Sunday, March 28, 2010

Health Insurance - A Basic Definition

The fight over Obamacare has brought a basic problem to the surface - many Americans have no idea what insurance, particularly health insurance, is.

The basic definition of insurance is a risk pool. A group of people band together, put money into a pool, then someone who needs the money pulls it out of the pool. A very simple example: A village of 100 people decide to put $100 each into a common pot. One person's barn burns down, he pulls the amount of money needed to rebuild the barn out of the pot. So, his replacement cost is not the full cost of building a new barn, but his $100 contribution to the pot. Now that the pot is depleted, everyone has to put up another $100 to build it back up for the next person who needs it. Nothing is free - it is simply spreading the risk over a number of contributors.

Now, add in the concept of an insurance company. This can be seen as the pot keeper, and the manager who decides who qualifies to get money out of the pot and how much. For his services, the pot keeper is paid a percentage of the $100 from each contributor. Again, nothing is free.

Translate that to modern times. Insurance companies are glorified pot keepers. They keep pots for all kinds of insurance, including health insurance. The money for the pot still comes from all of the individual contributors. The insurance company's overhead is pulled from the contributions - what is left is the pot from which all claims are paid. Again, nothing is free.

If what the insurance company is paid for their services is not enough for them to remain in business, the insurance company goes out of business. If the number of contributors, or the amount they contribute, does not meet the amount of money paid out for claims, either the contributions go up, the number of contributors go up, or the insurance company goes out of business.

It is clear to me that many Americans do not understand this. They believe that health care insurance is a benefit that should be given to each person by the government. It should be provided to them just like social security, welfare, medicare, food stamps ... etc. This is the definition of an entitlement - not insurance.

Health care is going to cost money - lots of money. No matter where the money comes from to pay for it comes from, the costs are still there. If a medical procedure costs $10,000, and the 'insuree' only has to pay $1000 of that, someone still has to pay the other $9000. Where does that come from? The government? The government has no money - it only has what is takes away from other individuals and companies in the form of taxes and fees. So, the other $9000 comes out of the pocket of other people - a risk pool, but with a big difference.

The difference - Obamacare increases dramatically the number of people who can pull from the pot, but doesn't give a corresponding increase to the number of people paying into the pot. Given our simplified example that we started with, this means that the people paying into the pot have to pay in more, or the insurance pot goes out of business.

I am by no means a fan of insurance companies. I have had my share of battles with them over the years, and it is no fun being stuck in a war with them. There are a lot of things that could be done to make them easier to deal with and more affordable - but Obamacare goes way off the deep end in punishing them, and in the end putting forth regulations that will force many of them out of business.

Once they are gone, who is going to provide that coverage? The government ... a single payer system ... oh, wait - that is what Obama is on record stating his overall goal is. The government providing and controlling all aspects of health care. If Obamacare is allowed to stand as is, this goal of Obama and the far left is on our horizon - after all, they've already told us time and time again that is what they are after.

No comments: