Putting the insurance business out of business

As we were saying last week, most political decisions are based on “narratives” — histories of how we got here, reduced to easy-to-grasp stories a few sentences in length.

The problem is, if we get the “narrative” wrong, bad outcomes grow far more likely, since we’ll be working to “solve” the wrong problem, or even applying larger doses of the “medicine” that got us here in the first place.

Let’s review one more “narrative” now in current circulation:

3) Many — even “moderate” Republicans — have been heard of late to say “There are sections of Obamacare that need tweaking, maybe even repeal. But there are some provisions that should be kept, that we can all agree make sense, including the ban on insurance companies refusing to cover people for pre-existing conditions.”

To say this provision is POPULAR is unexceptional. It sounds nice to say anyone who gets sick should receive free medical care, with the money coming from … somewhere.

Unfortunately, this single stipulation destroys the whole economic basis for “insurance,” turning “medical insurance plans” into nothing more than “pre-paid medical service accounts,” which will be either vastly more expensive or subject to rationing and other draconian restrictions once the new (government or government-controlled) purveyors figure out their real costs, as the British and others have learned.


The first modern insurance contract was signed in Genoa by 1347; the first modern insurance company founded in 1688 at Lloyd’s Coffee House in London, where merchants, ship-owners, and underwriters met to do business. The basic model grew out of the risks European merchants faced as they made their fortunes — or lost them — sending trade ships to the Orient.

They knew that — let’s round the numbers for simplicity — 5 percent of their ships might be lost to storms, rocks or pirates. The problem was that nature doesn’t destroy precisely one ship in 20 every year, rationing out her bad news to each owner in turn. Some years you might escape without loss, but then a year might come when you lost five ships in one season and went to the poorhouse.

So, some genius went to his fellow merchants and said, “Let’s each put 6 or 7 percent of the value of each of our ships into a pool when it sails. If we lose one in 20 the owners can be made good out of the pool, leaving 1 or 2 percent over for administrative costs. That way we share our risk, reducing the chance of a single disastrous year for any one of us.”

Assuming your primitive “actuaries” figured the loss rate correctly, it worked.

But what if you were part of such a “mutual assurance group,” one of your “partners” paid in 6 percent of the value of a ship called the “Star of the Orient,” and a week later came in a “filed a claim” contending the ship had been sunk?

What if you subsequently learned the ship had indeed been sunk … but a full month before your colleague “took out his insurance policy” on her?

That would be fraud. No insurance enterprise — which spreads among participants the risk of FUTURE misfortunes which cannot be precisely predicted — could long survive if people were allowed to buy “insurance” against unhappy events which HAD ALREADY OCCURRED, paying in (say) $6,000 to get back a guaranteed $100,000.

But this is the practice in which the government will now require insurers to engage when it requires them to “insure against the risk” of someone contracting, say, a brain tumor, when a physical exam and routine check of that person’s medical records reveals they ALREADY HAVE ONE at the time they apply for “coverage.”

The only sensible response to such a mandate is to charge an exorbitant annual “premium” which will add up to all the medical costs that person is likely to run up in the year to come, plus administrative costs — no longer “insurance” but really “pre-paid medical coverage.” If the government orders you to provide the “coverage” WITHOUT raising the “premium” to those levels, the state has just, in effect, put you out of business.

Sure, seeking to survive, firms can “cost shift” by charging healthy patients more to help cover the care of the profoundly sick — but only for so long. Eventually, the whole scheme, based on a fraud which we are barred from calling “fraud,” must self-destruct.

Now, if the insurance company is refusing to issue coverage against other risks, totally unrelated to a pre-existing illness — fire insurance for your house, say — that’s a different matter, best served by allowing more competitors into the market to bid for that still-profitable business. But the narrative above contends “we can all agree” that insurance companies “should be made to cover pre-existing conditions.”

When in fact we don’t all agree, since it won’t work, since that’s no longer “insurance.”

Certainly it’s “not a happy thing” that one can’t sign up for fire insurance on a house that’s already burned down. But the laws of physics, mathematics and economics cannot be repealed by the central state, as they must eventually learn.

Unless, of course, the whole POINT is to drive the private insurance firms out of business.

10 Comments to “Putting the insurance business out of business”

  1. MamaLiberty Says:

    Yes, it would seem quite likely that the destruction of ALL private property and business IS the point.

    The question is… what are we going to do about it?

    Where’s the Black Arrow when you really need him? 🙂

  2. Sean Says:

    But an insurance company (or maybe an entity more precisely called a Health Fund) can stay afloat while covering pre-existing conditions. I know this because I am a member of such a fund now.

    The Culinary Union Health Fund covers myself and my family at an out of pocket cost of $0/month. My employer contributes to the health fund based on hours that I work per day. (on average, $550/month) So long as I put in an average of 30 hours/week for 12 weeks, I am covered for the next Quarter.

