What is Insurance?

Edited to Add: Welcome Instapundit Readers! I apologize if I am slow approving comments today, but I’m glad you stopped by.

I paid two bills this past week, one for car and rental insurance, and one for health insurance. They are both called “insurance” but how they are seen in popular thinking and on the news differs considerably. In both cases I get the sense that for 90% of the people I work with and talk to, or hear through the various media, exactly how insurance started and what it was supposed to accomplish are complete unknowns. Which is a little disappointing, because the history of managing risk can be fascinating in the right hands.

So how did this all start? It started with trade, especially long-distance shipping in the 1600s. Insurance and corporate stocks and bonds share a similar ancestry, in that the goal was to spread out risk in return for reward, or at least for not going past bankrupt into debtor’s prison or losing everything down to your shirt and smallclothes. A group of merchants and other parties with some extra cash on hand would pool their resources, each assuming a share of the risks of the voyage. In return they got a share of the income when the exotic goods arrived in the home port a year or so later. If the ship sank, well, no one had lost everything, although everyone lost a little.

Not long after, groups of people came together and pooled their resources for a similar but more personal purpose. As more and more English moved to the new industrial cities after the 1780s or so, they found themselves outside the family and parish-based relief system that had always helped the local poor and those who found themselves indigent. So they got together by neighborhood, or congregation, or by profession, and pooled a little money to help each other in emergencies, or to afford a luxury like Christmas goose. Goose clubs (see “Sherlock Holmes and the Case of the Blue Carbuncle”), burial associations, Working Men’s Relief Funds, they had different names and covered different things, but the idea was for a lot of people to contribute a little with the assumption that enough money would accumulate to help the contributors if, Heaven forefend, something terrible happened. You might call it mutual assurance, and a form of it exists to this day. My current health care plan is a membership in a variation on the mutual assurance group.

At rock bottom, that is what all insurance still is today: an enormous pool of people who pay in a little every month so that if something terrible happens they will get a lot back out. Sort of a gigantic rainy-day savings account, if you will, but managed by someone else.

What fascinates me is how people look at car/home/stuff insurance as being very different from health insurance in how it is used. Car/home/stuff insurance kicks in when something bad happens – a nasty wreck, a house-fire, someone breaks in and steals your computer and jewelry and your pocket-watch or stamp collection that is now worth $$$. You don’t tap your car insurance for new tires, even though they are necessary for health and safety, or for repainting the inside of the house after someone decides that brown and crimson really doesn’t work anymore, or that the wallpaper that came with the house needs to go because pink, pea-green, and screaming orange are so dated that archaeologists now use them to identify epochs with. No, you pay your premiums and are glad that nothing has happened, and (I hope) watch your premiums slowly drop over the years because you have NOT made a claim and you don’t live in a high-risk area.

Health insurance, however, has become a “pay for everything” fund. The media expect health insurance to cover a lot of things I consider optional: hormonal birth control that is not medically necessary, yearly physicals, mammograms (for those who need them), well-child visits and all those things lumped into “routine examinations and care.” And then they also expect the insurance pools to only ask for small contributions from the users, contributions that don’t cover the risk. With predictable results, especially once the federal government really got involved in deciding which kinds of coverage everyone needed and how it would be administered.

I say predictable, because it comes down to who is the customer? Who is paying for the insurance: the end-user or a second party? If it is the end-user, that being me, I can pick and choose what coverage I want. If I only want liability on the car because I’ve saved enough to replace it and its Blue Book value is so low that the first question on the claim form is “How much gas was in the tank?” I can do that. If I want “replace it with a new one just as fancy” coverage, I can get that. Ditto for house and rental insurance. But once I was no longer considered the customer for my health insurance, when I was informed that I had to have coverage for X, Y, and Z that I’d always opted out of because I didn’t need them or they didn’t apply to me (prostate cancer screenings, for example), either my policy was cancelled or the rates went up a goodly amount, or both.

And my care options plummeted to the point that I crossed my fingers and told my doctors “I’m self pay,” and if pressed “I’m between carriers” (which was true, alas, fairly often after 2012) and just paid out of my savings rather than mess with finding a physician who took my insurance (I’m not driving 150 miles one way just to have my yearly lady-bits check. No. Assuming I could find someone located that close who took Brand D insurance.) Tellingly, paying cash gets you a 20-25% discount on all services and fees that I’ve encountered thus far. Instead of complaining about the “high cost of health care” how about we complain about “the high cost of the administration and bureaucracy now associated with health care.” And the problem of no longer being the customers of record.

People need health insurance. A lot of people can’t pay out-of-pocket for serious medical bills, things like chemotherapy and joint replacement and catastrophic car wreck injuries. I’m all for health insurance. I’d like to have better health insurance. But if society views it as a “pay for all the things” service instead of a “pay for major events” pool, it’s going to be a mess. How do we shift the mindset of people about insurance? No idea. Well, I have some ideas, but that’s why I’ve never been asked to run for office and why I’m not in charge of the world.

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18 thoughts on “What is Insurance?

  1. If there were a free market we could each buy what we want instead of what someone else thinks we need. I know that’s a radical idea but it might be worth a try.

    • Oh yes. Portable health insurance, tailored to an individual’s needs, multiple sellers, and a special reserve pool to help folks with chronic conditions . . . Nah. That makes too much sense.

  2. NCT beat me to it, sadly ‘maintenance’ on the human body is NOT cheap, nor is it easy when the human does bad things to itself… I’m surprised you ONLY get 25% discount, considering that up to 50% of costs are overhead for the bean counters in the back office…

    • I suspect it is because all the paperwork except for the billing is the same, lest the Feds scream about discrimination and lack of patient care quality metrics and all the stuff they use to get between the patient and the doctor. But I may be a WEE bit biased based on personal and familial experience.

