Why Health Insurance isn’t Working

Health insurance is somewhat different from other forms of insurance.  Really, what we call health insurance today is part insurance and part prepaid healthcare, which is why it isn’t working very well.  Today I thought I’d discuss how insurance works, and how health insurance is different.

Most forms of insurance are used to reduce risk.  For example, let’s say that there are 100 homes in an area, all valued at about the same price.  The homeowners decide that if they had a fire, they would not be able to pay to rebuild their home since it takes them 20-30 years to build up enough money to buy one.  They therefore decide to each chip in some money into a pool that they could then use to rebuild homes if there is a fire.  In doing so, they eliminate the risk that they would need to come up with a lot of money at one time to rebuild their home.

The first thing they would do is to determine how much money they would need to contribute to cover the costs of rebuilding homes.  Let’s say that they look through data and discover there is a home fire that destroys a home about once each ten years, and that the value of each home is about $100,000.  The amount they would need to contribute is:

(Value of Home x Frequency of Fires)/(Number of Insured)

= ($100,000x 1/10 years)/100 homes = $100 per year

Now, there is a chance that they could have two fires in a year or have a fire relatively early before they had built up enough money to cover the expenses, so they may choose to increase that a little, maybe to $110 per home until they built up enough funds to cover a fire or two, and then reduce the premiums back down to $100 until there was a fire and they needed to replenish the funds.  If a fire occurred and their funds were depleted, they might raise the premium rates back up for a time to build up a reserve.

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Note that everyone is actually paying the cost of replacing his/her own home as often as he/she was likely to have a fire.  He/she could also just save up the money and replace the home himself/herself if a fire did not happen for a long period of time.  There is a risk, however, that a fire could happen right away before savings had built up – hence the need for insurance.  If he/she had enough money in the bank to just pay to rebuild the home, he/she could just be self-insured and save the insurance premiums.

After a little while without a fire, the homeowners in the insurance pool would start to build up some funds in the pool.  Rather than just leave the money in cash, they might want to get a better return for their money.  For example, if they had built up enough to cover 5 houses – $500,000 – they might choose to invest $300,000 of the money in stocks where they could get a good return over long periods of time, keeping $200,000 in cash so that they could cover at least 2 home fires without needing to sell stock.  If the market swooned right when there were a couple of fires, they would still be covered.

An insurance company is no different.  They figure out how often a fire will occur and charge enough to rebuild homes at that frequency.  They also charge more for people who are more likely to have a fire, based on things like neighborhood and the age of the home, and based on how much damage they expect a fire at the residence to cost.  They would therefore charge more for homes that cost more, and less for homes that are close to fire hydrants and maybe those which have sprinklers and other measures to reduce the damage from a fire.  They also charge a little extra to pay for the salaries of the insurance company workers and executives, advertising, and other costs of running the insurance company.  If there is enough competition they will reduce these costs as much as possible to keep their premiums in line with those of the other companies.

The insurance company makes money by charging a little more than they pay out and by investing the money that they have stored from premiums during the periods between events.  If there is a big event they may raise premiums for a while to rebuild their savings to reduce the risk that they will not have the funds to pay for the next event.  If there are changes in their risk – for example, the value of the homes increases or there is an increased risk of fires because the town authorizes the use of fireworks – they may increase their premiums to cover the additional risk.  Likewise, if people start using the insurance more often, they raise premiums to cover the additional costs.

Health insurance is different.  In the past, what was called “major medical insurance,” which only covered hospitalization, was similar to fire insurance.  Most people would not go to the hospital in a given year, and therefore money would build up in the insurance pool which could be invested.  Modern health insurance, however, is really just prepaid healthcare.  Because it covers doctors visits, shots, and other things that most people do each year, most of the money that people pay into health insurance is paid out in claims each year.  Also, unlike homeowners insurance that most people do not use and would not use unless there was a major event, many people will go to the doctor for the least thing because they have the sense, correctly, that they are paying for it anyway.  Likewise, they might choose the expensive medicine over the cheap medicine because they like the color of the pill or the box it comes in.  If they had to pay $100 more themselves, they likely would not think the color or the box was worth the extra price.

So with health insurance, you are just paying the cost of your likely medical expenses each year to an insurance company, which then turns around and pays the doctors, in addition to paying into a risk pool for major events.  The portion going to the risk pool for the very serious conditions that require hospitalization may be building up and being invested, but the portion going to general healthcare like doctor’s visits is spent each year.  Because the money is being spent each year, the cost is equal to the amount you would pay the doctor when you went plus the cost of the insurance company administration, advertising, and a fee to make it worth their while.  So you end up paying more for healthcare than you would if everyone just went to the doctor and paid cash and only used insurance for hospitalization.

