For the sake of argument, let’s say that every privately owned home in the country is going to get old, have its electrical system go bad, catch on fire, and burn to the ground. And let’s say that you own one of these homes. Since you know that it’s going to burn to the ground, and you know you are going to need to rebuild it to have a place to live, how do you plan for this?
Let’s say that you have a survey done and they tell you it will cost $200,000 to rebuild your home. Do you start saving a little every month in a special account? Or do you buy insurance?
Now, turn it around. Let’s say you run a business that offers home insurance. You know that every house will age and die. You are going to have to pay out on every claim. If you know you are going to have to pay me $200,000 eventually, how much do you demand in monthly premium payments?
What should be obvious here is that the classic insurance model doesn’t work for things that are inevitable. The reason home insurance is affordable is because most homes don’t burn down. The insurance company takes in many small premiums and pays out only a few large claims. But we all die. Almost all of us get sick before we die. Almost no one goes to the grave without consuming expensive health care and pharmaceuticals. Most health care spending is done in our first and last few years on this planet. The way private health insurance companies make money is twofold. First, the government covers the elderly, many of the children, and high-risk individuals like our armed forces and veterans. The government also covers many people with disabilities that require ongoing care. So, the private companies are left with a pool of the healthiest individuals, who make relatively few claims. Second, they charge you money throughout your whole working life so that the expense of covering your decline and death is spread out and may be less than what you pay in (and if you live past 64, they don’t have to pay out at all).
Going back to our house analogy, you would be a fool to pay more than $200,000 in premiums if you know that the cost of rebuilding your house is only $200,000. And the insurance company would be a fool to charge you less than $200,000 if they know they will have to pay at least that much out to you.
When you buy home insurance, what you are really doing is hedging against an unexpected catastrophe that could wipe you out financially and leave you homeless. But, you know for certain that you are going to die and you know to a near certainty that will get sick and require very expensive care before you die. End of life care is so expensive that the only realistic way for most people to pay for it is to set aside money with each paycheck for their whole working lives. The only insurance you might want is against your getting sick early in life before you’ve earned enough to pay for your care. But, assuming that you live into retirement, you should have already paid for all the end-of-life care you are going to need.
When every citizen pays into Medicare throughout their working lives, but not every citizen lives long enough to consume that investment, then we create a pool of excess money that can be used to smooth out and equalize the cost of growing old and dying. That way, we’re all insured against catastrophic costs that can bankrupt our families.
Medicare isn’t really insurance. It’s buying health care on the installment plan, with a touch of insurance against catastrophe. So, why do we need this middle of life period where we are forced to buy health insurance? We pay for something that we are already paying for in our Medicare deductions. The insurance company takes our money and hopes that we live long enough that they can pass us off to the Medicare system. If we do need expensive care before we turn 65, then they try to find technicalities to avoid paying our claims. If they believe we’re a risk for making a claim, they just refuse to cover us at all.
From the consumer’s standpoint, this system doesn’t make any sense. It’s as if we know that our house is going to burn down before we die, so we lay-away a little money each week to pay for rebuilding our home. But we only get access to that money if we live to be 65 years old. Since it is possible that our house will burn down before we turn 65, we are forced to pay premiums to a private insurer in addition to our weekly lay-away. And if we reach the age of 65, all that money is just gone.
Why would we want to perpetuate such a system.
Why, ‘freedom’, of course. (It’s usually ‘freedom’, when we do something stupid.)
freedom to make a buck in a way that screws nearly every other member of society.
BooMan, I can’t thank you enough for this post. What you have laid out is exactly the kind of scenario that I need at-hand to give to all my winger friends, family and co-workers who seem think that the current system is the most patriotic, apple pie, red, white and blue American thing on the face of the earth.
I look forward to hearing what they have to say when presented with your “thought experiment”.
Thanks again.
If the masses could reason as well as you can, Booman, then, obviously they wouldn’t want to perpetuate such a system. But, they can’t and, furthermore, they base a lot of their decisions on what they see on television and this medium is very vulnerable to pressure especially by those who already have a lot of money, say like those who have lucrative positions in the health insurance and pharmaceutical industries.
Additionally, under our present form of government, those who make the laws require huge amounts of money to get elected and stay in office. They too are incredibly vulnerable to financial pressure from those profiting from the current situation. Thus, nothing seems to change as all reform gets headed off at the financial pass by the oligarchs who control the money and the politicians. Meanwhile millions and millions of people are without health care and in this super rich land, they quietly suffer. What an absolute pity it all is.
Neither Social Security nor Medicare are insurance. Both are societal pools of money to provide basic care for all people. Your contribution through Social Security and Medicare taxes goes to pay for folks currently over 65 who need medical care. When you are over 65, younger workers will be paying for your health care. It’s an inter-generational social contract; the elderly pay for your public education if you pay for their healthcare.
