Health Insurance Is Not The Same As Healthcare

“Half the harm that is done in this world is due to people who want to feel important. They don't mean to do harm; but the harm does not interest them. Or they do not see it, or they justify it because they are absorbed in the endless struggle to think well of themselves.”  ― T.S. Eliot

For more years than I have been writing this, politicians have been ranting about the cost of healthcare and how to fix it. Unfortunately, the conversation does not center on healthcare, instead they keep talking about insurance. The reason is simple: Insurance is much easier to fix; just throw money at it. Healthcare itself is a complex mechanism with many moving parts. But fixing insurance does not change the underlying issues. In some cases it makes them worse.

 

People often talk about how healthcare was good, but not great, back in the 1960s; and it was affordable. Some doctors still made house calls. They yearn for the good old days. Along these lines, an interesting comparison occurred to me.

 

Back in 1960 a typical television looked like this.

Just over half the population owned a black & white tube television, and you were lucky if you could get five channels.  The TV had no remote, and there was no cable, so you needed an outside antenna or an inside antenna known as "Rabbit Ears".  In 1960 an RCA black & white 21 inch console TV cost $268, most people financed this for about $10 a month.

Today the equivalent of $268, adjusted for inflation is about $2400, and here is what you can buy for a little more than half that!

But the costs of medicine and the education moved in the opposite direction. Today we live longer and healthier due to medical advances, but the price has increased faster than inflation. The cost of becoming a medical professional has likewise soared.

One reason for both, ironically, is government interference: low cost insurance on one hand and student loans on the other. This greatly reduced competition. Make it easier for citizens to pay for something, and the people who sell it have no incentive to control costs.

 

The only way to control cost, any cost, is to focus on the reasons behind the high cost. Politicians are silent about these underlying reasons for soaring healthcare costs, and have made no plans to deal with them. The primary reasons for the high cost of healthcare are summarized below. (A thorough explanation was given back in the spring of 2012.) 

• Insurance Design:  Insurance companies separate the provider from the patient. 
• Innovation: New medical technology and treatments save lives but add cost. 
• Lack of open competition.
• Over-testing.
• Billing and coordination issues.
• Regulations and Restrictions: Rules vary from state to state. 
• Liability: The high cost of malpractice insurance affects all patients' bills.
• Lax eligibility rules and outright fraud.

Unless someone comes up with a plan and makes a serious effort to address these issues, all the insurance or Medicare-for-all schemes will not succeed. The alternative would be for the government to fix a price on everything and see how many drug companies continue to innovate, how many doctors stay in business and how many students chose to get a medical degree.

But politicians will continue to promise the easy non-solution to give the appearance that they care about fixing the problem.

Different Cultures, Different Rules

A story about an incident in 2006 is suddenly getting a lot of attention on social media. An American woman temporarily working in Iceland “went from feeling a lump in her breast to getting checked out and assured that it was benign in the space of a single day, and for $3.” She posted the story of her experience on Twitter.

This gets many people stirred up, asking: Why can’t we do this in the United States? Some politicians think we can and are promising changes, but the comparisons are not as straightforward as we’d like them to be.

Iceland is a small, island nation in the North Atlantic with a population of about 350,000. For comparison, the city of Minneapolis has a population about 425,000. The entire country is smaller than many American cities. 

But it’s not just a matter of scale. Taking it a step further, that population is very homogenous. About 91% of the residents of Iceland are Icelandic citizens and only 16% are foreign-born. Unlike the US, the population is concentrated. Ninety-nine percent live in urban areas and 60% live very close to the capital. Furthermore, about 72% belonged to the same religion, the state Evangelical Lutheran Church of Iceland.

Back to our comparison example – where Iceland has homogeneity, Minneapolis has diversity. Its population is approximately 64% white from various heritages, 19% African American, 10% Hispanic and 7% various other ethnicities. It is the home of more than 50 denominations and religions.

