Posted by Jason | Posted in Health Care | Posted on 08-12-2010
In my post on why Bill Maher is an idiot, one commenter left the following comment. I figured I’d put my response in another post since it may get lengthy.
I still struggle with the for-profit model when it comes to insurance providers being owned by stockholders instead of policyholders. Is the point of insurance not to spread the risk as widely as possible (i.e. single-payer would be optimal)? Is it not a problem that insurance providers would profit more by paying out less in claims, leaving those that pay premiums fighting their insurance company at the time they need them most? Is it not a problem that my voting to provide insurance claims (dollars) to my fellow policyholder would lead to reduced profits, yet I want the same level of coverage (claims) when I get in the same jam? How do I balance these to seemingly counter scenarios? Having a pool of people with a vested interest in the profits, yet removed from the claims side of the insurance equation seems like a problem to me. What am I missing?
Let’s take these comments one at a time.
1. “I still struggle with the for-profit model when it comes to insurance providers being owned by stockholders instead of policyholders.” Who cares who owns the insurance providers? It’s irrelevant. The only reason profits exist is because one person or company can deliver what someone is demanding at a lower cost than the person demanding it values the good or service at. This doesn’t change because it’s health care insurance. It’s profits that tell suppliers that consumers want more than what’s currently being supplied. Without profits, suppliers are blind to that fact and supply will suffer, which means consumer or in this case patients will suffer.
2. “Is the point of insurance not to spread the risk as widely as possible (i.e. single-payer would be optimal)?” The point of insurance is not to spread risk as widely as possible. The point of insurance is to insure yourself against unexpected risks, such as your house burning down. Everyone knows they will have to go to the doctor for the flu, cold, etc. These should not be insurable. Not everyone knows they’ll get cancer, so this is an unexpected risk, that should be insured. Part of the problem with health insurance is we are insuring daily maintenance of our bodies. How much would car insurance cost if you insured it to the point you could pay for oil changes and tires with your car insurance? Let’s not even get into all the government mandates that your insurance coverage cover all the garbage you don’t want or need.
To take this a step further and make the point more clear that insurance isn’t to spread the risk as widely as possible, the insurance companies could care less how big the pool is. They only care that they can cover the estimated claims and still make a profit. If the pool is only 10 people, they don’t care. The insurance company will calculate the likelihood of claims in any given year. Then they will figure out what the cost of those claims will average. Based on that, they will calculate what the insurance premium needs to be in order to pay for the claims. Insurance companies then collect premiums, and they invest them. This is one of the ways they make profits. Next they will figure out ways to reduce their cost of claims, say negotiating rates with service providers. This also increases their profits. The larger the profit is the more likely another insurance company will pop up hoping to get in on the action. This will end up driving down profits as the new company does many of the same actions for less premium, which benefits the policy holders. Unfortunately, the government has closed the markets so we don’t get competition. You can’t even buy insurance across state lines let alone world wide, because of the government. That’s just another example of how government drives up the cost of insurance.
3. Single payer is a disaster and is the opposite of optimal. Who is this single payer? Why it’s the gov’t. Did you even read the post? It explains why the gov’t is so inefficient and always delivers horrible results given the resources they employ. This doesn’t change because the product delivered is insurance. Has it never occurred to you that since the government has intervened more and more into health insurance and health care that it has continually gotten more expensive and less efficient?
4. “Is it not a problem that insurance providers would profit more by paying out less in claims, leaving those that pay premiums fighting their insurance company at the time they need them most?” Yes, insurance companies will profit more by paying out less in claims (not less claims, but less in cost of claims), as I stated above. They typically do this in beneficial ways though as some of the examples I listed above show. Insurance companies cannot change your policy while it’s in effect. If you are fighting with them, then you are fighting over something that isn’t included in the policy or has certain requirements that weren’t met. I’m not saying that companies never lie or try to get away without paying rightful claims, but it isn’t good for business to do so. If they did this, it would end up driving customers away to a competitor who doesn’t deny rightful claims. Now, you have to look at it from the insurance company who is providing insurance based on expected risks, as I stated above, and they are constantly be forced to cover things that weren’t originally covered when our wise overlords tell them they have to. Because of this, health insurance is renewable every year. Does it have to be this way or is it a result of regulation and government interference? Is life insurance that way? No, I setup a term even to the point of covering my whole life without premiums ever changing. Couldn’t an insurance company offer a life long plan to policy holders that cover a long list of medical risks? Of course they could in a free market, but unfortunately this isn’t a free market. The government constantly changes the rules on them and forces them to cover things that weren’t initially in the policy.
Also, you can thank the government that the policies are so complicated that policy holders never read them nor could they understand them if they did. Then when they think something is covered, they find out it isn’t. If only they would have read the legalese on page 150 of their 200 page policy.
5. “How do I balance these to seemingly counter scenarios? Having a pool of people with a vested interest in the profits, yet removed from the claims side of the insurance equation seems like a problem to me. What am I missing?” What you are missing is there is nothing special about insurance that isn’t the same for any other good. How do you balance the counter scenarios of a pool of vested people interested in profits yet removed from the claims side of auto insurance, life insurance, or home insurance? Insurance operates all the same, except the government has heavily involved itself in health insurance and policy holders want maintenance covered for their bodies but not for their auto or home insurance. You may want to look at my post from last year on the root causes of the health care crisis. Also check out my proposed solutions, part 1 and part 2.