Wednesday, April 6, 2011

Selling Only High Risk Insurance is Bad Business; The Solution to Medicare

The original idea of insurance, whether is was for life, fire, health or what-have-you, was that everyone paid the same small amount into a fund and then if someone had the misfortune to need it, they were covered. The idea was to spread the risk of catastrophe among a large number of people. In any given year, most people paying the insurance would not need it.
Insurance evolved into a for-profit business and actuarial tables allowed the business to assign probabilities to the insured and separate them into risk pools. Insurance companies learned that if they could remove those most likely to collect on the insurance from the pool, their profits would soar. Now instead of everyone paying into a pool that was there for those that needed it, the business of insurance became one of trying to identify who might need it and excluding them from the pool. So if you are in the business of selling life insurance, you love to sell it to that 20-year-old but forget that 95-year-old. Selling life insurance to a 95-year-old is bad for business unless the premium is astronomically priced close to the face value.
In recent times, insurance companies have become better and better at predicting who might need actually need the insurance so they can be excluded or placed into a high risk pool.
When it comes to medical care, older people on average need a lot more medical services than younger people; the older they are, the more medical services the are likely to need. We all get there eventually; when we are young, we rarely need medical services but as we get older, things start going wrong and we need more medical help. Insurance companies don't want to sell medical insurance to old people because they have to charge them an exorbitant premium of thousands of dollars a month. Few old people could afford these premiums so they would wind up dying on the steps of the for-profit-hospitals; denied medical care. Not a pretty picture.
Enter Medicare. The government assumes coverage for the old people high risk pool and old people only have to pay a modest monthly premium that the government subsidizes. Health insurance companies are happy because the people most likely to need health care services are removed from their pools. They make more money because they get to sell health insurance to people who are not likely to need it and the government bears the brunt of health care for old people.
The problem is that selling only high risk insurance is bad business; adverse selection results in an insurance death spiral. If you are only covering people that need the services, you will go bankrupt; it really isn't even insurance anymore since everyone is needing service; there is no spreading of risk among a large group. It is just paying a relatively small fee for a large amount of healthcare.
The solution is to get back to the original idea of insurance; everyone pays the same into the pool. Do away with separating people into higher and lower risk pools. The premium that everyone pays is determined so that the pool is sufficient to pay all healthcare; young, old, healthy and sick alike. Everyone is covered with an affordable premium. Twenty-somethings pay more than they would if separated into a low risk pool but someday those twenty-somethings will be seventy-somethings so it all evens out in the long run. Everyone is covered; the program is self funded and adds nothing to the deficit and grandma doesn't have to die curled up on the steps of the hospital denied healthcare.

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