On the Other Hand...

Those 37 Million May Not Be So Dumb

by Jim Davies

The "Insurance" business started in the 18th Century, in a London coffee house called Lloyd's, where VIPs in the export, import and shipping trades were wont to relax and to wheel & deal. The idea to which they gave birth was that since the loss of a cargo-carrying ship was disastrous and unpredictable, there ought to be a free-market way to spread the cost so as not to wipe out the unlucky.

And of course, they found one. So long as each participant's probability of large loss is very small and about equally predictable, their idea works well.

The alternative - "self-insurance" - is unattractive because each of the players would have to set aside a large sum of money just in case, and the sum of all such set-asides would be far larger than would be needed to compensate all those whose ships were actually lost in storms; a waste of capital.

But with Lloyd's insurance, that "pool" of money was sized to fit, and each had to set aside only a very small sum, or "premium", representing his share of the risk - plus a profit, naturally, for the Lloyd's underwriters. The idea spread fast, and to a much wider range of risks than ships at sea.

Inappropriate

"Life" insurance became popular, though if the word was not such a no-no it would better be called "death" insurance. The risk there is that John Q will die unexpectedly, while still young, and with dependents needing support. It's reasonable to expect people to save so as to provide for their old age, for old age is almost a certainty; but for everyone to try to set aside huge sums against the small probability of premature death, would be a terrible waste of resource. So again, the idea of shared-risk, or insurance, fits well.

The question here is, does insurance properly fit the case of ill-health?

When you think about it, the answer must be Yes if the risk is small and the cost is crippling, but No if the risk is high and the cost, affordable. Those criteria would apply to any candidate for insurance coverage.

The reason why insurance doesn't "fit" the case that a risk is high and the loss relatively low, is that over a period of time (like 10 years) most people are going to incur the loss, to a more or less equal degree. Why, therefore, involve a third party (the insurance company) who will require profit and expenses over and above the sum of those losses? It's really rather silly to buy insurance against a near-certain expense. All it does is to increase it.

So for run-of-the-mill health-care expenses it's plain dumb to pay the Big Blue Insurance Co to pick up all one's doctors' bills (whether directly or via one's employer.) Thus, the oft-quoted 37,000,000 uninsured may be a good deal smarter that we're told; while about a fifth of them, being unemployed, may be unable to afford it, the majority evidently chose to self-insure on purpose. Under the Plan now coming down the pike, they will be denied that choice.

Where it does make sense (as for shipwrecks, house fires and and premature death) is in the rare case of catastrophic illness to people who are still young - like surgery after accidents, which are rare by definition.

Vicious Circle

There's another reason why insurance against ordinary health-care costs is a bad idea; it's very important but much more subtle.

It is that it makes the perceived cost of a regular doctor's visit much lower than the true cost; which means both that the patient goes there more often than he otherwise would (so pushing up total spending on doctors) AND that the doctor suffers a sore temptation to hike his prices, well above what they would be if he knew the patient was paying and counting every penny.

This effect is like a vicious circle, and has had a terrible impact on US medical costs; and in other countries where this "perceived cost" is zero because the government pays the premiums out of taxes, those costs have taken the form not so much of cash but of long waiting lists.

Whom, then, do we blame, for America's high cost of staying healthy? - the insurance companies?

Well, yes to a degree, but (up until now, at least) nobody has compelled us to buy the health insurance policies they offer, so I can't enthuse a whole lot for an anti-insurer protest. The fault, rather, has been spread much more widely. Yes, they may have sold us a bill of goods; but we were dumb enough to buy it. And along with freedom, goes responsibility.

The Government Part

The "vicious circle" effect became very noticeable after Medicare and Medicaid were put in place a quarter century ago: total US health-care costs took a sharp upward turn and have continued rising. Reason: millions of people were fooled, by the Feds, into supposing that care was "free", or that Someone Else would pay. So naturally, they took ample advantage of their Rich Uncle.

Enter Hillarycare. Having made the problem worse, government now proposes to "cure" the damage they themselves created, with more of the same poison. We don't yet know what the Clintons will eventually land us with, but can be very sure it will not be just a piece of cost-free advice to cancel all our health insurance policies except for those covering unpredictable catastrophes.

Rather, it will be designed to fool even more people into supposing they can get something for nothing - that they have some sort of "right" to be kept healthy at their neighbors' expense. And if you agree that the government's "Social Security Insurance" scheme is a disaster, you ain't seen nothing yet.

© Copyright Jim Davies 1999

Jim Davies lives in New Hampshire,
and enjoys contemplating which way is up.

The above is Edition # 20

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