How important is this homogeneity in the smooth operation of a more socially oriented society? Denmark believes it is vital to maintain the order and necessary shared values. “Beginning at the age of 1, [mostly Muslim immigrant] ‘ghetto children’ must be separated from their ‘ghetto parents’ for 25 hours per week for mandatory instruction in so-called ‘Danish values,’ which includes learning about the language and the traditions of Christmas and Easter, The New York Times reported in July 2018.”

(Again for comparison Denmark is about 35% larger than Maryland in area with about 5% fewer people. These are much smaller countries whose people share a common background and history.)

But there is no free lunch and no $3 health service without a huge subsidy. Here is a simplified comparison to make the point.

After a $5,145 deduction, Icelanders pay 36.94% of income up to about $85,000 and 46.24% on income above that. On top of that is a value added tax (VAT) of 24% on most goods and services, but a few categories are subject to a reduced rate of 11% (e.g. food, hotels, newspapers, books, and utilities).

Everyone in Iceland pays at least at the same level as the highest tax bracket in the US, 36.94% compared to 37%. They don’t “soak the rich;” they take it from everyone. On the other hand, their corporate tax rate is among the lowest.

In Minneapolis a single taxpayer owes no more than 17% on the first $85,000 after a standard deduction of $12,200 and pays about 8% sales tax, but not on food. (Sales tax and VAT are not identical, but the economic burden of VAT falls on the final consumer.)

Using those numbers, a single taxpayer earning only $20,000 in the US pays $780, whereas for the same situation in Iceland the tax bill would be roughly $5,500. When the money is spent, it is taxed again at a rate up to 16% more.

On another point, access to doctors is slightly better. Iceland has a physician ratio of 3.62 doctors per 1000. In the US it’s 2.3 doctors per 1000.

These and many other considerations are ignored by those who want to make simplistic comparisons, comparisons that in reality are light-years away from apples to apples. It would be nice to have all the benefits and not have to make any of the sacrifices, not have to adapt to an entire new set of values and expectations, not have to live within a completely different culture. (The US cannot even agree to have one official language!) But there are no simple answers.

Flashback - Health Insurance

[My argument back in July 2011 was that people needed to better understand how health insurance works to keep from getting fooled by advertisers and politicians. Here is the entry in full.]

A flyer in the newspaper today reminded me how naïve 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 costs of the “free” brochure and of paying for all the people who work there and of other operating costs).  They also want to make a 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 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 installment plans offered by some electric and gas utilities. It is often a good budgeting tool to trade unknown payments for smooth, predictable ones, but you are hardly getting thousands of dollars 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 that is really a smokescreen to disguise redistribution.

[Note that two and a half years after this posted, Jonathan Gruber, a professor at MIT and an architect of Obamacare said publicly: "And basically, call it the stupidity of the American voter or whatever, but basically [an intentional lack of transparency] was really really critical to get for the thing to pass." According to Snopes, the video footage of his remarks was deleted from the Internet in an attempt to hide it.]

Medicare for All – Part 2

With all the campaign promises about Medicare for all, I took the opportunity about two months ago to explain how Medicare actually works. Politicians give the impression that it’s a totally free health insurance program. Just walk into the doctor’s office or emergency room, tell them your number, get fixed up and leave with no expectation of receiving a bill. 

Real Medicare today is not like that at all. Why would they spend time on TV and in mailings advertising supplemental insurance that “helps pay some of the health care costs that Original Medicare doesn't cover, like: Copayments, Coinsurance, Deductibles”? Those extra costs can only be avoided by paying money up front as a premium for the additional insurance.

From recent news, though, it’s clear that this misimpression is not the only problem. Medicare fraud is another big issue. Sometimes this is a critical thinking issue where patients are lured in as unwitting participants. Sometimes it goes deeper.

Late last month, thirty-five individuals associated with dozens of telemedicine companies and laboratories were charged with fraudulently billing Medicare more than $2.1 billion for expensive cancer genetic tests. Nine of the defendants are medical doctors. “In addition, the Centers for Medicare & Medicaid Services, Center for Program Integrity (CMS/CPI), announced…adverse administrative action against cancer genetic testing companies and medical professionals who submitted more than $1.7 billion in claims to the Medicare program.”