      • A while back we found a doctor who didn’t take insurance. Nope, none at all since he was a one-man operation. He’d give you the form with the code on it so you could file for reimbursement with your insurance if you wanted to. It worked out really great for us, especially since our health insurance is used to some…odd payment situations. Now, usually those come from overseas, but they never batted an eye at what we sent in. And, if I remember right, it was quite a bit more than a 25 percent discount over what we’d otherwise pay.

        I’m not sure if he’s still in business, since this was pre-“Affordable” Care Act.

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  4. One of the few things that Congress explicitly has the power to manage is to set up a uniform system of weights and measures. This is relevant to healthcare because Congress does, in fact set up such a system in the form of the CPT code book. The way it does so is penny wise and pound foolish and contributes mightily to our poor situation.

    You see Congress hires the AMA to set up the CPT and update it yearly at no cost to the taxpayer. The AMA loves this deal because they retain the copyright that way and charge huge bucks in fees to anybody who uses it. They especially charge electronic data systems that use the code book. This has killed off any chance of a pricing website that would let you figure out the least expensive way to get an MRI as easily as the least expensive local gas station. Every new user of that theoretical website would require a new license.

    The dominant effect of this arrangement is to increase medical expenses by making it more expensive to administer and more expensive to price shop for good deals while at the same time widening the gap between the least cost provider of a service and the highest cost provider.

    A simple bill that just pays the AMA for its service and removing copyright protection going forward by having the document become public domain would have tremendous positive effects on the cost of service and the attitudes that we have about health insurance.

  5. Your lady bits don’t need a yearly check. Women primarily die of CV disease so this is another example of how insurance pools are being defrauded.

    Palpation is not a valid diagnostic anywhere tried but someone got around your commonsense.

    • Whether yearly is important or not depends on family medical history. In some families, it is more important to have certain routine and other tests done on a more frequent basis, in others it is best done on an “as needed if things start to change” basis.

  6. Health “insurance” is not insurance at all. It is pre-paid medical. I’m not sure why it’s still called insurance.

  7. I spent my career managing risk (property – casualty) and it has troubled me to see how health “insurance” works. The history can be traced to WWII when wage controls prevailed, and clever unions talked employers into providing health care “insurance” as a way to get around the restrictions. It is so ubiquitous, we barely question it, but why on earth should you get health coverage form your employer? When you want something to eat, you don’t expect your employer to provide a grocery store. When you want a place to live, you don’t expect your employer to build you a house.

    It may be too late to break the linkage, but that is the source of the problem. When someone else is paying for you, prices aren’t kept in check.

  8. “But once I was no longer considered the customer for my health insurance, when I was informed that I had to have coverage for X, Y, and Z that I’d always opted out of because I didn’t need them or they didn’t apply to me (prostate cancer screenings, for example), either my policy was cancelled or the rates went up a goodly amount, or both.”

    The geniuses in congress (the ones who “wrote” Obamacare but didn’t read it) call insurance policies which don’t cover prostate screenings for women or maternity benefits for old, retired couples “substandard.” Just like their own brains, assuming they have any.

  9. Our current medical compensation system is more along the lines of a buyer’s club than an insurance market. You can only buy what is offered from the club. The membership fees in any given one of these buyer’s clubs are so high as to preclude membership in more than one club. If what you want is not offered through the club to which you are a member, you are out of luck.

    Nearly every provider of anything medical offers their wares & services through one or several of these buyers clubs. However, if you try to buy their wares or services without going through one of the clubs that they provide through, they will charge you massively inflated prices. Meanwhile, none of the vendors for these wares or services are obliged to provide them through any specific club.

    Just an industry-wide collection of buyer’s clubs. Nothing more.

  10. paying cash gets you a 20-25% discount on all services and fees that I’ve encountered thus far

    I thought that too, briefly, but it turns out to be mistaken. What really goes on is this.

    1. Doc signs up with insurance companies who set reimbursement rates for procedures.
    2. For Procedure W, say the reimbursement rate is “50% of physician’s stated price, up to a maximum of $200”
    3. Physician therefore sets stated price of Procedure W at say $500. This guarantees that the physician will always get the $200 maximum
    from the insurer, and also allows a bit of wiggle room for changes in insurer rates, different insurers. Since the number is irrelevant financially
    you just set it up to be a big number that guarantees you minimum admin hassle.
    4. Insured patient walks in wanting Procedure W, gets treated. Insurance company gets $500 charge from physician, pays $200. Physician writes of $300 as discount.
    5. Self pay walks in wanting Procedure W. How much ? $500, but seeing as you’re a self pay we can give you a 25% discount, so it’ll only be
    $375. Self pay gets treated, pays $375 and walks out thinking he’s got a deal. But sadly he got a discount from a fake price and actually paid almost twice as much as the insurance company paid.

  11. A key point about insurance is that it’s really for the 1% event. We can’t afford $100,000 for a fire, or a car accident, or a medical emergency, We’re risk averse and willing to pay something over the fair value, like $1,250 each year.
    THAT’S real insurance. For anything that is more likely, even up to once every ten years, that’s financing. We ought to budget for a new roof, or a new car, or a checkup.
    But since people are heedless, and dirigistes are compelled to meddle, we get bad anecdotes making even worse social policy.
    AND once politicos get into insurance, it’s just another way to hide redistribution. Old/sick cost 12,000. Young/healthy cost 2,000. But politicos in their magnanimity charge everyone $7,000, a fraud to move $5,000 to the favored constituent.

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