Understanding Insurance

It is clear to me from reading public reaction to arguments made in the Supreme Court this week on the constitutionality of the new healthcare law, that many people do not understand the concept of insurance.

Insurance is a means for a group of people to share the financial burden from losses that are unpredictable for the individual members, but predictable for the group as a whole. All members of the group contribute to a pool of money that is used to pay for individual losses when the need arises. Insurance is not a means for getting other people, corporations, or governments outside of the group to pay for losses. It is the members of the group that pay for losses and share in the benefits.

Insurance agreements work best when the loss events are truly random occurrences for individuals, but have well known probabilities so that the loss rate for a large population is a known quantity. I cannot know for certain if my house will be struck by lightening this year, but I do know that it is a certainty that someone's house in my community will be struck by lightening. If everyone contributes a small amount to an insurance pool so that the total equals the expected communal cost of lightning strikes, then those that do experience lightening strikes will not suffer a catastrophic loss. Not knowing who among the group will suffer a loss that is almost certain to occur, motivates everyone to contribute to the insurance pool.

Unpredictability is what makes an insurance contract possible. Whenever loss events become predictable, the entire concept breaks down. There are two ways that predictability can enter the system.

•People's behavior: The likelihood of an auto accident is partly random and partly the result of a driver's skill and tolerance for risk. Because these traits tend to correlate with demographics, market pressures arise for insurance pools to either exclude, or demand higher payments from people who fit certain demographic profiles. As a result, teenage boys pay more for auto insurance than middle-aged moms. A person with a history of traffic infractions and accidents might not be able to purchase auto insurance. Even though in the auto insurance market people are treated differently solely because of age, gender, and prior history, these pricing practices are not considered discriminatory.

• Past events: Obviously you cannot insure the past or else no one would contribute to the insurance pool for the future. Unlike the future, the past is entirely predictable because it has happened. No state would sell lottery tickets after the drawing. No bookie would accept bets on a football game after it has been played. No auto insurance company will sell a policy to someone after that person crashed. If this were allowed all these businesses would be broke in a matter of weeks.

I feel like I am stating the obvious, but many people in the healthcare debate do not understand these points. My people are outraged that the new law forces everyone to buy health insurance, and at the same time support the provision in the law that forbids insurance companies from denying coverage to people with pre-existing conditions. But if no one bought health insurance until it was needed, no pool of money would exist to pay for claims. The insurance model would breakdown quickly and no one would have insurance. The belief that it is possible to have universal healthcare coverage without a universal mandate to contribute is completely irrational.

In fact, without the new healthcare law the insurance model will breakdown in the near future. Too much concerning an individual's need for healthcare is predictable. Age and prior history are big factors in predicting healthcare costs for an individual, and just like for auto insurance, market pressures have arisen to exclude older and sicker individuals from insurance pools, either by barring them or pricing the insurance out of reach. But, unlike auto insurance, for which most states mandate coverage in order to drive, there has not been a health insurance mandate, so there is little incentive for the young and healthy to contribute to insurance pools that pay the cost of care for the aged and ill. Financing the healthcare system through a patchwork of private insurance plans simply isn't working because the predictability of the need for healthcare undermines the entire concept of insurance.

Opponents of the new healthcare law argue that mandated health insurance is different from mandated auto insurance because people can choose not to own or operate motor vehicles. Therefore it is possible to opt out of paying for auto insurance. But the irony is that as a consequence of our mortality, the need for healthcare is truly universal. Even though many people would prefer not to pay for health insurance and to opt out of the healthcare system, that choice is not possible. Almost everyone will need healthcare at some point in his or her life and federal law already requires that emergency rooms treat all patients. That means that healthcare is already socialized.

Unfortunately the emergency room is the most expensive and inefficient place to provide healthcare, and many uninsured are using emergency room services and not paying because they have no other choice. This practice further drives up insurance costs for those that do pay and prices more people out of the health insurance market. The current system is spiraling out of control. Eventually when so few people are insured that the healthcare system can no longer cover its overhead, it will experience a financial crisis with an unpredictable outcome.

