Health care reform seems to be one of those topics that keeps coming up these days. That's understandable due to the fact that Obama is hell bent on having health care reform.
With all of of the many voices on Washington, in the news media, and probably even at your own workplace offering so-called solutions to the problem, what is really being ignored is the history of the problem.
It's amazing that anyone would try to solve the problem without first understanding it...but that is exactly what is happening. This problem is really a problem of Government intervention into the economy. There is a LOT of history behind this. Much more than most people are even aware of. I've blogged about the problems with the Blue Cross model before and Government intervention that causes an increased cost of health care, but I want to address a specific aspect of the problem that contributes to ridiculous cost overruns in the health insurance side of the equation.
Health insurance today, in many respects, is not really insurance. When you buy a policy from Aetna or Blue Cross, you are-most of the time-not really buying insurance as much as you are purchasing a prepaid medical care policy. Of course we call it insurance, because what else would you call it?
Health "insurance" doesn't operate on traditional insurance principles, for the most part. It is a "pay as you go" system. That means that premium dollars come in and are paid out as benefits as they are needed. Some companies do not even have to keep reserves-which completely destroys the insurance model.
Life insurance and property and casualty insurance does not work this way. Instead of a "pay as you go" business model, there is an actual insurance model in place. It is normal for the insurance company to overcharge you for the cost of insurance in the early years of your policy.
In other words, they charge you more than what the cost of pure insurance protection actually costs. They then invest the excess premium dollars to help offset the rising cost of insurance as you become older or a higher risk. This is called "level term funding", and is a perfect example of how insurance companies are able to, on their own without Government help, hold down the cost of insurance. The evidence that this model works can be found by just going out, and getting a life insurance or auto insurance quote. The premiums for many policies are incredibly cheap. Even for whole life insurance policies, the actual cost of insurance (which can be reverse engineered to some extent) is rather low-many times LOWER than the cost of insurance for most term life insurance policies (over the life of the policy).
This is, incidentally, why auto insurance and life insurance premiums are not "out of this world". When you pay your premiums and if you ever need to file a claim, you get a lump sum of money, not periodic payments to cover services as you need them. This lump sum of money constitutes your indemnity paid in full. You are then incentivized to fix your car, home, or invest the life insurance proceeds in such a way as to lower costs and fees associated with fixing your property or investing your money and get the best "bang for your buck" because once the claim is paid, that's it. That's all you get.
The same would hold true for health insurance if only we would remove the regulations that prevent this from happening. There is absolutely no reason why health insurance could not operate by the same principles that other insurance businesses do. The lump sum of money would force you to shop around for doctors and hospitals to receive the best care possible at the lowest cost available.
Doctors and hospitals would be forced to lower costs to compete with other doctors and hospitals in the same way and for the same reasons that mechanics and investment brokers compete on price to offer the best possible services at the cheapest possible price.
To those who believe that this simply wouldn't work, or that the quality of care would somehow drop, there is already evidence that this works. LASIK eye surgery is a competitive business where doctors have been forced to offer better services at an increasingly lower cost. When LASIK eye surgery was first introduced, it was very expensive. Today, the technology has improved vastly and the cost-even without insurance-is affordable for most people given the nature of the procedure.
The problem of health insurance and health care is political, not technical, in nature. Remove the politicians and the problem will be solved.
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_________________________This entry was posted on March 6th, 2010 by David. Edits may have been made to keep this entry current. · No Comments · Current Events, Insurance & Savings, Philosophy In Financial Planning