One of the defendants in this case, who cost taxpayers more than $1 billion in illegal Medicare reimbursements, “has been under near-constant federal scrutiny for the past five years and was supposed to have been deported more than a decade ago.” That was billions lost to fraud as a result of only one investigation, due in part to government inaction.

Meanwhile, the U.S. Department of Health and Human Services Office Inspector General has issued an alert to the public about other genetic testing schemes. Medicare eligible patients are offered a free genetic screening for undetected conditions, but the real motive is to get their Medicare information “for identity theft or fraudulent billing purposes.” The screenings are unnecessary and are usually denied by Medicare. When they are, the individual could be responsible for the entire cost of these useless tests, sometimes thousands of dollars. 

They get nothing but the promise of some new information about their health with the selling point that, as Medicare recipients, it may be free to them. This promise of something for nothing – free testing or free devices all paid for by Medicare – is used so often it’s beginning to sound stale, but it must be working.

Advice from the Inspector General is to not volunteer any information to these genetic testers, don’t stop at their booths at health conferences, ignore their ads, and return unopened any testing kits received in the mail.

Medicare fraud is a huge problem. The AARP reported in March of last year “roughly 10 cents of every dollar budgeted for the giant health insurance program is stolen or misdirected before it helps any enrollee. Looked at another way, about $1,000 is lost per Medicare member through theft or waste each year.” That estimate is based on government reports, but a leading expert from Harvard University believes the real number could be much higher, 20% or more.

AARP used the figure of $60 billion in fraud for the 2018 calculations cited above. Other sources show exactly the same estimate for 2015 and 2011. The number hasn’t changed in eight years. Apparently as fast as they can lock people up or put them out of business, more fraudsters spring up to take their place.

Would the general public as a whole be less likely to become victims of Medicare-for-All fraud schemes? That’s doubtful, and it leads to so much waste. 

Medicare For All?

People who are excited about the idea of “Medicare for all” obviously have as meager an understanding of Medicare as they do of Social Security. In fact Medicare is much more complicated than Social Security. It’s not a matter of walking into the doctor’s office, showing an ID card, receiving services and leaving without a bill.

When Medicare was passed in 1965, the government tried to follow a private insurance model. As a result they came up with two parts. Generally speaking, Part A covers hospitalization, and Part B covers regular visits to the doctor. But just like private insurance there are many details about what is covered and what is not.

In most cases Part A has no premium, but it does have a deductible of $1,364 for the first 60 days of Medicare-covered inpatient hospital care. Note that it’s the same for one day as it is for 60 days, so several short hospital stays can become quite expensive. From the 61^st through the 90^th day a $341 per day charge applies. 

The standard monthly premium for Medicare Part B enrollees is $135.50 for 2019. Some pay less and some pay more depending on an income scale. The annual deductible for all Medicare Part B beneficiaries is $185.

This government website gives more details of both parts, but it is clearly not free healthcare with the government picking up the tab.

But there is more. “With Part B coinsurance you typically pay 20% of the Medicare-approved cost of most services, after your deductible is met.” The bill comes from the provider showing the standard charge, Medicare reduces it to the Medicare-approved charge and pays 80%, then the remaining 20% is the patient's responsibility.

But there are also three classes of doctors. The 20% applies to participating doctors. “Non-participating doctors have not signed an agreement with Medicare and therefore might not ‘accept assignment’ for all of their services. A non-participating doctor may take the payment…for 80% of Medicare’s approved cost. But he or she can charge you 15% of the approved cost on top of the 20%.” Doctors who do not accept Medicare assignment can charge in full at the time of the visit.

Part D was added early in this century to cover prescription costs. It is a nightmare of private insurance options, premiums and differing formularies (a list of what drugs are and aren’t covered at different levels by each insurer). And what is available differs by location.

Because Medicare doesn’t cover everything, private companies sell supplemental insurance, sometimes called Medigap plans. There are 10 plans available in most states. “These plans are labeled Plan A, B, C, D, F, G, K, L, M and N, and each plan covers a different set of basic benefits.” How’s that for an additional headache?