    The co pays are reasonable, the prescription drug benefit is amazing (most scripts cost me $5 to fill with generics) and yes, they cover pre-existing conditions.

    How can they possibly afford this? Well, the Culinary Health Fund is a non profit, owned by the members of the Union. Their only concern is making sure their members have the best care available.

    Don’t take this the wrong way, I’m not trying to suggest that Blue Cross and the other insurance companies are “evil” or “greedy” for trying to make a profit. That is, after all, the capitalist way.

    What I am saying is that their approach to providing health care is flawed. They are too large, their administrative overhead is too high, and yes…they are over regulated with mandates. Bigger is not the answer. The Federal Government is certainly not the answer.

    Smaller, locally managed funds are a better answer. Maybe not perfect, but better.

    I know you’re going to tear this apart because I mentioned a Union. But this is a Union at its best…securing good benefits for its members, funded by a contribution that the employer agrees to at the bargaining table.

    The employees get good care, and the employer gets a healthy work force at a reasonable cost.

  3. Stephen R Says:

    Sean — That’s not quite a straight comparison, because (I assume) ALL members of the union — all the employees at that company — are paying in to the insurance.

    Imagine you could go to the company and say “I want some more money in my pocket, so instead of paying for me to be on the health plan, I want you to give that money to me directly.” Your employer says okay, and your paycheck gets bigger. Five years later you realize that you’ve got cancer, so you go back to the employer and say “Okay, I’m sick now, so pay for my insurance again so I can get treatment.”

    Wouldn’t work, because if that option were available, every single employee at the company would do the same thing, and there would be NO money going into the insurance unless somebody actually got sick, and that one person would start paying.

    So Obamacare *theoretically* works with the “pre-existing condition” clause in tandem with the mandate that everyone must purchase insurance. The concept stands on two legs, and if you take away the mandate “leg”, it falls over.

  4. Sean Says:

    You are correct, we all pay in (through employer contributions) and we all get the benefits. If people were able to opt out, the math would catch up with us quickly.

    My union actually has two health insurance options. One is the Culinary Health Fund, the other is insurance through Blue Cross. Whichever you choose, the employer contribution is identical.

    But to cover my family on Blue Cross, I would have to pay an additional $4,800 per year out of pocket. And that’s just for the coverage, doesn’t include the higher co-pays and higher cost of prescription drugs. The only advantage is that Blue Cross travels very well, while the Culinary Fund is only truly useful in the Las Vegas Metro area. (Emergency care is covered out of town, but not much else.)

    Why the huge increase? Because as a larger company, Blue Cross has a higher overhead and at the end of the day, they answer to the stockholders. Their job is to provide income for their shareholders, providing health care is a secondary concern.

  5. Frank Says:

    When we talk about refusing insurance for pre-existing conditions, it depends on what we call refusal.
    It is altogether correct for an insurance company to refuse to insure a new customer with an illness, just as Lloyd’s would refuse to insure a vessel that was a leaky, rotten tub that didn’t look as if it could safely cross a pond.
    It is quite another thing for an insurance customer to say to a customer that they have had for years that “Sorry you got XXX, but now we are going to cancel your insurance.” That kind of defeats the purpose of buying the insurance those many long years ago.
    When we argue about pre-existing conditions, it is important to know which situation we are talking about.

  6. Sean Says:

    Frank, imagine this scenario…

    John has an opportunity to take a job with a new company. More responsibility, higher pay for his family. New insurance company.

    Five years ago, John underwent treatment for cancer. It has been in remission since then.

    Now John has to wonder, will the new insurance company refuse to cover me based on my old illness? What if I get sick again?

    For that matter, what happens if the company John currently works for goes out of business or lays him off?

    This type of situation comes up more often than you might think.

    I understand the math, and I understand that some Americans will “game” the system for their own gain. It’s another reason that, to me, bigger is not better when it comes to funding health care.

  7. Mark Taylor Says:

    Someone has to mention, might as well be me, that sooner or later insurance has to be disconnected from the employer. It’s interesting to speculate what a lifetime individual policy with a large deductible would cost for someone just coming of working age. Could be that the government could pay for such an entity during unemployed periods for all of American for half the price that Medicare and Medicaid runs.

  8. Kirby Says:

    How about if Doctors were not so highly regulated that the cost of an office visit were reasonable? Or even major surgery?

    Medical Malpractice Insurance is sky high, so then doctors have to charge you more. You can thank lawyers and frivolous lawsuits. Of course some lawsuits are genuine. But shit happens.

    And talk about unneeded paperwork. Why do you think an aspirin at the hospital cost you 20 bucks?

    How about Govt/Insurance out of the medical field completely?

  9. Dick Allesee Says:

    Vin, Belated congratulations on your commentary regarding the health insurance industry — I couldn’t agree more! Keep up your usual good work. Dick

  10. Jake Witmer Says:

    Hi Vin!

    I enjoyed this post. I’m an ex-insurance salesman, and I was just talking with my old boss yesterday about this. You know what he’s doing now?

