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Sunday, April 8, 2012

The Myth of Health Insurance

By this time, the Supreme Court has decided the constitutionality of the Affordable Health Care Law, though we may not know what that is till summer. But whether the law stands or falls, whether the individual mandate that requires every person to have health insurance or pay a penalty or tax, whether Congress interpreted the Commerce Clause accurately or not, the fact is that the basic premise of the US health care system is flawed and the current fix is only temporary, little more than a Band-Aid and less use.

Numerous commentators have pointed out that the model that requires employers to provide health insurance to their workers is an outdated idea that greatly constrains the freedom and flexibility of the workforce on one hand while imposing a huge financial burden on the employer on the other, while providing less value for money spent than nearly any other comparably advanced nation and yet also leaving vast number of people without comprehensive medical coverage. The cost to the employer is uniquely American, and leaves local companies at a competitive disadvantage to companies in other advanced nations that do not have that cost on their books at all; the actual accuracy of that argument could be debated, but that's for another day and for now it is sufficient and accurate enough to agree that US companies pay for their employees' medical care unlike their competition in other countries.  There have been interesting discussions on the logic of taxing or not taxing the employee contribution and whether the employer contribution, usually much more than the individuals' should be treated as the individual's income or not. There is also vigorous debate about the need for pooled risk, shared costs and the wellness programs thrust upon the unwilling. But all these debates, while important ignore the fundamental flaw in the US health care model. This model is based on health insurance and we no longer are buying insurance.

Let me expand my thesis: insurance, in the succinct definition provided by Wikipedia, is is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.  Like any good definition, every word is important, none less than the terms "risk management" and "contingent uncertain loss". Let us for a moment hark back to the simpler times when health insurance was first introduced  - it was not intended to cover every dollar one spent on health care; in fact most doctor's fees and medicines were paid for out of pocket and insurance was meant to cover those catastrophic events that strike a small number of people, say an unexpected hospitalization just after one had raided the rainy day savings for a down payment on a house. Since only some people need to use their insurance, and since only a small number of people would tap into the insurance company at any given time, the basic insurance model worked. This model has been with us for several centuries now, dating back to the times of European explorer's of the New World and Africa, and the model has not changed fundamentally since then: the insured party pays a premium periodically that over time will exceed the amount the insurer would pay out in claims. Certainly the occasional untimely event might skew the ratio against the insurer, but in general we pay more than we collect. If we didn't, the business model would be unsustainable. When the insurer collects less than the insured amount, he still stays ahead by invoking the probabilities of  groups and pooled risk, meaning of course, that he still collects more from the group than he pays back to the group, even if a few individuals collect more than they pay in.

But when you consider the way health care and the way we pay for it has evolved over the last few decades in the US, it becomes obvious that the insurance model is no longer valid or sustainable. We now may all medical costs from our health insurance, with very few items covered out of our own funds. Not that we have much choice with the high, even ridiculously high cost of medical care, though again the value of medical care needs to be debated in full at some point, at another time and place. Combined with the increasing life span of the average person, and it rapidly becomes obvious that the insurance companies simply cannot fulfill their role anymore. But rather than admit that health insurance as we know it is a dead concept, they have ingeniously invented a vast array of means to stay ahead of the cost curve: rescission, preexisting conditions, gap in coverage, lifetime cap on expenses, false information on the clownishly impossible to understand forms - these are some of the tools and tricks used to deny insurance claims and ensure that they still collect more from the insured party than they pay out. The fact is, if insurance companies tried to fulfill the implied promise to their clients, they would be paying out much more than they collected.

Looking at it another way, the insurance model is based on the insured party probably not having a claim under their policy. How many times do you get into an auto accident? How often does your house burn down? How many times in a year do you get attacked by Martians? And there was a time when medical insurance worked the same way. Today however, it's a given that nearly every person will require expensive medical care, the kind that can be covered only by their insurance company; the small number who don't are those who sudden and quick, and for most part untimely early deaths. The rest of us will be tapping into that insurance pool without a doubt, clinging on to life till the money runs out. There is no management of risk left for the insurance company when the "uncertain contingent event" has become a certainty.

As I see it, the model we have is unsustainable. We may stretch it out a little longer, the insurance companies will find more imaginative ways to deny us our claims. But to be fair to the corporations, they are not people (with due apologies to the Supreme Court); they are in business solely to make a profit, not practice charity and compassion. And in the end, no matter how we slice and dice the question, insurance simply does not work if every insured party wants an unlimited coverage for an indefinite period of time, or will be cripplingly more expensive than anything we've imagined hitherto. Like it or not, the time for health insurance is past, and whatever the replacement, it must needs be based on a different mathematical model.