Besides the complexity and added costs, two additional problems arise: reimbursement levels and funding.

The Medicare reimbursement to doctors and hospitals is typically lower than private health insurance and much lower than the actual billed rate. (One of my recent bills for a simple annual checkup came in at 60% of the billed rate.) This can discourage providers, who must cover their costs. This source, for example, is not as current as I’d like but “a Kaiser Family Foundation analysis found that 93 percent of non-pediatric primary care physicians were participating providers with Medicare in 2015, but only 72 percent were accepting new Medicare patients.” In addition, a recent change to a flat rate payment program may discourage doctors from accepting Medicare for more challenging medical conditions. Will it soon become difficult, even under the current system, to find a participating doctor? Will fewer young people be inclined to study medicine if the program is expanded, further squeezing doctors' ability to earn an adequate living? All the insurance in the world does not help if you can't find a doctor.

Finally, there is the problem of funding. The money taken from each paycheck (with a matching amount from the employer) pays 88% of the cost of Part A, but the Part A trust fund is projected to be depleted in 2026. This may result in the institution of premiums for Part A. Premiums paid for Part B contribute only 26% to the cost with the rest covered by general government tax revenue. “Medicare spending was 15 percent of total federal spending in 2018, and is projected to rise to 18 percent by 2029.” (This website has some excellent graphs showing current and projected costs with no change to the system, particularly in Figures 6 and 7.)

As it is today the system is complex, and anything but free. It has many of the drawbacks of private insurance systems including waiting months for the paperwork to arrive. Already, many wonder how the government can afford to keep it up. 

This rather long explanation only scratches the surface. “Medicare for all” is easy to promise, but extremely difficult to explain. And, as I wrote years ago, the only way to reduce the cost of healthcare is to address the cost directly in ways that introduce transparency and competition, not by making it easier to pay ever-increasing prices.

Opinions, Opinions…

It happened at the beginning of this week. James Holzhauer broke a 32-game winning streak on Jeopardy after winning nearly $2.5 million. 

Many people were puzzled and suspicious by his totally explainable final wager. Some thought he threw the game. Some neighbors agreed with and passed along an idea being circulated on Facebook that another win would move him into a higher tax bracket.

First, his wager in Final Jeopardy made perfect sense. Since he had not hit any of the Daily Doubles, he was unable to risk large amounts at a time, a tactic that led to insurmountable leads on previous shows. This was a bit of bad luck. His opponent was quick on the button, hit the Daily Doubles and managed to have a small lead going into the final question – 26,600 to 23,400. She only needed to risk enough to finish one dollar ahead of him in case he risked everything, which is what she did. He understood that his only chance to win was for her to get the answer wrong. If they both got it wrong, he needed to risk enough to still be ahead in case the third place contestant got it right and doubled his score of $11,000. That is exactly what he did – 23,400 minus his “conservative” wager of 1, 399 would have been 22,001. The amount he bet, conservative or not, was the best decision.

People who didn’t understand this jumped right to a subject they likewise don’t understand, tax brackets!

The US has a progressive income tax; the tax rate increases as the taxable amount increases. The tax rate on the first taxable dollar is the same for everyone whether you make one dollar or $2.5 million. The tax on the first $100,000 is exactly the same for everyone $13,874. That is about 14%. Anyone making another dollar pays 22% of that additional dollar. Anyone who makes $110,000, for example, pays the same as everyone else on the first $100,000 and then pays 22% on the additional $10,000. That’s how it works as the brackets change. The rate goes to 24% at $165,000, to 32% at $315,000. The highest bracket under the current system is 37% from $600,000 on up. (All examples are for the status of Married Filing Jointly.)

There is no bracket issue in the $2.5 million range. Taxes would be 37% for every additional dollar.

Note how this misunderstanding lets politicians get away with something that is not quite a lie, but is at least a misrepresentation. As the system works, if they lower the rate for the middle class, it lowers the rate for everyone who makes under $100,000, but it also lowers the rate on the first $100,000 for everyone else who makes more than that – even those evil rich people. Fiddling with the lower tax rates to help the middle class, helps everybody, the rich too. It can’t be helped. It’s how the system is set up! 

