Monday, August 17, 2009

Health Insurance Negation Plan

One of the key provisions of Obama’s health care plan prevents insurance companies from denying coverage on the basis of so-called pre-existing conditions. In other words, according to him, as soon as someone has an illness, he should be able to show up at the insurance company and buy a policy in order to cover the subsequent costs. In fact, he appears to regard the fact that insurance companies deny coverage on this basis as morally despicable and tantamount to evil.

Of course, he is disregarding the fact that such a policy on the part of insurance companies, far from being evil, is the essence of insurance!

Imagine for a second that we apply Obama’s theory to the car insurance market. Imagine that insurers allowed anyone with a “pre-existing” car problem to obtain insurance immediately. Then, as soon as your car needs repair, you would call up the insurance company and say “ok, I need 'insurance’ now.” Under these conditions, why would anyone pay premiums, i.e., buy insurance? In what sense could this even be called insurance? Such a plan should rightly be characterized as nothing more than a wealth transfer. Consequently, Obama’s plan should not be regarded as a “reform” of insurance, it should be regarded as a negation of insurance.

The whole purpose of insurance is to pool risk in such a way that most of the time, premiums from some members of the pool are sufficient to cover claims from other members in the unlikely event that they have a claim. The premiums are priced based on the probability of a claim in such a way that the pool is almost guaranteed to take in more than it pays out. That is why on a private market, people choose policies with deductibles and/or policies that only pay in the event of catastrophes. The less likely a payout, the less the premium and vice versa.

There is no magic here. The insurance company must take in at least as much as it pays out or there is no reason to have an insurance company. Obama acts as if the process of insurance somehow creates a magic pool of infinite dollars that can be drawn upon to pay endless claims for anyone at anytime. There is no magic formula by which private or public insurance can pay out more than it takes in. Someone has to pay! Government schemes are just smoke and mirror ploys to redistribute wealth.

Forcing insurers to write policies for those with pre-existing conditions will skyrocket premium costs for everyone else as insurers find ways to pass on their increased costs to others. More likely, it would force private insurers out of business since no one would buy policies until they have a condition. The government would then tell us that the "free market" has failed and that it needs to step in to offer coverage. Since the government would not deny coverage based on pre-existing conditions, this would amount to a welfare scheme since you would only obtain the government coverage as soon as you have a problem. This is precisely why Obama's plan must force anyone not covered to purchase the government plan and provides yet another example of how government intervention begets disaster which begets more government intervention...

Of course, the whole reason premiums are so high and, in many cases, impossible to purchase in the non-employer provided market is precisely because the government provides incentives and/or forces insurance companies to provide more coverage than otherwise would be demanded on the open market. Since benefits are tax deductible but cash wages are not, employers have an incentive to pay employees with health care benefits. As these plans became popular, the government began mandating coverage for pre-existing conditions and disallowing variable deductible policies. These government policies continually force premiums higher and have all but eliminated the individual health insurance market. On a free market, individuals would purchase insurance in the same way they purchase car insurance. In other words, they would pay out of pocket for small problems and have reasonably priced catastrophe insurance in the event something major goes wrong.

Can someone ask Obama why is there no crisis in the car insurance market? That's too simple.

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