In addition, because the natural tendency is for people to use more healthcare since it costs the same whether they use it or not and because the most expensive treatment and the least expensive treatment generally cost the same to the patient, insurance costs are higher than they would be if people were limiting their visits and choosing the low-cost treatment because they were paying out of their own pockets.  This feeds on itself, with premiums increasing, causing people to be more likely to go to the doctor and “get their money’s worth.”  We would be paying less and be in a much better situation if health insurance were like auto insurance, where you pay for the tune-ups and the oil changes yourself, reserving the insurance for only unexpected accidents.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Missed Chance to Change American Healthcare History

I’m extremely disappointed that one of our Senators, Lamar Alexander (R-TN), went along with nine other Republicans and all of the Democrats and voted against the straight Affordable Care Act  repeal bill put forth in the Senate the other day.  The repeal would have been phased in over two years, giving plenty of time for people to shift to new health plans (that would become available once the markets were freed to sell insurance plans that people wanted, rather than those mandated by the government) and for Congress to pass free-market measures that would reduce the cost of healthcare such as mandated Health Savings Accounts, transparent pricing,  and portable health insurance, sold to individuals instead of through work.

When I wrote to Senator Alexander about the repeal of the ACA, he said that he would not vote for any bill that caused people to lose access to health insurance.  Yet Obamacare is imploding as we speak, and it is likely that many insurance markets will have no providers, so people will lose coverage.  Others will have only one or two providers, and those ones will charge so much that those who can’t afford standard health insurance won’t be able to afford the Obamacare plans anyway, so people are losing their health insurance even if Congress does nothing.  And even if people have insurance, that doesn’t mean they have access to healthcare through their insurance.  Many people right now need to pay thousands in premiums and thousands for their deductible even with the Obamacare plans, so they end up needing to spend $10,000 or more per year before their insurance covers anything.  How is this helping them?

And what about Senator Alexander’s other constituents?  How can he vote to protect a small subset of the people in Tennessee while forcing the majority to pay for their protection.  I strongly believe that individuals should voluntarily provide for those who they find in need due to circumstances.  Certainly we need to care for the 21-year old who gets brain cancer and needs expensive treatments.  We need to help the young single mother who has a child who need round-the-clock care.

But think about what we’re doing by enacting forced welfare.  We’re telling productive members of society that they must surrender a portion of their income to us to give to someone else, either through taxes or by forcing them to purchase subsidized health insurance on a sliding payment scale, or we will go to their homes and seize their property and/or throw them in jail.  We are taking people’s money by force and giving it to other people, some who truly have no other way, some who simply choose not to produce, and some  who are unable to take care of themselves because they always have made bad choices and continue to do so.

In many ways, forcing everyone to contribute to what is effectively a public healthcare system, which is poorly run, has an inferior product, and is way over-priced as all public systems are (see public schools for another example) is worse than simply having taxes and providing overpriced, poor quality benefits (see Medicaid) to those who qualify for them.  At least with just taxes people can take whatever money is left over and maybe get better healthcare than what is available in the public system.  By forcing people to buy into the public system (which is what you’re doing when the government fully controls the insurance offered and the prices that can be charged, even if private companies are providing the insurance), you take away that ability for all but the very wealthy to find better healthcare since they have no resources left with which to do so.  Note the similarity with public education, where because people are already paying for the public system through property taxes, only the very wealthy are able to afford private schools, even in places where the private schools are far superior.

But what about the people being helped by public welfare programs?  At least it is a good thing for them, right?  Maybe not.  Think about people in your family who could get a full-time job and take care of themselves, but choose not to.  This is different from a family member who loses a job and needs to move in for a couple of months or needs some help with the rent until they get back on their feet.  This is someone who always has an excuse about why they can’t work here or work there.  Often there is someone in your family who is an enabler – a very sweet person who pays for the food, apartment, and lifestyle of the non-working family member.  In doing so, the needy family member never gets a job or makes anything out of their life.

When we give through private charities, the charity is normally able to do a better job of figuring out who truly needs help and who would be better served with a kick in the pants.  Public programs often give money out blindly, and often even encourage individuals to not work or do anything or the hand-outs would decline.  Get a job, you see your housing allowance cut.  Have another child, see your food stamps payments increase.  If you’re religious, imagine needing to stand before God, having had two good arms, two good legs, and a good brain and having done nothing with the gifts He had given you.  If you’re not, just imagine spending your whole life and doing nothing of value.  How kind is it to encourage others to face that fate?