Now those same politicians have the power to change the system and make it work differently, but they don’t, they just propagandize.

But the biggest takeaway from the Jeopardy story is not the wager or the tax implications. The biggest take away is how inclined people are to form an opinion, defend that opinion, post it on line and spread the word on subjects they don’t understand and apparently are too lazy to do a little bit of research to find the truth. They are so confident that their opinions are right, because they have been constantly reinforced by others with the same degree of ignorance. Bad information spreads like the plague.

Everyone pretends to understand taxes, but they are too complicated for most people to do themselves, which allows politicians to demonize opponents and tax preparation companies to stay in business. But many other more important and complex subjects fall into this same category of confidently held opinions grounded in a woeful lack of understanding: Social Security, Medicare, the healthcare system, economics in general – such as minimum wage and the comparative virtues of socialism vs. capitalism, government spending and the National Debt and the proliferation of deceptive advertising and junk science.

Many Americans can’t even figure out Jeopardy wagers, yet on issues vital to their personal and to the national success they participate in protests and demonstrations, post nasty comments and cartoons on social media and go to the polls to vote for politicians who are often equally mistaken about how the world works.

Lower Tax Refunds, Not Bad News

Despite what CBS and others tell us, the report from the IRS that “tax refunds are about $170 lower than last year” is not bad news. The fact that “the average refund so far this year is $1,865, down from $2,035 in 2018” is only a timing issue. People who think otherwise are forgetting how income taxes work.

Employers are required to withhold taxes from each paycheck. These are sent to the federal and state governments. It is better to have them withhold a little more to avoid being hit with penalties and interest for not paying enough up front. But traditionally, taxpayers have jacked up their withholding on each paycheck to ensure a large refund. It makes up for lacking the discipline to voluntarily put aside a little each pay period. 

At the beginning of each year they experience what seems to be a windfall. But it’s not some gift from Uncle Sam; it’s really just a matter of getting their own money back after it has been withheld from them throughout the year. Withholding and the refund are not separate, unrelated pieces. They are each part of the whole. Changes in one lead to changes in the other, but the total paid in taxes is exactly the same whether you get it today or next March.

Getting a smaller refund leads some to believe that the tax cut was not real. (See the CBS piece for examples.) But they have only themselves to blame. “According to payroll processing firm ADP, only a small fraction of workers bothered to change their withholding” as the IRS urged them to do after their employers adjusted their withholding. They were happy to get more in their paychecks, but want to complain later about a smaller refund.

If they looked at total taxes paid, it would be obvious. When someone else files the tax forms and people only sign at the bottom, it’s so easy to ignore the total tax and only care about the size of the refund check. 

Then the news media stir things up by airing the complaints and making a big deal of it while only explaining the details in the last part of the report (if at all). And Bloomberg predicts that Democrats will intentionally promote this misunderstanding to their political advantage. 

As one expert told CBS, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul." The story is the same with taxes, tax refunds and other related issues, such as Social Security and Medicare. Many Americans don’t want to take the time to understand the details. They just want to complain. The frightening part about democracy is that someone who doesn't pay attention has the same number of votes as someone who does.

Critical Thinking and The Mail

Yesterday was my birthday, but I wasn’t born yesterday. Nor am I naïve enough to fall for all the advertising tricks that come my way. This must come as a disappointment to many companies. I got many examples in a single day last week when I picked up the snail mail.

First, let me repeat the assumption that a large percentage of the ads we see must be working to some extent. If consumers didn’t respond to the ads and buy the product, the company would either change their approach to advertising or go out of business. So let’s go to the mail.

The first envelope contains a typical auto insurance ad. It tells me I can save 15% or more on my insurance simply by switching to their company. (The number of discounts they can offer will make my head spin!) But didn’t I just receive a mailing the week before from another company telling me how much I would save with them? Theoretically, someone could keep switching back and forth between companies, saving with each switch, eventually paying almost nothing. That is certainly too good to be true. So this one gets recycled.

