Smile, you have Medicare.
Occasionally I take a little time off to explain stuff that everybody already knows. This is one of those.
Over the past three weeks (actually the past four weeks) there’s been a lot of swirl over Obamacare, otherwise known as the Affordable Care Act. Lots of Republicans don’t like it. Maybe I could be safe to say that all Republicans don’t like it. Well, it’s here now, regardless of who doesn’t like it. And I am not going to discuss it. Just now. I figure I first need to explain insurance before getting even close to explaining Obamacare. Here’s insurance.
A little personal history. I am dead sure that when I was born at home in a small house (shack) in Tolar, Texas, my father, barely employed, had to personally pay the doctor, who drove the nine miles from the county seat to attend my birth. There was no health care insurance.
In fact, I never became aware of health care insurance until quite late in life. I will get to that.
Seven years later, when my father went to work at a defense plant, we likely had health insurance provided through the defense contractor. That’s where health insurance really took hold in this country.
This started during World War II. The United States came out of its worst economic depression and straight into a major war. Unemployment, which had peaked at 25% during the depression, now reversed. The United States government committed to building 50,000 airplanes (they ultimately built a multiple of that number) and to building thousands of ships. Plus there was ammunition, uniforms, mess kits, the whole works for an armed force of millions. And there were men disappearing off the unemployment lines and into uniform. Defense employers were competing for workers.
Except, the government, in its great wisdom, foresaw this. The government was not prepared to pay inflated prices for war materials, and it put caps on the wages defense employers could pay. Still the employers had to compete for the few available workers. But what else could they offer besides wages? They could offer health insurance, which was not restricted. And they did, and defense employees got insurance paid by the defense contractors.
Except… Except what? Except that employers never pay for employees’ insurance. The employee always pays. In this case employees were receiving insurance (not capped) instead of higher wages (capped by the government). Nothing changed after the war was over and won.
Employers still provided health insurance, and employees still paid the premiums. Which they do today, those who can get health insurance through their employers.
Back to my personal history.
I never noticed health insurance. As I passed through childhood I suffered a number of self-inflicted prangs that resulted in trips to the doctor or to the hospital, just a block from my house. I never paid.
Then I graduated from high school and started my active duty in the Navy Reserve. The Navy has doctors, even aboard ship, and the eye doctor on my ship decided I needed eye surgery. He scheduled me for a visit to a Navy hospital ashore. Later that year I took a few days off from my ship and checked into a Navy hospital, where a Navy doctor performed the eye surgery. I did not pay. And all this time I was getting medical checkups and immunization shots. And I did not pay.
Off active duty and on to college, and I had to pay a health center fee. My first week at college, when I bent my ankle during a college prank, the health center fixed it up and gave me crutches. I did not pay. I already had through my health center fee.
Off a summer from college I had no health insurance, and when the emergency workers scraped me off the street one sunny afternoon and rushed me to the hospital I still did not pay. The woman driving the car that collided with my motorcycle paid. Rather, her insurance company paid.
Out of college and married and looking for a job, I had no health insurance. Fortunately no accidents. Immediately I went to work for the same university I had just graduated from, and my wife said I should definitely check “yes” and sign up for the health insurance. And that was my first real encounter with traditional health care insurance. I was paying premiums, and the university was paying premiums, and we had health coverage.
So it worked thereafter. When I worked for an employer, health insurance was available through the employer.
So, why not just go out and buy insurance on my own? A real problem here. You walk into an insurance company’s office (figuratively) and ask to sign up for insurance. They’re going to look at you. Really hard. There’s an adage in the industry. You never insure a burning house.
Insurance companies make their money the same way a bookie makes his money. They play the losers off against the winners. You know some people are not going to need health care, yet they pay premiums (suckers). Others are going to pay the same premiums, and they are going to cost the insurance company thousands. They are the real winners. If you can consider having major surgery of other life-saving procedures performed to be some kind of winning.
Insurance companies are going to make these kinds of arrangements with employers, especially with large employers, because they know you are getting the insurance because your employer is offering it and not because you’re already sick (in most cases). You’re not going to get any kind of deal like that on your own with an insurance company, for two reasons.
