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Pittsburgh Tribune-Review: “Insurance: Health vs. real”

In my column for the November 25th, 2009, edition of the Pittsburgh Tribune-Review I do my best to explain that what Americans today call “health insurance” is no such thing. My column is available in full beneath the fold.

Insurance: Health vs. real

The pop logic fueling the demand for health-care “reform” goes like this:

Health insurance is good;

Some Americans lack health insurance;

Therefore, government should make health insurance universally available.

Forget that the existing health-insurance coverage of about 90 percent of Americans is quite a respectable achievement for an industry allegedly so unresponsive that it must be radically overhauled by Washington. Ignore the flawed logic in the claim that no real or imagined shortcoming in the private sector is beyond government’s ability to correct. Disregard the dangers that attend concentrating more power in politicians and bureaucrats.

Ask only: Do we really want more of what Americans today call “health insurance”?

Real, genuine insurance protects people from unexpected financial losses. The definition found at Investorwords.com is typical: “Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss.”

Note especially the words “financial well-being” and “unexpected loss.”

Having to pay $100 for an unexpectedly worn automobile tire is unwelcome, but it doesn’t jeopardize any American’s financial well-being. Not so for having to pay $1,000,000 for unexpectedly crippling a pedestrian because of a moment of negligence while behind the wheel. Without liability insurance, most drivers who cause such injuries would suffer immense damage to their financial well-being.

There’s a second difference separating these two cases: A crippled pedestrian is much less likely to occur than is a worn tire.

All drivers routinely replace worn tires. Even if you’re surprised today to find that one of your tires is worn, you nevertheless knew that one day you’d have to replace that tire. It’s not a terribly shocking surprise.

In contrast, fortunately, only very few drivers ever cause serious injury to pedestrians. Each of us correctly expects never to do so.

Still, the chance that any driver will accidentally inflict such injury on others is high enough — and the financial burden of doing so is large enough — that we can’t ignore it. So we buy liability insurance against these low-probability catastrophic events.

Insurance companies can profitably offer such insurance at affordable prices chiefly because, by insuring large numbers of drivers, these companies use the laws of probability to determine with great accuracy the amount of money they’ll have to pay out annually in claims.

And because each driver’s chances of filing such a claim are low, the premium that each driver is charged for the insurance is low enough to make the insurance affordable to the driver, yet profitable to the insurer.

What is a huge uncertainty for each driver is transformed, by insurance companies, into an affordable, insurable risk.

This transformation of costly uncertainties into affordable, insurable risks is not what happens in today’s so-called “health-insurance” market.

With low deductibles and copayments, today’s “health insurance” is more of a health-care reimbursement plan.

Of course our insurance covers us financially against big-ticket, low-probability medical procedures such as cardiovascular surgery. But this insurance is used mostly to help pay for small-ticket items that nearly all of us buy routinely.

Got a sinus problem? Your health-insurance helps you pay for prescription nasal spray. Pregnant? Insurance covers much of the cost of your physician, hospital stay and medications. Your children need their teeth cleaned? Dental insurance will pick up much of the tab.

This coverage isn’t insurance. Each of these medical conditions is quite likely and predictable. And their costs are not so high as to threaten most Americans’ financial well-being. (Even the cost of prenatal care and birthing in a hospital is affordable, as it’s a small fraction of the total amount of money that parents spend on children over a lifetime. And because pregnancy is under parents’ control, they can plan their savings to cover medical expenses associated with it.)

If automobile care were supplied like health care, each of us — directly or through our employers — would pay premiums to auto insurers. Every time we change our oil, we’d pay out of our own pockets small copayments — say, $5 — with our insurers reimbursing Jiffy Lube or Pep Boys for the rest of the bills.

Ditto for tire replacements, front-end alignments and fixing bent fenders.

Because insurers must cover their expenses, alignments and oil changes wouldn’t really cost us only $5 each. We’d each pony up the full price for these procedures in the form of insurance-premium payments. As the guy in the old Fram oil filter TV commercials said: “You can pay me now or pay me later.”

The problem is that paying “later” — in the form of premiums — relieves each of us of the necessity of carefully weighing the full cost of each treatment against its potential benefits. Is that runny nose really worth a trip to the doctor’s office? By having to pay only very little out of pocket to the physician, you’re more likely to visit the M.D. You thereby tie up her time that might have been better used to treat someone suffering from a more serious ailment.

When multiplied over tens of millions of health-care consumers, the cost of this failure to ensure that medical resources are used as efficiently as possible is immense. And this high cost is reflected in rising health-insurance premiums.

Real insurance protects us from financial catastrophe without causing us to overuse resources. Today’s health-care “insurance” protects us from financial consequences — which is an important reason why health-care costs are so high.