Sonntag, Oktober 18, 2009

What is Fundamentally Wrong With Health Care Plans...

There is one thing fundamentally wrong with the current House and Senate Health Care Reform plans.

Both ignore market realities.

By market realities I mean how and why the markets function: supply and demand.

Insurance sellers offer coverage for health-related expenditures in return for a cash flow from their customers. The size of this cash flow is dependent on two things, and two things only:

1) Risk
2) Coverage

Tamper with either of these, and you destroy the business model of insurers: if they cannot charge for increased risks, they will have to absorb those costs, which, given the fact that the insurance companies are businesses, means that they will increase base rates to cover those costs.

The same is true for increasing what is covered and who is covered. There are people out there whose lifestyles are so risky that no one wants to provide them with coverage, since there is little or no likelihood that extreme costs cannot be avoided; there are coverages out there as well that provide services that have virtually nothing to do with health-related issues, but rather are for comfort or for having fun. My insurance, for instance, doesn't cover going to the spa for relaxation; if it did, I'd be paying extremely high insurance rates that would, in sum, exceed what I would pay if I paid for the spa trips myself.

Now, there are no ways around these points: these are the cold equations of the insurance industry. Insurance underwriters - those who put the capital up so that insurance companies have adequate reserves for covering very large expenditures when they become necessary - are putting their capital at risk and receive income for this; it's part of the cost of doing business as an insurance company. Old, established companies have usually built up their own capital reserves and while a goodly portion are invested in safe, long-term investment instruments, some of that money has to remain liquid, i.e. can be paid out rapidly when needed.

Obviously, the supply of such money is limited: hence the supply of insurance coverage is also not a free good, but one that carries a cost. You can adjust the cost by adjusting the coverage: if all you want is coverage against what is called catastrophic events - major operations or serious illnesses - and you are willing to pay for your day-to-day coverage out of pocket, then your insurance costs are going to be moderate, since the insurance companies are familiar with the statistical chances of such things happening to you. Of course, if you are a smoker, enjoy high-risk sports (or sports with high risk of injury), have an unhealthy life style (obese or, and no I'm going to anger people, are a male homosexual with frequent partner changes), or have a high-risk occupation, your risks are higher and as a result, your costs will be higher, as you are statistically a high risk.

The demand for insurance is inverse: everyone wants outstanding coverage, paid for by their employer, so that they have no out-of-pocket expenses for health care, allowing you to keep a lot of that hard-earned money. Further, those whose life styles are high risk don't want to carry the burden of those costs, since that is a real cost, as opposed to the theoretical costs of an accident or injury or illness; they want the general public to subsidize their life style risks so that they can actually enjoy them without having to pay the financial price. Further, as one ages, problems increase and are increasingly expensive to deal with; here we all want the coverage that prevents our children from having an inheritance, or, in the worst case, lead to an early death because we didn't pay for the increased coverage when we were young and it was too expensive when we were older.

Now, take a look here and here.

Understand that the first link shows the fundamental misunderstanding of politicians when dealing with the insurance business (oh, and by the by: this is also applicable to anyone offering insurance, even if it claims to be non-profit or "collective" or "public option", since the cold equations of the business do not change!).

The key point in both House and Senate plans is that pre-existing conditions are no longer to be considered when offering insurance: this means, given the above facts, that overall costs must increase if risks are no longer permitted to play a role in what insurance companies charge for coverage.

Unless, of course, you take a look at the second link and realize that what the government really wants to do is to change the definition of what risk is: this is nothing but the politicization of risk analysis for the health industry.

That way lies madness: no insurance company will be able to work on long-term risk financing, since these risks may well change every couple of years as medical fads come and go, and as administrations change. Further, and this is more fundamental, politicizing risks means that you create the mechanism for making politics, so to speak, risky: if you are in the wrong political party, you may end up paying for your political beliefs because of a hidden charge for being in the wrong party.

Am I being paranoid about this? No: all I am saying is that the mechanism for such abuse is being created. That cannot be denied: this is what is fundamentally wrong with the health care plans currently up in the House and the Senate.

So, we are facing, once again, government interference of the basest kind in the industry: instead of dealing with the fundamental problem of the insurance business - that there are those who would like to have insurance but literally cannot afford it, as opposed to those who want outstanding coverage but don't want to pay the price - by offering support to low-income earners in the form of insurance subsidies and a government willingness to pick up the tab for extreme cases - the Obama Administration, in its infinite wisdom and understanding, is instead directly intervening in the functioning of the insurance market in the belief that they can simply define how the market is to work (as opposed to understanding how the market actually works).

After all, that's worked so extremely well with mortgages, hasn't it?

The idea that the government is there to be used as an instrument of social experimentation and control will be the downfall of this great nation. It cannot be such and prosper.

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