If insurance actuaries could predict with certainty that every year every house in Kansas would be destroyed by a tornado, how much would a Kansan be charged to insure his house against tornado damage? If you think his yearly premiums would be equal to the cost of replacing his house, go back to business school. Since every Kansan who had such insurance would be making a claim, the premiums would be rather more than the replacement cost of a house. After all, insurance is a business, not welfare; businesses exist to make profit. Also, insurance companies must pay for the overhead involved in running a business: salaries, advertising, computers, rent, paperclips, and perhaps even health insurance for the employees.
So in our hypothetical Kansas with the really crumby weather, smart Kansans would elect to forego home insurance altogether. Since they’re going to have to eat the costs of their houses whether they’re insured or not, why pay for an insurance company’s profits and overhead? This assumes that policies covering tornadoes would be available in our hellish Kansas, which they wouldn’t be. (But Kansans would still be able to get hurricane insurance, and at the same low price.)
That farfetched scenario illustrates a basic law of the insurance business: the higher the probability of an event actually happening, the higher the premiums to insure against it. A corollary to that law is this: Insurance is affordable only when the majority of policyholders don’t file claims for catastrophes.
It used to be that Americans thought of insurance as protection against very rare calamities; catastrophes that would ruin you, wipe you out financially, such as tornadoes. The things we could predict, we saved for; the things we expected to happen, we paid for with money out of our own pocket.
But over recent decades, the way we think about insurance has changed; we now think insurance should be for just about everything. We even have a separate category of insurance for what all insurance used to be: “catastrophic insurance.” Inasmuch as the insurance industry has tried to accommodate the new thinking, we see more and more things covered by insurance. So more and more folks are filing claims for an ever-widening array of things, which drives up premium prices. Perhaps nowhere is this trend seen more than in health insurance.
Modern medicine itself, due to its recently acquired capabilities and advances, is one reason for the soaring prices we’ve seen in health insurance, although it is by no means the only reason. Medicine can now treat so many catastrophes that until recently it could not treat. And today’s medicine treats everything from acne to separating conjoined twins. Let’s consider the recent changes in medicine.
America used to have a huge problem with infectious disease. We learned how to deal with that problem with high-tech things like antibiotics and vaccines, but also with low-tech things like quarantines and cooking food at higher temperatures. Diseases like polio, cholera, and smallpox, if not eradicated, have been gotten under control. But infections that we thought we had beaten reappear, as we’re seeing with tuberculosis and other diseases brought in by illegal aliens. Steering clear of infection is often just a matter of washing hands, boiling water, getting shots, and not consorting with the wrong people. In short, you can keep from contracting many infections, even dread ones, with a little common sense, individual effort, and changed behavior. On many fronts, the war against infectious diseases has been won. However, new infections pop up, like AIDS, MRSA, Ebola, flesh-eating bacteria, brain-eating amoebas like Naegleria fowleri, and drug-resistant mutations. These new infections can be enormously expensive to treat, as we saw with the American physician who contracted Ebola in Africa.
Today, however, many medical problems are degenerative diseases, such as cancer, cardiovascular disease, diabetes, and arthritis. Although degenerative diseases can strike the young, the increase in them comes from our longer lifespans, which is due, in part, to our victories over infectious disease. Degenerative diseases can be more intractable than infectious diseases. They can to be chronic; things one has to live with, needing constant monitoring and treatment. They can’t be cured with, say, a regimen of tetracycline.
So, one inescapable reason health insurance is so expensive is the very success of modern medicine. We have magnetic resonance imaging (MRI), dialysis, lasers, lithotripters, cutting-edge drugs, and transplant operations, all of which cost a bundle to recoup the cost of research and development. Someone who would have been doomed just a few years ago can now be opened up like a chicken, the old failing part taken out and a new one put in. Rather like replacing the hard drive in your PC. Whereas before you’d just lie in bed waiting for the end, but now they heroically go to work on you.
There are a gazillion ways the human body can break down and fail, and some Americans think every last one of them should be covered by insurance, regardless of the cost. And if that weren’t enough, some folks expect health insurance to cover things that don’t threaten health, such as birth control, fertility treatments, Viagra, and even sex-change operations.
All of which redounds to this: everyone with health insurance is going to be filing a claim. That’s a hyperbole of course, as there are a few genetically blessed individuals who neither get sick nor need sex-change operations. But the statement is close enough for government work. And it is a violation of that basic law of the insurance business.
Health insurance nowadays is a lot like insuring for tornadoes in our imaginary Kansas: almost everyone will be hit with at least one catastrophe. And those who aren’t suffering catastrophes are also filing claims. There’s only one direction for premiums to go, and that’s up.
The deterioration of the body is not akin to “acts of God,” that is, rare events like tornadoes in the real Kansas. The deterioration of the body is a given. So if we can be assured that ill health will befall each and every one of us, why insure for it? Should it even be thought of as insurance if it’s for the inevitable?
Modern medicine is just too successful. Medicine is extending lives for decades, during which time folks experience additional catastrophes and have more time in which to file claims. With more and more ailments that can be treated with modern medicine, the question becomes: Does the insurance industry’s “business model” really work for healthcare?
If America wants to preserve the private health insurance business, then private health insurance policies need to revert back to being “catastrophic insurance,” just as in the days of old. That means we’d all be paying more out-of-pocket.
On July 31, Hillary Clinton said at a National Urban League conference that: “People can’t rise if they can’t afford health care.” But when people buy health insurance under the Affordable Care Act, it’s not because they suddenly can afford to pay for the premiums; it’s because of government subsidies. People only pay part of the price — so people still “can’t afford health care.”
With ObamaCare, Democrats have promised Americans things they can’t deliver. Republicans running for election in 2016 have promised to repeal ObamaCare. Republicans need to have a replacement system ready to present to the people that bends the “cost curve” down. And Republicans need to explain to Americans why healthcare and health insurance is so very expensive.
Jon N. Hall is a programmer/analyst from Kansas City.