That doesn’t make it buying healthcare on the installment plan; your payroll tax contributions are not assigned to your account but to the overall fund. During the Reagan era, Congress added psuedo-premiums and co-pays that the elderly have to pay but even these are pooled instead of assigned to an account. You never get told, “Sorry, you haven’t paid enough in installments to get this care.”
Single-payer healthcare would be an true insurance pool if all of the funding came from the individuals in the pool and Medicare and Medicaid were folded into it. HR 676 does not fund it this way because of the need to recapture a part of the savings that corporations would have by not having to offer healthcare as a fringe benefit and the savings that earners in the top 5% would save differentially on insurance over those in lower income groups.
Insurance started out as mutual societies to pool risk among neighbors or occupation groups. As the groups grew and the management of the funds became more complex, professional management took over; there are still a lot of “mutual” insurance companies in which the members are shareholders but which operate just like any other private corporation. Then the entrepreneurs saw that insurance was a good cash cow; people pay say a quarter a week; you get a lot of people; you have a lot of cash to invest any way that you want to until someone claims a loss. The abuse inherent in so much cash lying around in reserve is why every state now has an insurance regulator. And as the insurance companies permeate more and more of American life–the latest being “service contracts” — the accumulation of cash to speculate with grows.
As for the installment plan, most people are paying co-pays for major hospitalization through installments negotiated with the hospital and other providers.
yes, there is a generational transfer of wealth.
But that is only one way of looking at it. Another way of looking at it is that you pay a certain amount of money in your life for health care. If you knew what that amount was going to be before hand and when you would have to pay it (and your insurers knew that too) then insurance would be impossible. The only reason to buy insurance is as a hedge (because you don’t know when or how much health care you will need).
You pay for your health care (most of which will be consumed at the very end of your life) by making small contributions over a very long time. That’s why it is like an installment plan. That is the correct way to do it. But we pay less that we should because instead of paying the full cost, we send our money to private insurers in addition to our Medicare payments. Those profits are sucked out and needlessly increase our overall lifetime bill. Medicare takes a beating because their pool is all high-risk so they don’t take in enough to cover what they have to pay out.
Basically, the private insurance is an inefficient drain on the system that dramatically increases every person’s lifetime cost of health care. Every cent of profit spent by insurers is wasted. The only benefit is that it creates jobs that are higher paying (and, thus, provide higher tax revenues) than a government-run system would.
Thank goodness Medicare is based on need and not upon how much you’ve paid into the system.
However, Social Security does track your “installment payments” over the course of your lifetime and that determines the amount of your pension when you retire. Not everyone gets the same monthly check; high-income workers get higher retirement benefits. If you’ve been poor all your life, you will continue to be poor in your “golden years.”
(There is some unfairness in this, for sure. For example, people who spend their working life in a disproportionately high-wage area, get higher retirement benefits, retire to a lower-cost area of the country and live quite well. While the poor are just stuck being poor wherever they are and end up needing subsidized housing and food stamps to suppliment their retirement.)
If you draw on Social Security before the age of 65 because you have become disabled by illness or injury, the amount of your monthly support is determined by a formula based on what you paid into the system in the prior 12 years, not over the course of your lifetime. In the case of chronic illness, the worker often suffers a progressive loss of income in the years immediately prior to applying for SSDI. Therefore, almost everyone who gets SS Disability Insurance payments is poor and requires additional subsidies.
Actually the payments are tilted toward the lower income retirees. They get a larger percentage of their pre-retirement income. http://www.socialsecurity.gov/pubs/10070.html#estimate
Is that true? And if it is, how broad is the range of expenses? If the range of expenses is broad enough, risk pooling still makes sense. My guess is that while the range is broad, the mean of the distribution is not affordable when compared to mean income.
Unless you die suddenly and without preexisting conditions that were being treated, you are going to wind up taking an increasing number of prescriptions. You are going to have surgeries. You are going to have expensive testing done. You may require dialysis.
Yes, almost everyone goes through this. And some astronomical percentage of lifetime spending on healthcare takes place in the last months of life, which Medicare almost always has to pay.
My mother-in-law had a hospital bill over $50,000 for the last four days (yes days!) of her life after being admitted to the emergency room and taken to intensive care. She had multiple heart attacks and finally they couldn’t revive her.
An excellent analogy, Booman. Now consider that the Federal Government wants to give you the option to buy home insurance from them while you retain the right to buy private insurance instead or in addition. Naturally you would scream that it was Hitler-like and claim that home destruction panels were being planned. Then you would claim that banning arson law suits and more tax cuts would solve everyone’s problems. Except for those who really wanted to be homeless by choice.