Tuesday, April 26, 2011

We need better incentives in Health Care

The Fundamental Incentives are Wrong
            In economics an incentive is a motivator for people to do something. The reason that people prefer lucrative fields such as medicine and law over teaching is due to the incentive of money. Most people will follow the incentives of the system that is created. Of course there are always exceptions to the rule. But when dealing with systems it makes more sense to look at the majority rather than the few outliers.
            Take for example a salesman at a paper company. The paper company gives him a very modest salary with benefits. They then attach the rest of his earnings to commissions (or a percentage of his sales). Therefore the more paper he goes out and sells the more money he makes.
            If the salesman decides to work incredibly hard he can make $100,000 a year, but if he is lazy, only $35,000. The salesman is encouraged to work hard because he is motivated by a desire to make money. This is a good thing for both the company and the salesman because everybody wins. The more money the salesman manages to sell the better the company does, and the better the salesman does. This is an example of properly aligned incentives. The paper company wants the salesman to work hard. So they have given him an incentive to work hard.
             Now let’s take a pipefitting company that hires a salesman and paid him a flat rate salary of $60,000 a year, with no incentives. But now the salesman only has the incentive to work hard enough not to be fired. Of course some people will be thankful for the job and will work hard anyway, but the company this time hasn’t provided any reason for the man to work extra hard, which would in turn benefit the company.
            Now lets take a third company, let’s say they sell electronics. Now this company hires a salesman (or saleswoman) but provides this salesperson with a different incentive. They have a decent starting salary of $40,000 plus benefits and receive an extra bonus in the terms of a one thousand dollar bonus for each percentage of sales that are retained year to year. This system would encourage the salesman to focus on retaining current clients rather than expanding the business. Because if he only has four clients but keeps all of them from year to year he would receive a bonus of $100,000, even though that wouldn’t really benefit the company very much.
            The reason I’ve given three examples is because they show different circumstances of different incentives systems. The first has a positive incentive to work harder and everyone benefits. The second salesman has no benefit to work harder, and the last salesman actually has an incentive to not work hard.
            The reason that this crucial to understand is because these basic tenets apply to the health care system. The fundamental and possibly fatal flaw of the United States Health Care system is that our incentives are not aligned with our goals. The goal of trying to ensure that patients receive the best care, and to keep costs down so that the system does not go bankrupt are not mirrored in the way we’ve incentives health care in this country. And unless proper incentives are put in place, there is no way to save healthcare.
            The incentives that people are responding to are wrong in several places. Doctors don’t have monetary incentives to provide the best care for their patients (although almost all doctors do want what is best for their patient), or to keep down unnecessary costs. Patients have little incentives to keep down the cost of their medical treatment by keeping themselves healthy. Insurance companies do have an incentive to keep down costs, but have no incentive to keep patients healthy unless it is as a means of keeping down costs. Unless we address those issues there will be no needed change in the American Health Care System.

