You walk up to a table in a casino in Las Vegas. The dealer explains up front that the house has its percentage, and the game is rigged so that most people will lose, and lose big. You step away from the table, only to find two very large gentlemen who are very insistent that you play the game. In fact, they will become most unpleasant if you continue to refuse to play, intimating all kinds of unfortunate consequences unless you bet now. They even go so far as to tell you how much to bet, and what to bet on.
What does this have to do with health insurance?
Insurance of any kind is a con game where you are forced to bet against yourself, knowing that you are going to lose money. Las Vegas never had it so good!
It’s like this: for an insurance company to make a profit, it must take in more money than it puts out. For this to happen, on average each customer must pay more for his policy than he gets back in benefits. All the talk of 'cost sharing' and 'spreading the risk' is a smoke screen; the bottom line is that when we buy insurance, we pay more than we get back.
So why do we do it? Because most of us get our insurance through work, and we don't see just how much we are actually paying. We think we are getting more than we are paying, when the opposite is true. Take a look at your next pay stub, and see how much you are paying for health insurance. Now multiply by 4, and you'll get your employers contribution. Add the two together and multiply by 26 to get your annual health insurance bill.
Staggering isn't it? On average, employers pay 80% of the cost of your health insurance. Just ask a laid off worker how much his COBRA coverage costs.
I pay $56.50 bi weekly. My employer pays another $250 biweekly for a total annual cost of roughly $8000. Do I spend that much on an annual basis? Heck no! And I’m raising 6 kids. Now, financial advisors will tell us that we will recoup our costs when we get older, since we will be spending more on health care by then. Of course, most of us will no longer be on private insurance by then; we will have retired, and be on Medicare. Our excess payments will remain with the insurance company, to be paid out on somebody else’s claim. But even if we were still on private insurance, if the average man gets all of his money back, the insurance companies would go broke. Remember what I said at the start; if the insurance companies want to survive, then on average they must pay out less than they take in.
I've seen some of their buildings, and their balance sheets. They aren't going broke.
In order for the system to work, those who claim in excess of what they pay in must be outnumbered by those who claim less than what they pay in, which means that for the majority of the people, they will pay in more than they get back. In Vegas, this is called a sucker bet, and the house loves gamblers who take it. Additionally, insurance companies set their premiums based on total claims over the past year, adjusting the rates to ensure a slight profit. In Vegas, it’s called the house’s edge, and it is what pays for all those multi million dollar casinos and resorts.
Now here’s where it really gets fun, and where Bugsy Seigel could have learned a thing or two. In same cases, insurance is mandatory, either through law or necessity. For example, in most states, you must carry auto insurance in order to drive legally. Insurance companies, and the lawyers that follow them like hyenas have lobbied for and won legislation forcing you to take the wrong end of a sucker bet. Auto insurance isn’t quite as bad as health insurance, because there is no employer to hide the cost, which keeps it somewhat in check. But, because it is mandatory, market forces are limited, and in every state where auto insurance became mandatory, rates rose by as much as 200%.
In the case of health insurance, the necessity is a little subtler. Insurance companies routinely negotiate discounts for services rendered to patients on their plan. These discounts are often at or below the doctor’s costs. How does he make up the difference, so he can feed his family? He raises the price for non-insured patients. Check out your last insurance claim report. Check the difference between what the doctor charged, and what the insurance covered. The difference can be staggering. I know of one gentleman whose daughter stayed in the hospital overnight. The hospital bill was roughly $6000. The insurance company paid $700.
The worst part is that it is all unnecessary. If my employer paid me the $500 he pays for my insurance, I know I could invest it for a higher return than any private insurance company. I don’t have the overhead of adjustors, secretaries, boards of directors, advertising, and so on to cover. 100% that money could be dedicated towards creating a medical savings account, covering my health care far more effectively than an insurance company could. Of course, it would throw a lot of insurance company employees out of work, but we need to get rid of the parasites before they suck us dry.
