THINKING OUTSIDE THE BOX
When asked to comment on individuals with high-deductible, catastrophic health plans, Health and Human Services Secretary Kathleen Sebelius said, “Some of these folks have very high catastrophic plans that don’t pay anything unless you get hit by a bus. They are really mortgage protection, not health insurance.” (AP)
By: Dr. Charles Ormsby – April 2013
If you had an acquaintance who was an astrophysicist that specialized in planetary physics and he commented during an interview that the sun came up in the west, you would have to suspect that his brain must have turned to mush. Some sort of brain disorder would be the only explanation for such a patently false assertion.
The quote from Kathleen Sebelius is similarly disturbing. As the Secretary of HHS, Sebelius should be the top dog when it comes to understanding health insurance and, as a prerequisite, what the concept of insurance entails.
What is insurance and what is its function?
Insurance is a way to spread the risk of events that are uncommon, but whose costs/consequences are unacceptably high for an individual or family to bear alone.
For example, assume everyone has one chance in a thousand each year of being hit with a million dollar loss (say from fire) and most people were unable to afford this loss. After watching the unlucky few be devastated each year and losing sleep worrying about being the next unlucky person to be hit, someone would invent the idea of insurance.
“Hey everyone, why don’t we each pay $1050 every year into a pool and then use the funds in the pool at the end of each year to cover the million dollar losses that occurred that year? The $1000 would cover the actual risk and the $50 would provide for a buildup of extra capital in case a higher frequency of loss occurred in a single year plus pay for administrative costs and profit to those guaranteeing the payout. If we do this we can all sleep well at night knowing that we no longer need to worry about this risk.”
After the applause died down, someone might ask, “What should we call this?”
Let’s call it Insurance!
Based on this idea, several million families might participate in the “Global Fire Insurance Company” by paying the annual premium of $1050.
After several years, some analysts might determine that the risk was not exactly the same for all participants in the pool. Those with wood houses might have a fifty percent higher risk than those with brick houses. Those with the brick houses would start complaining that they are being over-charged to pay for the excess risk incurred by those with wood homes.
The Global Fire Insurance Company has a choice. It could establish two different insurance premiums to more accurately align costs and risks or it could stay with one annual rate in an attempt to assuage their higher risk customers who do not want to pay for the risks they are incurring.
If the Global Fire Insurance Company choses to stay with a single annual rate of $1050, a competitor (aptly named the Smart Fire Insurance Company) will quickly spring up offering two policies: one for $1250 (wood houses) and one for $850 (brick houses).
At first, all the wood home owners would sign up for the Global $1050 plan and all the brick home owners would sign up for the Smart $850 plan. But the folly of the Global Company would quickly be evident. Their claims would quickly out-strip their premium income and they would either have to go bankrupt or adopt the rates offered by the Smart Company. Either way, the rates that persist will be those that fairly align with actual risks – because any discrepancy leaves an opening for a new start-up to exploit.
One final note: After these fair rates became standard, owners of wood homes would have an incentive to reduce their fire risks in a manner that would lead to lower rates (insurance companies would adjust or new competitors would spring up) and brick homes (or any home with lower risks) would become more desirable. Over time, home owners and home builders would reduce their risks of fire in response to the differential in insurance rates. The world would become a better/safer place in response to the market’s rate setting competition.
Insurance for health costs is conceptually no different. Insurance represents a pooling of improbable risks that represent costs that are unacceptably high. If an event is highly likely, it is not a good candidate for insurance. If the cost of an event is minimal, it is a poor choice for insurance.
For example, assume that 100% of individuals need heart transplants at the age of 50 and that transplants cost $100,000. It would make no sense to insure this event because the premiums would be set to the actual cost plus an extra administrative fee. Why pay the fee if you can just save for this known event yourself? If anything, people would offer investment plans to prepare for this predictable cost.
If there is one chance in a thousand that you will incur a broken toe, but the cost to treat it with a simple splint was under $100, you wouldn’t insure this either. For the same reason, we don’t insure the cost of groceries or gas for our cars.
So, what is insurance? It is the pooling of risk to avoid unaffordable costs of rare events. Exactly what Kathleen Sebelius says is NOT insurance.
Is she an idiot?
No, her big government, statist philosophy is merely overpowering her rational faculty. Truth no longer matters. She is willing to deny the most obvious facts to achieve her statist goals. She is on a mission.
Her mission is to have the government take over the healthcare industry. She and the statist cabal that is running our federal government have to re-define insurance to get the public to accept government control.
Note that what she and Obama describe as health insurance is exactly the opposite of that described above for fire insurance. What constitutes insurance to her/Obama has the following characteristics:
• Everyone pays the same regardless of risk (young vegetarian marathon runners and older, obese chain smokers pay the same premium; pre-existing conditions pay the same even though they represent established high risk and known costs. Note that this provides no incentive to make healthy life-style choices.)
• Even the least expensive items are covered just for a co-pay (including predictable events like annual checkups – the health equivalent of car inspections, and inexpensive/affordable tests like blood tests and x-rays. Note that this provides no incentive to economize when buying healthcare services.)
This is not insurance. This is the intentional elimination of fair market pricing of health insurance, the government take-over of one sixth of the private economy, and the destruction of the liberties of those that work in healthcare. Equally important, it is the destruction of the world’s finest healthcare system and a permanent intrusion on all American’s right to manage their own healthcare choices (both lifestyle choices and healthcare buying decisions).
Sebelius and Obama don’t have dementia, but they are evil. They are consciously deceiving the American public to socialize our healthcare system and to destroy our liberties.
Don’t let them do it. You may live to regret it … but not for long.