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The notion of "Insurance" and how the American insurance mess developed

Obama care deadline looms as sign-ups accelerate
Obama care deadline looms as sign-ups accelerate
Photo by Joe Raedle/Getty Images

The basic notion behind all insurance can be summed up with two words; shared risk. Any group of people who pay periodic insurance premiums for insurance expect a portion of their payment to be deposited into a risk pool against covered hazards. Those who suffer a loss are made whole by payments from the risk pool. The principle is best explained by a well-known TV auto-mechanic who sold oil changes. "You can pay me now or you can pay me more later," he said.

Many insurance companies were originally owned by the folks that it insured in mutual companies. Premiums deposited into the pool were invested and any returns not needed by the pool were redistributed back to the insureds. Any surplus money was similarly returned to policy holders.

Early insurance companies protected against fire losses and may have funded fire department operations. Insured homes displayed a sign which signaled an in-force policy. In the case of a fire, the fire department put out only fires in homes owned by policy holders. Non-insured homes were allowed to burn.

The whole idea worked pretty well until insurers subdivided or rated the risk pool. In an effort to limit losses, insurers required extraordinary payments to or even excluded homeowners deemed to represent a more than usual risk. The practice of "risk rating" spread. Deductibles were added and exclusions proliferated. We know these rating devices today as the "whys and wherefores" in complicated insurance contracts. Folks with the highest need for insurance were restricted from owning it.

Examples of this practice are legion. People who live in earthquake, flood, or hurricane areas may well be excluded. A tendency toward hail in one area of the country can easily end private hail insurance in that area. Government then becomes insurer of last resort and creates programs to insure events like floods, or crop damage that the private sector chooses not to cover.

Similar thinking went into the evolution of health insurance in America. Rating of individuals and groups became the name of the game. Potentially uninsurable citizens due to rating were offered relief by the government run Medicare program in 1965.

Prior to World War II, very few people carried health insurance. Corporate health insurance groups became fashionable during the war and after. Wages had been frozen during the war years and employers embraced health insurance as a (then) cheap benefit for workers. The new benefit helped retain needed workers, and still conformed to wartime policy. Following the World War, health insurance benefits grew between large employers.

There are several methods for rating health insurance participants. Employer based plans are rated as communities. Health records of all employees are analyzed and rated. Larger companies enjoyed the lowest premiums. Smaller firms could be negatively affected by one adverse event. Other rating schemes have measured age, pre-existing conditions, gender, lifestyles, hobbies and even credit ratings in determining premium charges.

The 2010 Affordable Care Act (Obamacare) unwinds some of the complexities that have wormed their way into health care rating. "State health insurance exchanges" expands risk pools for individuals and eliminates exclusions or waiting periods for pre-existing conditions. Obamacare attempts to simplify something very unwieldy while satisfying the hundreds of interest groups who will be winners or losers as the result of any change to the status quo.

The 2700 pages of the ACA are not as much new law as much as modifications to existing law. The Affordable Care Act of 2010 is wobbly baby steps toward unwinding a system so complex it cannot work very well. There are over 35,000 registered professional lobbyists in Washington D.C. who sole purpose is to influence the 535 members of the Congress. Health care interests support the work product of thousands of high priced lawyers.

Kansas and Missouri voters already know that anything that can be opaquely designed by a bunch of lawyers can be circumvented by three Kansas farmers over morning coffee. So the unwinding of the lawyers and the farmers begins and at least partially explains why everything surrounding health care is so contentious.

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