February 13, 2012

INSURE AGAINST DISASTER, PAY FOR WANTS OUT OF POCKET, SAVE FOR THE END GAME:

Confusing Health Insurance with Health Care Is Bankrupting Us (Dean Zarras, 2/12/12, Forbes)

Until this country stops confusing health insurance with health care, we're on a road to certain national bankruptcy.   Indeed, many would argue we're already there.

To see why, it's instructive to review what insurance actually is, mathematically.  The entire premise centers around the estimation of risk to an individual and spreading that risk amongst a larger pool.   With this at the root of a business plan, funding an insurance plan is a conceptually simple exercise:      Estimate the total annual expenses for the insured pool, divide that number by the size of the pool, let's call that "N", and then charge each person in the pool some amount more than N.

Note that I said "conceptually simple" on purpose.  Obviously the actuarial studies that underly the above are often fraught with uncertainty.   Insurance companies compensate for this uncertainty by charging higher premiums.

Given the above, any individual's insurance cost then is a direct function of the expenses incurred by the total group.   If everyone wants to insure themselves against some low probability medical and financial catastrophe,  the annual cost might be very reasonable when spread around the pool.  Say one person in a million is going to get hit with a $1 million dollar catastrophe.   If a million people join a pool to insure themselves against that unlucky lottery ticket, the theoretical break-even cost to the insurer (ignoring their own operational expenses) is a mere $1 per person.  At $5 a person, each person gladly signs up, and even in a statistically unusual year, the insurer likely stays in business to be able to meet the $1 million claim or claims that come in.

All of the above cost savings to the individual (spending $5 to get $1 million of coverage) go out the window when we start try to "insure" ourselves against things that are guaranteed to happen to most people.  [...]

Indeed, because human wants are unlimited, the definition of "human care" is unlimited, too.  As wonderful as it sounds, society simply can't afford "unlimited" and will tear itself apart trying to do so.   But we can afford reasonable risk management: insuring against the truly catastrophic, low-probability events that hopefully never afflict us.

Fortunately, there is a solution to the above, but it flies in the face of big government, the proponents of which are all too close to a permanent voting majority:  Health Savings Accounts.   Only Health Savings Accounts separate the costs of health care from the costs of health insurance and address both issues independently. 

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Posted by at February 13, 2012 6:26 AM
  

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