When I talk about economic understanding, I mean the ability
to trace large economic or business decisions back to how they affect you and me
as individual consumers and taxpayers.
There is no free lunch, no magic money tree; every time money is spent,
it comes out of someone’s wallet.
This understanding seems especially difficult when it comes
to insurance. People are led to believe
that they can pay small insurance premiums and receive larger returns. AARP advertises that their Medicare
supplement insurance “could save you thousands of out-of-pocket costs.” How likely is that to happen when every
insurance company must collect in total more than they pay out just to be able
to pay their employees, to buy their office equipment, and to pay their rent
and utility bills? If their average
customer saved thousands, where does that money come from? Sales pitches like that drive the
misunderstanding.
To add to the confusion we are led to believe that insurance
availability is synonymous with healthcare availability, that insurance quality
and affordability are synonymous with healthcare quality and
affordability. When it doesn’t work out
that way, politicians and the press join in mutual head scratching.
So when someone comes up with the idea of adding individual
choice to healthcare and health insurance, on first blush it sounds like a good
idea. Why would a man or elderly woman
want to pay for pregnancy coverage?
Could I sign a contract with my doctor promising not to sue in return
for a lower bill? These and other
similar programs could keep my premiums lower and really save me
thousands. Unfortunately the law will
not allow this nor would it work in the insurance business because of a concept
called adverse selection.
“Adverse selection occurs when a product or service is
selected by only a certain group of people who offer the worst return for the
company.” As a simple example, I had a
work colleague whose wife became pregnant late in the year, just at the time
when everyone at the company was selecting coverage for the following
year. He said that he was dropping the lower-cost
high deductible plan and was willing to pay the higher premiums for the next
year because of the anticipated expenses.
The next year he intended to switch back – good for him, bad for the
insurance carrier. If many people take
similar actions, the insurance company must raise premiums or go out of
business. Likewise, if healthy people
are allowed to go without insurance and pay their own doctor bills, insurers
would not be able to collect premiums from them.
Since the insurance companies simply cannot afford to pay out more than
they collect on a regular basis, there must be enough people paying in more
than they are getting out to support the company’s expenses. Forget about those exorbitant profits for
“big insurance”; this is true even for a non-profit company.
For a long time companies would not insure people with
pre-existing conditions. Why? It was their way to limit the pool of
customers who were collecting more than they were paying. As they are forced to accept them as
customers, the increased cost is spread over all their customers. The insurers can no longer weasel out of
paying, but we don’t want them to go out of business either – or no one would
be covered.
This is the situation we find ourselves in. Because everyone is required to have
insurance, overall health is a public concern.
Everyone’s health is everybody else’s business. Those who don’t try to take care of
themselves are a financial burden on the rest who are forced to subsidize
them. This is neither good nor bad; it
just is the way things are. People need
healthcare, and people get healthcare, but the money doesn’t grow on trees –
even if it comes from government subsidies.
We need economic understanding about insurance to see what is happening
and to anticipate the benefits and ramifications of future proposals.
The next time you hear those ads for term life insurance
that assure you that no physical exam or health questionnaire is necessary,
think about what that means in terms of costs. Such a deal will be especially attractive to
those who want to avoid a physical exam.
As a healthy person with an average life expectancy, you would be
required to subsidize them through your higher premiums. You can likely find a cheaper policy to protect
you from an unforeseen tragedy, if it is one that protects the company against
adverse selection by asking about your health first. That’s the way it works.
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