan could save you up to thousands of dollars in out of pocket costs. That looks like a great deal, but where do those thousands of dollars come from, the AARP magic money tree? Perhaps the insurance company, out of the goodness of its heart, is going to make up the difference – of course not.
The insurance company is going to collect premiums from everyone. (Since premiums are not out of pocket costs in insurance language, maybe they are ignored when counting up the thousands in savings.) The first thing the insurance company must do if it intends to stay in business is to pay its expenses (including the cost of the “free” brochure the ad offers to send you). They also want a little left over for profit. So already the total amount paid by everyone must be more than the total amount paid back to everyone (or to their doctor). There will be winners and losers. The (financial) winners will be the people with high medical expenses for doctor visits, tests, etc. The losers will be the healthy ones. This may fluctuate, so in some years you come out ahead and in other years you may be a part of the healthy bunch subsidizing the sickies – paying more in premiums than you receive in return. Except for people who are chronically ill, this amounts to little more than a smooth-monthly-payment program similar to the one your electric company may offer. (Actually, it’s a little worse, because you are paying in even installments the same amount you would pay plus those insurance company expenses.) It is often a good budgeting tool to trade unknown payments for smooth, predictable payments, but you are hardly getting something for nothing as the flyer suggests.
This is a common tactic. It implies that the money is coming from somewhere else - but there is no money except our money. Companies and governments handle it, allocate it, and sometimes waste it, but their only source is to get it from us. Americans must listen to advertisers, news media and politicians with this always in mind to avoid getting tricked by this common something-for-nothing sales pitch.