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Insurance: A bet you don't want to win

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Insurance is simply about limiting risk - and the Devil's in the Details when it comes to the Affordable Care Act.

Even though our founding father Benjamin Franklin was the first to form a (fire) insurance company in Philadelphia, we Americans don’t know what insurance is. Here are two definitions:

Concise encyclopedia:

Contract that, by redistributing risk among a large number of people, reduces losses from accidents incurred by an individual.

Wikipedia:

Insurance involves pooling funds from many insured entities... to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee...

Get it? In order to have insurance you need a large pool of people. It’s in the definition. You can’t have insurance without a large group of people, some of whom will not experience any loss. Why is that? Because one individual doesn’t have enough money to protect herself against catastrophic loss! You can’t have an insurance pool with only the people who experience loss. You’d go out of business. The people who don’t make any claims pay for the people who do. That’s why young people have to be in a health insurance pool.

When you buy insurance, for example car insurance, you are protected from a risk, namely, the risk that you will have an accident and lose all your money and your house. You pay, say, $200 year, and if you have an accident and lose your left arm, you don’t have to sell your children for medical treatment. It doesn’t matter to anyone (but you) whether you are the guy that has the accident and gets the insurance money. In fact, it’s better for you if you don’t have the accident! You pay a little bit of money compared to what you would have to pay if you’re the unlucky one. The government, by the way, requires that you buy car insurance. The state government.

When you buy fire insurance, you are protected against the risk of losing your house in a fire. It doesn’t matter to anyone (but you) whether you are the guy that has the fire and gets the insurance money. When I buy fire insurance I hope it isn’t me. I’m glad if somebody else has the fire! They can have my premium and welcome to it!

When evaluating the health insurance provided under Obamacare, it makes no sense to argue that young people are paying for old people. It’s the same as every other kind of insurance: you pay a premium you can afford, and hope it’s not you who gets sick.

The important thing to remember here is that you are not buying health care! When you buy car insurance, you are not buying a car; you are buying protection against the possibility of losing everything you have.

Everybody has the possibility of getting sick or hurt, no matter how young or old, healthy or unhealthy we are. We have different amounts of risk, but we are all at risk. If your risk is less, you pay a smaller premium. 

For example, if you are young, your risk of getting sick is less, so you pay a smaller premium. (Obamacare puts a cap on how much less a young, healthy person must pay: it can’t be less than 1/3 of what an older person pays.) When you are old your risk is greater and you pay a higher premium. No one cares (except you) whether you are the guy who gets sick. In fact, I’m the lucky one if you get sick and it’s you who is getting the money I paid. I’d rather not get sick! On top of that, we all get old. When the young become old, they will be glad the young are still in the pool.

I think of insurance as a bet that I can’t lose: if I don’t get sick, I win. If I do get sick, I’ve only laid out a fraction of the money it will cost to get me well. WIN-WIN! Still, you might say, people should have the right to choose their own bets.

Fine. That works for fire insurance. If you own a house and don’t insure it and it burns down, tough luck. The problem is, that if someone has no health insurance and still gets sick, we can’t just let them lie there and suffer or perhaps even die.

States understand this principle when it comes to car insurance. We all have to pay fees on our car insurance for “uninsured motorists” That’s so that if someone causes an accident and has not paid for insurance, the people who are hurt in the accident are still entitled to some financial protection.

Well, guess what. Part of the cost of insurance premiums without Obamacare is because we are all paying higher premiums because the people who haven’t paid for insurance are still covered! Hospitals charge higher rates because they can’t turn away emergencies. We pay higher taxes so the people who haven’t paid for insurance can get Medicaid, or other types of state/federal financial support for their care like state catastrophic funds.

So, here’s an idea. Why don’t we just do away with health insurance all together? We’ll still be covered by Medicaid or the emergency room...( at least until the money runs out. That’ll take about six weeks.) The ones who get sick will just lose everything they have. So what. Sounds fair to me. But given the choice, I’d rather hedge my bet.

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Nancy Gerth is a freelance writer

Tagged as:

insurance, Obamacare, Affordable Care Act

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