First, the insurance company is going to look you (and your family) over very closely, and they’re going to sell you insurance only if you don’t need it.
Second, when you walk into an insurance company office on your own you’re already costing the company more than the group policy member. Having to deal one-on-one costs insurance companies more, and they are going to charge more.
I have not yet explained what insurance is. Although the concept of insurance as a form of risk management traces back thousands of years, I like to cite Lloyd’s of London as the founding model for modern insurance:
Some forms of insurance had developed in London by the early decades of the 17th century. For example, the will of the English colonist Robert Hayman mentions two “policies of insurance” taken out with the diocesan Chancellor of London, Arthur Duck. Of the value of £100 each, one relates to the safe arrival of Hayman’s ship in Guyana and the other is in regard to “one hundred pounds assured by the said Doctor Arthur Ducke on my life”. Hayman’s will was signed and sealed on 17 November 1628 but not proved until 1633. Toward the end of the seventeenth century, London’s growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd’s of London remains the leading market (note that it is an insurance market rather than a company) for marine and other specialist types of insurance, but it operates rather differently than the more familiar kinds of insurance.
When Benjamin Franklin initially proposed insurance in colonial America, the religious colonists opposed the idea as a form of gambling. As mentioned previously, gambling is exactly what insurance is—as in a casino, with the odds stacked in favor of the house.
So, why and when should you acquire insurance? My answer is you should only insure against monetary losses, and then only against ruinous losses. You might not carry theft and collision insurance on your car if you can afford to replace it. Not the case with your house. If you have a mortgage on your house, the holder of your loan will insist you maintain casualty insurance, at your expense of course. If you do not have a mortgage, you would be unwise to drop casualty insurance, since the cost of rebuilding would likely be financially crippling.
How about insuring your life? You’re never going to collect. You should purchase life insurance only if you have people financially dependent on you. Beyond that life insurance is absurd. However, insurance companies, for mendacious purposes of profit only, will write life insurance policies on children. Examples: Years back a Texas dentist took out a life insurance policy on his son, then murdered his son with poisoned Halloween candy. The insurance company refused to pay, and the dentist was executed. A Texas mother took out life insurance policies on two pre-school children and knifed them to death. Again the insurance company declined to pay.
So, what should you pay for a health insurance policy? If I were running the insurance company I would carefully examine the life style and health history of each prospective insured and set the premium to match my expected loss. Of course with some margin of profit for me. Once again, insurance companies take on group plans, and for these plans they set premiums based on expected claims from the group demographics. They generally do not look at individual histories.
Health insurance premiums have been on a steady march upward for years. Why? Three things:
1. Health care costs are increasing. There are procedures now that did not exist before, and these new procedures, e.g., MRI, are expensive.
2. People are living less healthy life styles. We have grown immensely fat in the past 50 years, and this has precipitated health conditions requiring more and more expensive treatment.
3. We are living longer. See item 2 above. We are smoking less and living longer. Typically you cease to incur health expenses when you die, so if you previously died in six weeks after developing cancer, new treatments now allow you to live six more years, all the while receiving pricey treatments for your cancer. Truthfully, your insurance company would prefer you died after a couple of days. I have long suspected that’s why some carriers will cover “alternative medicine.” People receiving these treatments based on pseudo science are not likely to live so long.
What is a Cadillac plan? I’ll answer that. Suppose you make $500,000 a year. You have to pay a lot of taxes (or not). You can afford it, and you purchase a Cadillac plan. All of this has caused you a lot of stress. Your plan covers means to manage this stress, including a week off in Hawaii. You spend a week in Hawaii, paid for by your Cadillac plan. But you paid premiums to cover this type of treatment. What have you gained? The premiums are tax-deductible. You have just taken a Hawaiian vacation and written the expense off on your tax return. You have received a vacation discount, and other tax payers have made up the tax shortfall. Pretty neat.
All of this leads to the ACA, which is all about insurance and not about health care. Check back next week when I cover Obamacare.