Now, I know what you’re thinking: What about the people who won’t save their money? What do we do about them? Let them suffer?
Yes. Why shouldn’t people face the consequences of their actions?
What about those who don’t make enough money to save for medical care?
Medical care can be provided as part of a safety net designed to help those who can’t help themselves, but it should be need based, and repaid through money, time, or service. Staff these public clinics with doctors, who can serve in lieu of paying off student loans. Patients pay once they are back on their feet, either with cash, volunteer hours, or, if they have a business, through services. But that is another post for another time.
If my employer paid me the $500 he pays for my insurance, I know I could invest it for a higher return than any private insurance company.
Employers know that not all employees will take the insurance. For instance, we have insurance through my wife's company. So, my company gets off cheaper with me. The odds are 50/50 that a married employee even needs insurance.
Posted by: SayUncle on December 20, 2002 1:56 PMGreat points, but if my employer gave me the $500 it pays for my insurance...I would probably just go to Vegas and give it to the large guys in the casino. Then I would really be in trouble the next time I choke on a quarter.
Posted by: Brehd on December 20, 2002 9:38 PMI tried to sign up for an MSA account about 5 years ago. It was very hard to find anyone (insurance co. or other) who know how to set it up. But, it did not matter. Apparently our deductible is too HIGH to meet the MSA guidelines. Can't lower our deductible because have to get re-qualified for a "new" policy and pre-existing condition may disallow acceptance, at least at current rate. Catch 22. Quite disappointed in the system again.
Posted by: Mrs. Bubba on December 21, 2002 8:16 AMThe real problem is that people have come to accept the notion that medical insurance must be provided by their employers, rather than being something that you provide for yourself. It should be something you own, and take with you as you change jobs, etc.
Sure, younger, healthier people would tend to forego paying that money, as well they should. That's where things like the MSAs kick in-- ideally, one should be buying into old age medicalcare the same way one buys into retirement.
Worse, people start thinking about the current medical insurance system not as something to take care of unforseen, catastrophic events, but as a requirement for routine maintenence. When I've had to buy my own, I always got the policy with a high ($2000 or more) deductable. What should be offered is a "preventive maintence" type contract for those people who want to have a doctor look at every sniffle and scrape, or who have conditions that require chronic care, and return insurance to being something to handle the big problems.
How exactly do you know you could invest it for a higher return than the insurance companies get? Individuals typically do quite poorly as investors. And even smart ones are unlucky sometimes.
What will you do when you need bypass surgery, or extensive cancer treatment, or your baby is born prematurely? Your $500/mo savings, even given your brilliant investing, isn't going to cover the cost of these kinds of things. That's why people buy insurance. It's not stupid. It's reasonable risk-aversive behavior. They would rather pay $6000/yr than have a 5% chance, say, of being out $60,000.
The kind of car insurance that is typically mandatory is LIABILITY insurance. The requirement makes sure that if you cause a wreck and do some damage you will be able to provide at least some compensation. Not a perfect system, but people have to be held accountable in some way. If you were hit would you rather sue someone who may not have any money anyway?
Posted by: Bernard Yomtov on December 21, 2002 4:46 PMNo matter how well an insurance company invests, it has to cover costs thatI would not have to, ie plan administrators, claims adjusters, the guy who makes the coffee. Their overhead alone makes it impossible for them to achieve a high return. The only reason the system works is like I said, on average, people pay in more than they take out.
As for the excessive cost of treatment, remove the insurance system, which allows for those exhorbitant costs, and market forces will bring the prices back down in line with what people are willing to pay. Or do you think it is right that a 5 cent Valium pill should cost $75 when administered in a hospital?
Posted by: rich on December 21, 2002 6:47 PMI have no idea what valium costs in a hospital. But I doubt it costs 5 cents anywhere.
Anyway, I'm not talking about "excessive" costs. I'm talking about expensive procedures and medicines. And just how much are market forces going to bring things down? Are you going to forego a bypass operation after your heart attack because it's just too expensive?
