A health care plan is not insurance

One argument put forth by opponents of the recently passed health care legislation is that they object to subsidizing others’ health care.  A common counter-argument, often made by intelligent people who should know better, is that you already do that for auto or homeowner’s insurance, and nobody complains about that.  The counter-argument does not bear close scrutinty.

As I’ve pointed out before, the idea behind insurance is that individuals voluntarily contribute to a fund that is used to reimburse members in the face of a catastrophic loss.  This works well in situations where catastrophic loss is relatively rare.  For example, you can get quite good homeowner’s insurance coverage on a $150,000 home for less than $1,000 per year.  If your house burns down (a rare catastrophic loss), you’re covered:  your participation in the insurance fund insures that you’re compensated for your loss.  This kind of insurance works well in any situation where there are large numbers of people who individually have a small risk of loss:  property insurance and auto insurance being the types of insurance most people in the U.S. will be familiar with.

There are three very important conditions that must be met in order for insurance to work in the long term.

  1. The sum of the premiums (annual payments by those insured, plus expected income from investing those funds) collected must equal or exceed the expected cost of all losses experienced.
  2. In order to be fair, each individual’s premium is calculated based on the calculated risk of loss and the expected cost of such a loss.  In the case of auto insurance, the premium is based on your age group and driving record (calculated risk), and the value of the car that you’re insuring (expected cost of loss).
  3. The pool (the insurance company) must have the right to increase an individual’s premium as conditions change, or to refuse coverage (i.e. kick the person out of the pool) if the calculated risk for that person is unacceptably high.

If any one of those conditions is not met, then the pool will become insolvent because the accumulated cost of losses over time will exceed the premiums collected and any income generated from investing the collected premiums.

Note that insurance only covers unexpected losses.  Depending on your coverage (based mostly on how much you’re willing to pay), your auto insurance might cover glass breakage and hail damage, or it might cover just the cost of replacing the car were it to be “totaled” (cost of repairs exceeds the vehicle’s fair market value).  Usually, you choose your coverage based on two things:  how much you’re willing to pay for coverage (your monthly or annual premium), and how much you’re willing to pay out of pocket whenever a loss occurs (your deductible).

Insurance does not pay for gas, oil changes, tires, or other things that are considered normal wear and tear.

A health care plan is a much different thing than insurance.  The new health care legislation provides for the following:

  1. Everybody contributes, whether they want to or not, based on their ability to pay.  And before you tell me that the new legislation doesn’t provide for this, you might read it again.  There are subsidies for people earning up to $88,000, and much of the additional cost is covered by increased taxes on people who earn more than $250,000.
  2. All services are covered, with little or no co-payment (deductible) required.
  3. The pool is prohibited from refusing anybody for any reason.

Let me point out here that the new health care legislation didn’t invent the health care plan.  Most people who currently have “health insurance” actually have a health care plan that’s similar to but much more limited than the one described above (i.e. participation is voluntary and there are limits on services).  They’ve been around for decades.

Health care plans under the new legislation are akin to a “transportation plan” in which you obtain whatever car you can get hold of and, in exchange for a token monthly payment, everything but gas is covered.  You don’t have to pay for oil changes, tires, or scheduled maintenance.  If you fail to check the oil regularly and your engine burns up, the pool is required by law to replace your engine.  If you buy a trashed out 1955 Mercedes Gull Wing, the pool is required by law to restore it to original condition and maintain it.  No matter what you drive or how you abuse your car, your token monthly payment (amount based on your ability to pay) ensures that you’ll always have a working car to drive.  In addition, even those who don’t drive are forced to contribute, again based on their ability to pay.

Yes, I and any person who accepts the responsibility for his own driving habits would object to being forced to pay for that kind of transportation plan.  And yet that’s the kind of health plan I’m being forced to contribute to.  Of course I object!