Saturday, April 16, 2011

Tort Reform, Health Policy

Problems in Health Care: Malpractice and Tort Reform
            One of the problems with Health Care that is driving up costs is Medical Malpractice. To what degree Malpractice drives up cost is debated by doctors and lawyers. Dr.’s argue that Malpractice costs a great deal to the health care system, while lawyers argue that it is such an infinitesimally small part of the Health Care costs, that it doesn’t need reform.
            The best way to start understanding Medical Malpractice and then Malpractice reform is to understand how medical Malpractice is supposed to work. Medical Malpractice is suppose to function in a way that doctors who make mistakes due to negligence pay financially for those mistakes. Negligent mistakes being that a doctor did something wrong like prescribing the wrong medication when the doctor should have known better. That the mistake was avoidable, like mixing medications.
            In the system of how malpractice “ought to” work when someone is injured by a doctor, they are able to bring a suit against the physician. Having several cases brought against an individual doctor, or having a few big awards against an individual physician will drive up his insurance rates, just as getting into car accidents will make it more expensive to get car insurance.
            This in and of itself isn’t a problem; a doctor who is constantly negligent should not be practicing medicine. We should all be able to find the common ground that grossly negligent doctors should find another profession. People who defend the malpractice system do so because they say it is a mechanism to remove unfit physicians from practicing. In theory they are right. But in reality our medical malpractice system is vastly different then how it is “in theory”.
            The crucial detail between the theory and the reality of medical malpractice is which doctors are being sued. In theory only doctors who are negligent get sued. The reality is that anytime there is a negative outcome where a patient is unhappy with the result can result in lawsuit. In fairness it isn’t easy to determine when a doctor is to blame. Patients have such lofty expectations of doctors it is easy to erroneously conclude that anytime a doctor can’t fix a problem they made a mistake. Instead of doctors being sued over negligence they are sued over a variety reasons.
            The number one factor that determines whether or not a physician is going to be sued (Blink) is how much a patient likes their physician. If a patient believes that the doctor cares about them, and is doing their best for the patient probability of lawsuit is minimal. Conversely if the doctor comes off as arrogant and insensitive, their likelihood of lawsuit is much higher. Therefore negligence is not the number one cause of lawsuits, it is popularity.
            If doctors only had to worry about being sued when they made mistakes, that would motivate doctors to practice medicine the best they could. This would drive up the quality of care. Instead of negligence, lawsuits are initiated when patients are unhappy with the outcome they have received. The lawsuit will proceed forward if a lawyer determines that they can make money from the case.
            Because patients being unhappy with outcome of care does not always correlate with a physician making a mistake then a lot of cases are brought forward even though the doctor hasn’t done anything wrong. Not all of those cases that patients want initiated will be pushed, because a lawyer must determine that money can be made from the case. Therefore the two determining factors of a lawsuit are unhappy patients, and the ability to make lawyer money, not doctor liability. The perversion of medical malpractice away from how ought to function to how it in fact does function costs the United States health care system a great deal. It increases the cost of medical care in two ways. Malpractice premiums and defensive medicine.
            Malpractice premiums are insurance premiums that doctors pay to protect themselves against a lawsuit. The premiums vary by state (due to what tort reforms have been enacted) and by specialty. The premiums need to be large enough for the insurance company to pay lawyer’s fees; lawsuit damages and then still have enough money left over to stay in business. Therefore the states with the highest number of suits, and the largest damages means the insurance premiums will be the highest. If the insurance company has to be paying out a lot of money, it needs to take in a lot of money to stay in business.
            When people refer to Tort Reform, they are almost exclusively referring to a cap (a maximum amount an insurance company is required to pay) on the payment due to pain and suffering, not economic damages. In a civil suit those are the two ways a plaintiff can be awarded money. Economic damages are the monetary losses suffered by the plaintiff. For example, a school teacher making $30,000 a year is left unable to work due to negligence by a surgeon. Economic damages would cover the cost of subsequent procedures and operations  due to the negligence by the surgeon, and it would cover the cost of her income, and possibly care for her if need be. This type of damage is almost never capped.
