I’m working on the second edition of my book on healthcare. One chapter is on the idea of insurance. Is insurance an investment or a gamble?
One of the profs in my MBA program talked about the difference between insurance, investing and gambling. He was making a point about our expectations.
A rational person does not go to a casino with the expectation of a positive outcome. My wife and I like to go and limit our losses to about twenty bucks each. Last night I won eighteen dollars very quickly. We left while we were ahead. Our experience is that eventually the casino wins. A rational gambler expects to lose money, a negative return.
Similarly, a rational person does not expect to make money from an insurance policy. Insurance covers risk of loss and pays to make you whole. The hope is that you will never need the insurance. You expect a negative return, like gambling.
If you do a good job of investing money, you expect a positive return. You expect to have more money because of the investment.
Before we go into insurance, I want to explain why insurance companies want more money to accept more risk. Again, one of the profs in the MBA gave a great example.
Imagine I put an eight foot two by four board on the ground and offer $1 to anyone who can walk the length of it without falling off. Everyone in the class might try it. Imagine I bring in two five-foot ladders and balance the same board between the ladders. Fewer people will try to walk the board between the ladders for $1. If I offer $100, I might get more takers. Now imagine the same board between two towers one hundred feet in the air. I might not get many takers for a million dollars. It is the same board. The risk changed.
That is the basic idea of paying people or companies to take risk. The higher the risk, the more we have to pay. Now we’ll look at insurance.
Insurance is protection by compensation for loss. Two things affect the premium. One is the risk of loss. If the risk is high, the premium should be high. If the risk is low, the premium should be lower. The second thing that affects premium is the amount of the loss itself. If the amount is high, the premium is high. If the amount is low, the premium should be lower.
Car insurance pays if you have an accident. If you drive recklessly, you will pay a higher premium. If you drive an expensive car, you will pay more to insure your car. Increased risk and increased loss are easy to understand.
The case is similar for homeowner’s insurance. You insure your home in case something bad happens to your house. Fire is the most common. Insurance doesn’t pay for you to paint your house every five years. It doesn’t pay for you to put a new roof on it. It may not even pay if you have a flood. If there is a fire, your insurance will pay.
Life insurance is really death insurance. It pays when the covered person dies. Insurance companies may require a physical exam to decide the risk of death and the resulting payout by the amount of insurance. A million-dollar policy for a person in poor health will cost a lot more than a one hundred-thousand-dollar policy for a person in good health.
What about health insurance? It used to cover risk of loss. It paid for medical care if you became ill or got hurt. It didn’t cover all risks, and it didn’t try to reduce risks. I remember talking with an agent when my wife and I were young. He explained that adding obstetrics care would cost more. We paid more to have pregnancy covered.
In an effort to sell more policies, insurance companies began covering things that were supposed to keep you healthy. A certain number of wellness massage visits, acupuncture, chiropractic, etc. were allowed every year. In addition, health club memberships were sometimes covered by insurance.
Where is the risk of loss? The Office of the Insurance Commissioner regulates insurance companies. Why did the Insurance Commissioner allow insurance companies to offer services for health promotion?
The reason is public demand. A former executive director of our Washington State Chiropractic Association told me that he met the president of a large insurance company at a social function. The director pulled the president aside and told him that chiropractic care could save his company a lot of money in treating their subscribers. His reply, “I don’t care what will save us money on the back end. I want to know what will sell policies on the front end.”
Allowing insurance companies to offer coverage for wellness care blurred the difference between what should be covered by insurance and what should not be covered. People thought it was a great idea that their insurance company wanted them to stay healthy. Costs continued to rise.
If we want the cost of health insurance to go down, we must go back to covering risk of loss for covered conditions. We must realize that health insurance does not pay for everything. It does cover certain treatments for covered conditions. Individuals should pay to stay healthy. Insurance premiums should be lower for those who live healthy lives. The risk is lowered.
What conditions insurance covers and what treatments are reimbursed should be a matter of science – not politics. However, the problem is that politicians have already rigged the system. Research funding goes primarily to allopathic medicine. The fix is in, and costs continue to rise, because health insurance is not about health or insurance. It is about getting your money.