The next one is supposedly from my bank offering me a credit card with a 5.99% APR rate fixed for life. I don’t get too excited, because the fine print gives away some additional information. It’s not really from my bank; all my bank did was sell a mailing list with my name on it. The rate shown boldly at the top of the letter applies only to balance transfers during the first 3 months. After that it’s 15% to 24%. They are no doubt counting on the fact that people who already have a balance to transfer will also carry a balance with them and end up pay the higher rate (for life) – along with the possibility of some $37 late payment fees. This great deal follows the insurance offer into the recycling bin.

But wait – there’s more! This one according to the return address comes from “Your Local Office” in a city I am not familiar with. A gentleman working there is saving my free copy of the Medicare Guide. All I have to do is tear off the stub and mail it back telling my age, phone and email – so he can haunt me for the next year? No, thank you! (The actual name of the company is in the fine print at the bottom of the letter where I am informed that it is not affiliated with or endorsed by any government agency.) Out it goes.

Finally, the letter offering me wonderful, affordable health insurance joins the rest.

This is not the first time I have seen these or similar letters. So what could be the reason that these mailings continue? Someone must be responding. Perhaps it is the people who relieve stress by cow cuddling.

That’s right, for only $300 for a 90-minute session, the latest health trend, according to this source, is “snuggling up with a 1,000 lb farm animal to help with your mental health.” One farm in New York “has a program offering the ‘Horse & Cow Experience’ where individuals can spend time connecting with the large barnyard animals.” When it comes to mental health, paying $300 to spend time snuggling with a cow seems more diagnostic than therapeutic!

I wasn’t born yesterday, but based on the mail I receive and the latest health trend, yesterday must have seen a figurative baby boom. If we get drawn in by these, how will we ever start using critical thinking to solve real problems?

Scooters for All!

Here is another strong case for the plea:  “Don’t Ask Your Doctor.”  Earlier I pointed out what a delicate position doctors were in, caught between the advertisers and their best judgment, while being pressured by patients who only know what they saw on TV or read in a magazine.  The ask-your-doctor promotional ploy is specifically designed to put doctors into this position of disappointing or even potentially losing a patient whose expectations have been raised by promoters of particular drugs.  Remember, these are the same doctors who pay large sums for malpractice insurance because people are so sensitive about getting flawless care.  If the patient says that he wants a certain pill because he saw it advertised on TV, is it easier for the doctor to prescribe it, or to argue about its appropriateness?

Furthermore, the move to reduce the cost of prescriptions makes the pill less expensive and more desirable.  Then all we need is for the placebo effect to kick in, and the patient thinks the advertising was right and the pill helped, the doctor has avoided a difficult conversation about proper care for the problem, and the drug companies get richer.

A new twist, as this article points out, comes from the scooter industry.  They advertise on TV showing elderly people scooting around, happy and carefree on scooters that may be totally paid for by Medicare.  “Wow, a free scooter, and all I have to do is ask my doctor!”  The down-side should be easy to understand – “hundreds of millions of dollars in unnecessary spending by Medicare, which is only supposed to pay for scooters when seniors are unable to use a cane, walker or regular wheelchair” and the medical profession’s concerned that “seniors who use scooters unnecessarily can become sedentary, which can exacerbate obesity and other disorders.”  Of course it’s easier and more fun to use a free scooter than to walk off the weight or do the physical activity to stay healthy or regain more mobility.  It’s clearly a discipline issue, detrimental to the senior and costly to a healthcare system that can’t afford it.

Again, don’t ask your doctor about an advertised drug, with the preconceived expectation that it’s right for you.  Tell your doctor your symptoms and let your doctor discuss the options with you.  If you force your doctor into a corner you may end up spending more for pills you don’t need or a scooter you shouldn’t have, undermining your own health and driving up the cost of healthcare for everyone.  But as Medicare or insurance is forced to pick up the cost of more and more treatments, these quick-fix solutions are very tempting.

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.