The demand for healthcare is universal and government works best when addressing universal needs. The ideologues who denounce all government interventions ignore the fact that without government action there would be no Interstate highway system, no universal electrical service, no universal phone service, no Internet, no national defense, and the list goes on. Private enterprise could not have provided these services that we regard as essential to the modern functioning of our society. The loud voices denouncing all government intervention in the marketplace ignore reams of facts. Conservatives may long for a simpler past, but I doubt many of them would be willing to go back and live in the past, and give up all the modern conveniences they take for granted today.

Obama's affordable healthcare law is not a perfect solution, but first attempts to solve complex problems always need modifications. Scrapping the law and doing nothing leaves in place a healthcare financing system that is unsustainable. It is time to stop the shouting and have a serious, informed, and reasonable discussion on how to move forward with our nation's healthcare policies. Unfortunately in our current political climate, characterized by fear mongering, rigid ideologies, insatiable greed, and blind irrationality, I don't see that happening.

The Republican Party: In The Twilight Zone

The ability to assert two mutually exclusive statements, as both being true, has been a requirement in politics for some time. But the cognitive dissonance within the Republican Party has gone off into the twilight zone.

The Republicans have threatened to not raise the federal debt limit unless the Democrats agree to substantial cuts in spending. This is equivalent to threatening to end a hostage standoff with a nuclear weapon. Obviously the United States government cannot default on its debt obligations because the worldwide economic catastrophe that would result would make the 2007-08 financial crisis look insignificant in comparison. A threat that can never be executed isn’t much of a threat at all.

Actually, it’s interesting to track where the federal largess that the Republicans so bitterly complain about goes. A USA Today article on April 25 ranks states in order of government benefits received. Heavily Republican states that voted for McCain in the 2008 presidential election tend to rank high on this list, meaning that they receive more government benefits than most states. For example, West Virginia ranks number 2. Some followers that voted Republican, with their rankings in parenthesis, are Kentucky (8), Mississippi (11), Arkansas (12), Alabama (14), and Louisiana (17). Why are the Republicans in those states so opposed to the benefits that they receive? Maybe they should be careful what they wish for.

On that note, I wish Ayn Rand were alive and giving interviews on her economic and philosophical theories. She is a cult figure in the Republican Party, especially among the Tea Party wing, for her advocacy of unfettered capitalism and ethic of rational self-interest. A new movie has just been released based on her novel Atlas Shrugged in which the capitalists are the heroes.

Actually, Ayn Rand, a Russian Jew who emigrated to the United States at the age of 21, was a committed atheist who opposed all forms of religion. To her, valid knowledge arose only from sense perceptions and human reason. She rejected all claims of knowledge obtained outside of the senses, such as divine revelation. It’s hard to imagine her going very far in today’s political climate as a Republican or a Democrat.

Although, some Republicans simply ignore inconvenient historical facts about their heroes. Maybe Republican Congresswoman and Tea Party favorite Michele Bachmann could re-write Rand’s biography in the same way that she re-wrote American history in a recent speech. She stated in regards to the U. S. Constitution that: “the very founders that wrote those documents worked tirelessly until slavery was no more in the United States.” Actually, many of the founders, such as George Washington and Thomas Jefferson, owned slaves. Not until after the Civil War, nearly 100 years later and long after the founders were dead, was slavery abolished.

On the other hand, if Ayn Rand did endorse Republicans her religious views might not matter. The Reverend Franklin Graham in an interview with Christine Amanpour says that Donald Trump could become his “candidate of choice” for president because “the more you listen to him, the more you say to yourself, you know, may be the guy’s right.” This was said in the same interview that Graham questioned Obama’s Christian faith. There was no discussion of Trump’s faith. Franklin Graham has since been clarifying his comments. I would advise him not seek help from John Kyle’s press agent for issuing clarifications.

John Kyle stated on the Senate floor that “well over 90% of what Planned Parenthood does” relates to abortion. When called out on that obvious falsehood, his office released a statement that “his remark was not meant to be a factual statement.” I checked the definition of the noun “lie” at dictionary.com and found this definition: “a false statement made with deliberate intent to deceive; an intentional untruth; a falsehood.” In other words, according to John Kyle’s office his statement on the Senate floor was a lie. Evidently John Kyle must have realized this too because he clarified his clarification by stating that he “misspoke.” As to the earlier statement released by his office, he said: “"That was not me - that was my press person.”

The upcoming presidential contest should be a great event for comedy writers. Unfortunately it’s going to be a very bad contest for the electorate who will have to listen to all this nonsense.