    1) Trying to convince people to eliminate their health coverage entirely, since the Feds have capped the profits for health insurance companies at 20%. This leaves nothing to pay Health Insurance Salesmen, so they won’t sell any longer. (In fact, it might not leave the companies enough reserves to pay claims, so they might face the same government-caused insolvency that many of the realtors and mortgage brokers recently faced in the housing crisis!) Since the benefits of complex insurance plans aren’t obvious to most of the consumers who buy them, more people on the edge of being able to afford health insurance will simply go without –unless their employer pays for a group plan. (Which will undoubtedly pressure many independent contractors to work for someone who “witholds” federal income tax from their paycheck –the real purpose of denying medical care to the peasants emerges!)
    2) Insurance salesmen might also try to convince them to “re-up” their health insurance with a cheaper health plan that requires a higher “deductible”, in addition to the ancillary products (especially since their health insurance rates will now be skyrocketing, due to the government mandates). (For those who don’t know what a deductible is: a deductible is the amount that the person buying the insurance has to pay out of pocket, before the insurance “kicks in”. In addition to the deductible, the person is further pressured to not buy health insurance by the rising cost of their “co-insurance” which means that they pay a percentage of the total cost of the expense, even after the deductible has been paid.) If people sign up for a cheaper health plan that requires them to pay out-of-pocket if they go to the doctor for anything serious, they can still buy catastrophic protection (ancillary or “add-on” protection against crippling accidents, and critical illnesses –such as heart attack, cancer, and stroke– for a lesser but still affordable monthly payment).
    3) The result of all of this is less coverage for those who can afford to pay for it, and more coverage (state provided) for those on welfare.
    4) It’s also a threat of coercion against anyone who is “barely making it”. Those people are encouraged to claim that “they aren’t making it” and sign up for welfare –lest they be included in the category of people who “are making it” and can therefore be parasitized by all those who are “not making it” or “working for the government”.
    5) This encourages class warfare, with the comparatively tiny productive class being the only group that has an incentive to strike out against the government (the cause of the problem). Hence the new laws (and corresponding court precedents) that identify everyone who has ever uttered an anti-government word as a “potential terrorist”.

    Ultimately, this simply means that less healthcare is provided, because the same amount of healthcare is provided as before, but to more recipients (since everyone “must” be insured by 2014). Those recipients have less money to pay, so there is no incentive for medicine to develop cutting-edge (expensive, new) treatments! Gradually, this lack of competition (since no health insurance provider is still allowed to make money by insuring —and paying out to so some of— the “most insurable”). Since the profits of the insurance companies are capped at 20%, they are all competing over a smaller slice of the pie: …which is not worth it. In fact, it’s not worth it to the insurance companies to continue to “re-up” their own clients! (Better to shift them to less coverage, that is not over-regulated, with ancillary products! The salesmen can still hold their heads high on a salary made from ancillary products! They can still make $60K per year doing that, if they hustle!)

    So the “Unintended Consequences” of the new insurance laws will result in fewer insurance payouts (less insurance!) and less medical treatment (for the same amount of illness). It will also result in the productive being punished for their productivity, and their responsibility, since they previously purchased health insurance so they would have more medical treatment than those without insurance. Now, they have no such incentive.

    Moreover: the insurance companies no longer have to compete with each other to increase coverage for the same risk. Noone’s making money in these areas after this year (and certainly not after 2014!). So the products won’t move, and the people won’t buy coverage. And those who do have coverage will watch their rates go up faster than inflation, because of the indices the health insurance is tied to (which reflects the cost of mandated health insurance provision to those with pre-existing conditions).

    Ultimately, the decrease in health insurance payouts caused by less health insurance provision is tied to the incentivization of innovation in the medical system. If there is no such incentivization, there is less innovation.

    Ultimately, this leads innovators who want to woo the redistributors of stolen money to the top profits of the medical world. Those innovators who wanted to profit from the voluntary adoption of their medical devices and inventions by a free market?

    They can go to Portugal! (where there’s no FDA and people can buy what medical products they wish!) …And it’s already happening, as the case of the late William Dobelle attests to. He cured blindness in Portugal for a few years before his death in 2004, by mapping 100 pin electrodes inserted into patients’ visual cortices to their visual fields, attached to a video camera. –A “cutting edge” treatment, to be sure!– Ironically, he died of type II diabetes, a disease caused by the FDA’s outlaw of accurate dietary information. (This outlaw of dietary information flies directly in the face of the first amendment, but that hasn’t stopped it.)

    So, the USA becomes the USSA, another third-world Soviet State, where rightless submitizens jostle for position in receiving government privileges and handouts, and the thouthgtful and productive turn into jumpy cowards who fear a midnight knock at their front door.

    Since most voters have ignored the Libertarian alternative, I can honestly say: they deserve their fate.

    …I only wish my freedom wasn’t tied to theirs.

    Peace (through superior firepower),