Yes. Insurance does drive up costs somewhat by encouraging usage. But to claim that eliminating them will somehow solve the problem is ludicrous. Aren't some market forces already at work? Isn't it in the interests of insurance companies, HMO's at least, to hold down costs? Don't they in fact try to hold down costs now?
And why should we "remove the insurance system?" What about people who want insurance, just in case thhey get really sick? I thought you liked markets and individual freedom.
Posted by: Bernard Yomtov on December 21, 2002 8:15 PMI certainly do believe in a free market, but when it becomes necessary to obtain insurance at a cost higher than the average person would have to pay for a lifetime of care, then market forces are no longer applicable. Remember, the brunt of the cost is born not by the consumer, but his employer, adding a layer of separation between the provider and the consumer.
Yes, HMO's do try to hold the line on costs, buit they do so by either denying care, or negotiating reasonable prices for services rendered, often 50 to 70% below listed prices. remember the example I provided; a $6000 dollar hospital stay was settled for $600. The price inflation is not just due to "encouraged usage." Why should a consumer have to pay ten times what an insurance company pays?
Posted by: rich on December 22, 2002 10:19 PMI can't agree totally with the premise of doing without insurance coverage, although we know that insurance companies as a whole are some of the most profitable in the country. Here in Tennessee everyone who owns a car is supposed to carry liability, to protect anyone they hit. However, I was involved in an accident with two young people who had no driver license, no current tags and of course, no insurance. Instead of hauling them in the police wrote them a ticket and let them drive away! It's one thing to write a law requiring people to have insurance but another to have a system in place to verify it.
Posted by: dvest on December 26, 2002 8:49 AMHello,
I live in GEORGIA and it is mandatory for me to have auto insurance. I hate it my cars are all used and are not worth having just liability to drive on the roads and full coverage is 3 times the price. When I had full coverage on our 92 & 93 autos and asked the question. " Today I totaled my 93 Nissan 240 SXSE, how much can I get?The answer...$1,700 to $2,000 MAX...So I pay around $1,300 a year for Full coverage and $600 for just liability...WHO IS GETTING SCREWED...I would like to know if I can just buy E&O bond insurance bworth 5 million that protects me?
Rich
Posted by: Rich on April 8, 2003 3:50 PMI completely agree that health insurance is way overpriced. There are too many people out there that are using their health insurance as a maintanance plan and go see a doctor with every ache and pain that they get. To make matters worse alot of doctors, hospitals, and clinics overcharge or add for services that were not rendered knowing that the insurance company will most likely pay. Guess who pays for this, the average health insurance policyholder.
Auto insurance is a little different. Lets say that you pay around $600 a year for Liability insurance and $1300 for full coverage. Now for the sake of argument you are traveling on a busy highway after a couple of drinks at dinner and your tire blows out causing you to lose control of your car. Your car crosses the median and strike me almost head on at 65 mph and somehow everyone involved survives the accident without permanent injury. Since you hit me and the collision was your fault your insurance company will pay me for your legal liability up to the limit you have selected which should be at least $100,000. My car is totaled and cost $30,000; my hospital bills equal $45,000; your car is totaled and cost $5,000; and your medical bills equal $20,000. You insurance company will be paying out around $100,000!!! Now lets say that you and I survived the accident but my wife and 6 year old daughter died. Guess what, not only will your insurance company pay out your liability up to the amount that you selected but now I am going to sue you for $10 million and now I'm going after everything that you have ever worked for incuding your retirement money that you have so wisely invested. Don't ever think that this could never happen. As a licensed Funeral Director and Insurance Agent I'm here to tell you that it can and has.
I don't mind paying $1200 a year on my car insurance because I like the fact that I am covered for my legal liability up to $1 million. But I do not like being forced to pay $600 a month for a health plan with a $5000 deductible when I am 28 years old and know that the odds of having to spend a great deal in medical care within the next 10 to 15 years is pretty thin.
Of course, everyone is entitled to their own opinion.