Why Health Insurance Isn’t

Last week I wrote about the success of Obamacare in driving people from the private insurance market towards a national healthcare system. Clearly, I touched a nerve when I look at the tone of the responses received. Although I don’t discuss big-picture issues in this space nearly as much as I do day-to-day business operations, there is one more item about the health care market that we should visit.

Did you ever think about the concept of health insurance? First, just to be curmudgeonly, we don’t insure against health, but rather illness. So it should be illness insurance. But I digress…

What is insurance? It is a form of gambling. Like the office Super Bowl pool. Everybody puts a little money in (they don’t call the participant base an insurance pool for nothing), and the “lucky” winner gets his or her bills paid. That’s how it works for cars, homes and property liability.

It’s for that reason that insurance is against the law in Moslem countries. It is considered gambling, even though winning a “prize” requires an unhappy accident. It is still a large number of contributors putting a little money in, so that one of them can get a large sum out.

What would happen to the office Super Bowl pool if it paid off equally on every single box that was purchased? Of course, everyone would only get out what he or she put in. That’s why health insurance isn’t really insurance at all.

Health insurance became a tax-deductible employee benefit after WWII, and grew widely in the 1960s and 1970s. I will beat my demographic drum once again. In the 60s and 70s the workforce was expanding at a record rate with young, relatively healthy Baby Boomers. Just as they did for Social Security, they carried the sick and accident victims in the insurance pools easily.

Today in the US, as in most of the developed world, the three major causes of death are Heart Disease, Diabetes and Cancer. I laugh at those health experts that point out how our unhealthy lifestyles make those the major killers. It is true that obesity, red meat and lack of exercise are contributors. But the biggest factor is age.

Let’s face it, in countries like Somalia or Myanmar, the biggest killers are communicable diseases from polluted drinking water, starvation and bullets. It isn’t hard to figure out why so few people die from diabetes. They don’t live long enough, or have enough food, to contract diseases from unhealthy eating habits.

No shared risk pool functions when everyone expects to take out as much as they put in. In a society where the vast majority will live long enough to require extensive and extended health care, insurance struggles just to maintain a zero-sum outcome.

Health insurance is no longer insurance. It is a lifetime prepayment program for the medical needs that each participant is statistically almost certain to need. About 30% of all Medicare claims are paid in the last 6 months of a patient’s life. Some use that as an argument against extending life, but I bring it up here just to make the financial point. Clearly 30% of recipients don’t pass away every year.

I can’t find any hard dollar figures past the mid-1990s for that end-of-life spending, but judging by my own and others’ recent hospital bills, I would consider $200,000 to be a very realistic number. If you work for 40 years, that means you’d have to save $5,000 a year net over your current health needs to build up enough to come out even. (I’m ignoring both interest on the contributions and medical cost inflation. Just making a point here.)

Of course, for the vast number who can’t pay in that much, someone else has to make up the difference.

There is no simple solution, but first we have to realize that our “insurance” is that in name only. It only works when each participant pays in as much as he or she is going to get back out.

Enjoy “Awake  at 2 o’clock?” Please share or forward to another business owner.