BUD BREWER
One Man's Opinion
Understanding The Transfer of Risks
November 7, 2009: In order to protect themselves from catastophic loss of net worth in the event of an extraordinary event such as an automobile accident, a residential fire, violent storm, or damage to or theft of a valuable asset, the consumer today has the opportunity to join pools made up of other people all of whom have a common desire to protect themeselves from such a loss.
These pools are called insurance or indemnity companies and operate on the basis of determining each party’s cost (policy premium)to be part of the pool using historical experience along with a calculation of probability for the number and frequency of occurances expected in the future.
In order to assure that benefits may be paid on any legitimate claim submitted by a policy holder, the owners of the insurance company must commit a certain amount of capital to the reserves for anticipated losses over and above the amount of premiums collected from the policyholders. As the dollar value of claims or loss rise or fall, the company accounts for these amounts as an underwriting profit or underwriting loss and this amount will be credited or charged to taxable earnings of the pool. In addition to these gains or losses, and as the primary source of the insurance company’s earnings, the entity receives income from the investment of their member’s pre-paid policy premiums and this also is credited to the income of the company. Careful risk management will enable the company to reduce underwriting losses and in some cases even show an underwriting profit, however, underwriting profits usually will reflect a probability that the premiums are excessive and this fact will soon subject the company to competition from other pools with lower premium rates.
This works well for property such as that listed above but it hasn’t worked well for healthcare insurance. Why is that? One reason is that risk management is based on the ability to forcast or estimate the probability of an insured event taking place and being able to quantify the probable loss. In healthcare, the probable loss is potentialy unlimited. So the premium cost for healthcare insurance is based more on recovery of losses than the probability of an event. In order to provide some constructive influence over the amount of monies the pool has to pay out from premiums collected, the risk manager may deny coverage for pre-existing conditions. In these cases if a member of the pool has experienced a serious malady or desease before joining the pool, the premium charged that individual for his or her share of the general coverage risk transfer could be exceptionally high or even denied coverage at all.
It is this procedure that has so many individuals upset about the cost of their health insurance and the belief that having the government take over the pool is going to solve their problem. It will do so only temporarily and then at the expense of the population as a whole by way of increased tax rates. Furthermore in providing healthcare services, the medical profession’s charge is an open ended mandate that says “make me well no matter what the cost”. Being sensitive to the needs of suffering people, the medical profession spares no expense in pursuing the cause of and needs for the individual to be cured and then expects to recover the major portion of those costs from the insurance company or in the proposed case, the U.S. Treasury .
This fact makes the element of probability in determining the cost of premiums to be moot. It becomes more a process of reimbursement and there is little or no guidanc for limiting the potential cost of the cure. What a dilema. Unless the individual consumer becomes willing to settle for a restricted degree of health services, their cost of sharing the risk via ever increasing expenses billed to pools will rise in parabolic form. Our political friends in Congress and the Administration are prepared to provide these medical services no matter what the cost as long as their constituents indicate to them that they expect to receive the benefits of unlimited health care. Their solution, i.e., increase tax rates and take control of the administration and distribution of medical services, will eventually overwhelm the ability to pay from the country’s tax base. Countries that now have a Universal Health care single payer system have had to solve this problem by reducing the quantity and quality of the services they provide their citizens. And even then, the demands upon their tax base is ever growing.
We will no doubt soon begin our journey down this long road to mediocrity unless a growing number of citizens begin to understand where this road leads and insist that the healthcare legislation be scrapped in its current form. In place thereof, perhaps a system where the patient is required to have both input (approval) regarding which services they are going to have performed and financial responsibility (so called “skin in the game”) to pay a rising variable percentage portion of the cost of any proposed medical expenses to be incurred in that year that are above a given standard. Any allowable or standard amount of coverage provided under the basic insurance policy may be increased voluntarily by paying an increase in the normal premium. In this way, everyone has a basic amount of health care provided for a basic premium, but when proposed services rise above that minimum, they have the discretion to accept the proposed services but must either pay for a rising portion of that increment or defer receiving some or all of them or consider less expensive alternatives.