Senators Don’t Grasp Basic Insurance Concepts

Regarding the continuing high-drama ACA reform effort, it is hard to shake the niggling feeling that a significant number of U.S. Senators don’t have even a basic understanding of how insurance works, let alone health insurance.

Every one of the proposals that has zoomed on or off the stage in the past several months has suffered from the same flaw, namely a failure to understand that private, commercial insurance only works when it is spread across the entire at-risk community. Insurance becomes unaffordable when only high-risk people are insured. In order for insurance companies to have enough money to pay the claims, people must be in the system long before they become risky.

We know we are not allowed to call up Acme Insurance to buy home insurance when we are upstairs and suddenly smell smoke. That would be unfair to Acme, and would be insurance fraud to boot. And, more to the point from the economic perspective, Acme would either go bankrupt or be required to charge premiums equivalent to the full replacement value of the insured house.

That is why our mortgage companies require us to insure our homes at all times — sunny days as well as hurricane warning days. The premiums we pay during sunny days are precisely what pays for the damage when Katrina rolls through.

Healthcare is the same — every person every day is at risk, so if we want to use commercial insurance companies to run the healthcare system (and the ACA debates in 2009–2010 settled that for the foreseeable future), then every person must be covered every day.

That is an obvious truth. Yet bill after bill, proposal after proposal, waters down or eliminates the requirement that every one be covered — call it the individual mandate, or required waiting periods, or whatever you will — the point is that healthy people must be in the system. And, they won’t go into the system if they are free to jump in without penalty when they get diagnosed with a disease or hit by a bus.

Any proposal that does not have a strong mechanism to get healthy people into the system — be it by carrot, by stick, or a combo — is really FAKE INSURANCE, and millions will lose or decide not to secure coverage, knowing that they can jump into the system when and if they need it; meanwhile, the truly sick who will pay any price to get insurance will flock into the system — making the pool of insured folks sicker and sicker (and more and more expensive) so the carriers will have to boost premiums even further. That’s the vicious cycle they call the “death spiral.”

Seems pretty basic. So why does proposal after proposal ignore it?

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