            The other type of payment due to “pain and suffering” is the type subject to Tort Reform. Lets take the same teacher who is permanently disabled. She is awarded $1 million dollars in economic damages to cover her cost of living, and medical procedures. Now it is time to award pain and suffering. In states without Tort Reform the sky is the limit on how much money that woman can walk away with. And many juries will reward her with an obscene amount of money lets say $4,000,000 (in addition to her $1,000,000 in economic damages) thinking that the cold insurance company can suffer the loss.
            But that means the insurance company will then have to raise rates on its doctors. The doctors will then in turn raise rates on its consumers, and everyone else pays the price. The teacher and her trial lawyer (who would take home around 30-50% or 1million dollars) benefit. In states that have Tort Reform, the school teacher in the scenario would have had her pain and suffering damages capped to the tune of about $750,000. In the state with Tort Reform she would have received $1.75 million dollars, in the state without she receives $5 Million.
            If there were just five cases like that in an entire state. The insurance company in the state with Tort Reform is on the hook for $8,750,000, while the insurance company in the state without Tort Reform has to pay out $25,000,000. That difference of $16,250,000 will then be made up higher premiums for doctors in that state.
             Missouri passed Tort reform several years ago, and insurance premiums for doctors have been falling consistently since then. That is because at the end of the year the insurance company recalculates the cost of doing business, and if it has gone down they lower their prices. I know many people would expect that insurance companies would keep that money because they are greedy and evil. The reality is that there is competition among insurance companies and that keeps them from doing that.
            Insurance premiums get passed onto consumers in terms of higher costs going to the doctor. If a primary care physician’s annual premium is $5,000 in the state of Wisconsin and $20,000 in the state of Illinois. The Illinois doctor has to charge more if he wants to make the same amount of money. Those numbers aren’t just to prove a point. A friend of my father runs an insurance company that provides malpractice insurance to doctors in Wisconsin. He recently tried to venture into Illinois, and even when he quadrupled the premiums to the doctors there, he couldn’t manage to stay in business. The reason is that it is easier to bring a lawsuit in the state of Illinois, and easier to get a settlement there.
            Let’s follow the progression of what happens to the people of Illinois as a result of this. People seem to think that Malpractice is only an issue for Doctors. But this view fails to take into account that doctors don’t practice in isolation. The Doctor in Illinois has to pay four to five times his counterpart in Wisconsin for medical Malpractice. Therefore he has to charge more to his costumers.
            Since we have a third party payer system, the cost is not directly passed onto the consumer. But it does mean that it is passed on to the insurance company for the people who see that doctor. This means that insurance pay outs for medical health insurance companies in the state of Illinois will be higher. 
            If the health insurance companies are paying out at a higher rate then they need to raise their rates to stay in business. This means higher insurance premiums, and lower wages (or simply a wage freeze). Lower wages because if a business has to pay higher insurance premiums for its employees that means it has less money to give salaries or raises.
            Furthermore the driving up of health care costs causes some employers to not cover employees at all, particularly low wage employees. Malpractice is not the only cause of rising costs in our health care system, that assertion is disingenuous. But Malpractice is a cost on our health care system that benefits almost no one.
            Who does benefit? Lawyers; and the occasional person who hits the lottery with a big settlement. It is fair to say that most people who are suing and seeking damages are not benefitting from the system; if someone loses the ability to walk then receives $500,000. That person can’t walk anymore, compensation seems fair.
            The people that really benefit from Malpractice are lawyers who bring cases to trial. A $500,000 settlement means that with standard lawyer fees of between (30-50%) that lawyer will be making between $150,000 and $250,000 off of that case. That’s a second house, and that is why trial lawyers do not want tort reform. That is a pretty sweet gig for trial lawyers. Trial lawyers benefit, everyone else suffers. People pay for trial lawyers’ second homes and BMWs through higher insurance premiums and slightly lower wages. The question we should ask is how much is this costing our system?