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Fixing the US Health Payment System: Repeal and Remove

Many say the US healthcare system is broken, but they are wrong.  To see a broken healthcare system, go places like Vietnam and see people dying on gurneys in hospital corridors, or even Great Britain  to see people waiting months for critical procedures.  See also cases like Charlie Gard, where the government of Great Britain is basically telling the parents that they must just watch their child die, forbidding them from going and get care elsewhere.  Because the waits are so long, “good” Canadian insurance includes a clause that allows for treatment in the US if the lines are too long in Canada.  In the US you can almost always get into see a doctor the same day or at least within a couple of days, which is not true in many countries.  Even if you don’t have the money required to pay for care, you can still get the care needed to preserve and even better your life through the emergency room.  You may get a bill, but the hospital will just write the cost off and pass it on to other patients who have insurance.  No one is dying in the streets for lack of care.
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The issue in the US is not healthcare, but the effects of health insurance and government programs on the healthcare markets.  Because most people get insurance through work, and because each insurance company has their own deals cut with providers, it is virtually impossible to figure out how much you will pay for a procedure ahead of time.  You might get the list price:  “Popping that pimple will cost $20,000 plus doctor’s fees, billed separately,” but the actual price you and the insurance will pay will be maybe 10-20% of the list price.  The trouble is that the person who goes in without insurance will need to fight to get a better rate, and that rate usually depends on how much the hospital thinks they can get out of them.  If you can pay $20,000, you’ll pay $20,000.  If you can only pay $200, you’ll pay $200.

Health insurance also distorts the cost of routine care at your doctor’s office.  They charge $120 for the visit and $500 for x-rays and screenings, but they know they’ll actually get $60 for the visit and $150 for the screenings from the insurance company.  If you knew you would be paying $60 for a visit and $150 for x-rays, you wouldn’t be willing to pay $1200 per month for health insurance – you would just pocket the $1200 and write the doctor’s office a check during the half dozen times your family went in during the year.  Put the rest of that $1200 away each month and you’d have the money needed for the times you did end up with a hospital stay or more serious issues.

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The issue is that you don’t know what things will cost and what you will pay because insurance has distorted the prices so much.  As a personal example, after a family member spent a couple of weeks in the hospital recently, we received a bill for $60,000.  Insurance reduced the amount down to $15,000, then we paid $3,000.    A $60,000 bill is scary.  A $15,000 bill is significant, but manageable with some savings and perhaps a payment plan, particularly if we weren’t paying $12,000 per year or so in health insurance.  Without insurance, however, we would have needed to fight the hospital to reduce the bill, and perhaps seen it cut to $20,000 to $30,000 after a significant back-and-forth since we don’t have the negotiating power the insurance company does.  If insurance did not exist at all, however, the hospital bill would have been $15,000 to start with since no one would go to a hospital charging $60,000 when another one across town was charging $15,000.  There would probably be a phone app that you could use from the waiting room to compare prices at local hospitals and you would transfer for a $45,000 savings.

The Affordable Care Act (Obamacare) has not brought healthcare to millions of people as some advertise.  Instead it has just amplified the issues caused by the insurance market by making all plans cover the same thing (everything) and forcing everyone to pay with insurance instead of paying out-of-pocket.  It has also added government subsidies, which have the effect of making health insurance cost “whatever you are able to pay” rather than being based on the value of what you receive in return.

In addition, while you may have insurance through Obamacare, it doesn’t mean you’ll actually get healthcare.  Customers are stuck with insurance policies that they cannot use since the deductibles are so high.  It doesn’t do anyone any good to have a policy with a $9,000 deductible since very few people would ever reach that level in a given year.  Even if they did, how many would have the $9,000 to pay?  They would be better off just saving the $4,000 to $8,000 they spent on the insurance policy and just paying for healthcare out-of-pocket.

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Even those who are now on Medicaid, which covers all of the costs, are having trouble getting care since the government is not reimbursing providers enough to make them want to treat Medicaid patients.  In California the free and reduced price clinics have gone away due to the ACA, but doctors are not accepting Medicaid patients.  One individual was quoted in a recent Wall Street Journal article who went to mexico for a critical gull bladder operation after waiting for months in the US for the surgery needed to save her life.

The actions needed to fix the US health payment system are actually quite simple and could be summarized as follows:

  1.  Repeal the ACA in its entirety.
  2.  Eliminate the tax deduction for companies that provide health insurance to their employees.  This would incentivize them to stop providing employer healthcare and just pay higher salaries instead.
  3.  Create a tax deduction for individuals who buy insurance.  This would further create the incentive for insurance to be something individuals buy instead of the norm to be to get health insurance through work.
  4.  Outlaw insurance with deductibles of less than $3000 per year for a family of four.  This would cause most people to pay for routine care out-of-pocket, which means they would be more sensitive to prices and shop around.
  5. Require that all doctors and hospitals publish their rates for procedures online and outlaw charging different people different rates.  Pricing transparency is critical to an effective, efficient market.  Prices would fall as people sought out the best deals for healthcare just as they do for everything else.
  6. Require that everyone put 10% of pay into an HSA.  This would ensure people had the money to pay for healthcare as needed instead of buying a bunch of other things and then not having money for the doctor.
  7.  Provide a direct tax credit for donations made to organizations like free clinics and hospitals.  This would provide a safety net for those between jobs or who were unable to work.  Individuals would be funding these causes directly instead of the money filtering through the government first.

Take these actions and the issue would virtually disappear.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.