            The first way that our system is affected is that doctors pay premiums to insurance companies. To the tune of about 35 billion a year, doctors pay to protect themselves against law suit. That $35 billion is then passed onto people in higher premiums, higher deductibles and lower wages. With three hundred million Americans this amounts to about $100 per person per year. It really isn’t that much money in relation to the 1.6 trillion Americans spend on health care (or roughly $6000 per person per year). And this is the argument given by lawyers and defenders of the current system. There are a few things wrong with this argument. Wasting $35 billion dollars a year is a lot of money. Obviously it won’t save the health care system on its own but as Senator Everett Dirksen used to say “A billion here, a billion there, pretty soon it adds up to real money.”
            The CBO estimated that tort reform on a national level would save the Federal government $5.4 Billion per year over the next ten years. This savings would come from decreased costs of Medicare and Medicaid because prices would decrease as insurance rates would decrease.
The much larger cost on the system is defensive medicine. This cost on the system is argued to be between $100 and $200 billion per year (CITATION), which amounts to 10-15% cost of the entire health care system, is doctors running useless tests to cover themselves legally. That is a serious cost to our health care system. And chipping away at that number could significantly alter health care in America.
            Defensive medicine is when a doctor runs tests that are not needed or for which they already know the results, not for the benefit of the patient, but for due diligence if there is ever a lawsuit. As discussed earlier doctors are sued regardless of whether or not they made a mistake.
            Since practicing excellent medicine is not enough to avoid lawsuit, doctors take preventative measures in case they are ever brought to trial. For this reason doctors run unneeded labs, X-Rays and CT scans to protect themselves from lawsuits. If a doctor can show through the running of labs, that everything medically possible was explored they are less likely to lose a lawsuit.
              It is sad to think that drives medicine, and it is hurting our health care system. That $100 billion a year could be used expand coverage to uninsured Americans, or used for research of new cures. As it currently stands it is wasted.
            Lawyers will argue that the $100 Billion a year number is a fantasy. That doctors do not practice defensive medicine, even though doctors are willing to admit it. Lawyers also put forward a second argument that doctors still practice defensive medicine even with Tort Reform. If this is true it is a real problem, Tort reform is aimed at both lowering Malpractice rates for doctors and reducing defensive medicine. It may be that simple Tort reform is not enough to prevent doctors from practicing defensive medicine.  
            There are a number of options for Tort reform outlined in a recent New York Times article. Instead of regurgitating their ideas as my own, I have provided a link to the article (see Attachment). It is important to know that while our current system of Malpractice is wasteful and primarily benefits trial lawyers. We must recognize that their must be a safety net to catch negligence, because medical mistakes hurt and kill people, not to mention it drives up costs.
            The goal of any Tort Reform should be to drive down costs. But another goal that should be talked about with Tort Reform but often isn’t is preventing doctor mistakes. One of the problems with the current systems is doctors are afraid of lawsuits. This leads to defensive medicine that drives up medical costs. But it also leads to covering up of mistakes, instead of learning from them. And that drives down patient care.
            There are mistakes made by physicians that lead to lawsuits. There are times when lawsuits are brought against physicians and hospitals when no mistake is made. But there are also mistakes made by doctors that result in no consequences. Mistakes in medicine are inevitable. The medical health care field is run by human beings and people have and always will make mistakes. The best that we can hope for as individuals or as a medical community is to not make the same mistake over and over.
            The problem is that medical professionals have a strong fiscal incentive to hide mistakes. If they admit to medical mistakes they open themselves up to malpractice, increased insurance premiums and loss of business. It is to their own personal advantage to keep a tight lid on all mistakes.
            The problem with this method is that sharing lessons learned from mistakes has the potential to save lives. Some estimates are that 100,000 people die each year from needless medical mistakes. Those numbers could be reduced if an atmosphere of fostering the lessons that providers learn from medical mistakes, and near misses. Sharing the case of one bad incident could enlighten other providers and prevent them from making the same error.
            To make any serious dent in this issue would require alleviating doctors from the fear of baseless lawsuits. There are several ideas out there on the subject. All would require a dramatic shift from the current system that we have now. But if any of them would mean the saving of thousands of lives each year. They are worth it. 

Who has insurance, who doesn't and why.

Who Has Health Insurance, and Why?
              There is a lot of talk in the health care reform debate about covering everyone. That there are 45 million Americans uninsured and its necessary that we cover them (a more accurate number is 26 million, but that issue will be discussed later). Whatever the exact number is, there are a lot of uninsured Americans, and it is important to understand why.
              During WWII the United States government issued wage controls to businesses. Employers could not pay their employees more than certain government mandated thresholds. But employers wanted to pay employees more money than that, because if they could compensate their employees better they could recruit the top talent. It is easy to understand that if one firm A is paying 25% more than firm B, then firm A will have first pick for all its positions.
              Since Employers were not allowed to directly increase wages for their employees due to federal law, they circumvented the law and provided other benefits to their employees namely health insurance. Since the IRS agreed not to tax businesses contribution to employee health insurance, business was allowed to do this, and health insurance through business has dominated the US for the last six decades.
              People who have health insurance have it overwhelmingly through their employer. 87% of non-elderly with insurance in the state of Missouri have it through employers (Show Me Series, pg 12). For people under the age of 65 (and thus ineligible for Medicare), employee based insurance dominates.
              The reason that people prefer to receive health insurance through their company is because of tax incentives. Companies can buy health insurance tax exempt, but if an individual attempts to buy health insurance that money is subject to tax. This makes it overwhelming more affordable for people to get insurance through their employer. This system also makes it more difficult for people to get insurance if they are unemployed or if their employer does not offer health insurance.
              Lets take a look at the implication of this. A janitor who makes $25,000 a year isn’t offered insurance through his company, but the engineer who makes $95,000 a year is. Now that engineer’s insurance plan isn’t taxed, because it’s been bought through his employer. But if the Janitor wants to go out and buy health insurance, it will be taxed.
              This example of the janitor and the groundskeeper is exactly what happens to people in this country. The tax code that treats business who buy health insurance better than individuals who buy health insurance hurts the people that can’t afford it the most.
              Why would a company provide health insurance for its engineer and not for its janitor? Its very simple, employer offered health insurance is a wage. It is a wage now, and it has been since companies used it as a wage to circumvent WWII wage controls. In general it is a wage in the several thousand dollar a year range. That means that the company is paying the janitor $25,000 a year, but is really paying the engineer $102,000 or higher. The engineer knows this and would accept a job paying $95,000 with insurance over one without insurance.
              So why does the janitor not get insurance? Because he makes less money. The employer of course could offer the janitor $18,000 a year with insurance, but choose to offer $25,000 without it. One of the largest sources of inequities in who has health insurance is who makes more money.  The % of employers offering health insurance to its employees increases the farther away from the federal poverty line. For people who are earning at or below the poverty line only 55% are offered insurance that number improves to 69.5% offered insurance for people making between 100% and 199% of the poverty line. When someone makes between 200% and 399% of the poverty line the chance of employer sponsored insurance is 85%, and people who make more than 400% the poverty line employer offered insurance is 92.6%.
              In the US people overwhelmingly have insurance through their place of employment. It is advantageous to people to get insurance through their company rather than trying to get it individually. The closer people are to the poverty line the less likely they are to be offered insurance by their employer because health insurance is a form of wage.

Understanding Different Types of Insurance

Pure Insurance vs. Newer Hybrid Amalgams
After gaining a basic knowledge in how insurance is structured and how it works. It makes sense to compare insurance in its pure and simple form to a form that is much more complex and complicated. The reason that health insurance, and health insurance reform is so complicated is that in this country it has gotten away from its roots of providing people a safety net against catastrophes but also now covers a wide variety of things as mundane as a doctor’s visit.
              The simplest form of insurance is life insurance. The purpose of life insurance is that if the policy holder dies that persons family will be ok financially. If a spouse makes $100,000 a year, and then suddenly dies leaving behind the other spouse with two kids and $100,000 a year less in annual income, those left behind are in for significant financial hardship. To make sure a death does not leave a family broke, people buy life insurance.
              Since the relative risk of someone dying is pretty low, large life insurance policies are incredibly inexpensive. For example about $200 per year, buys about $500,000 of life insurance for a healthy individual. Obviously with underwriting the premiums increase for smokers, obese and other risk factors.
              Life insurance gives us an incredibly simple view of insurance because it is an all or nothing scenario. The insurance company is either paying out or not, because someone either dies or doesn’t. This uncomplicated system, combined with market competition has led to incredibly affordable insurance.
Life insurance provides a nice comparison to two types of insurance that are much more complicated, and are good to look at together auto insurance and health insurance. Auto insurance is a useful analogous tool to health insurance because of its similar construction, but it has fewer moving parts and is easier to understand.
Auto insurance is similar to Life insurance in the fact that it is primarily designed to cover catastrophic losses. The two primary types of catastrophic events that it is suppose to cover is severe damage to a car (something in the thousands of dollar range, that you wouldn’t be able to readily pay for out of pocket) and damage to another individual (putting someone in the hospital for a few days, or worse). The hybrid function that makes it different from life insurance is that many people use it for minor or relatively minor claims, like fender benders and the like.
Because people use insurance to pay for minor incidents, and not just catastrophic events, insurance companies charge more in premium to cover those incidentals. That simple point right there is at the crux of any argument in terms of insurance reform of any kind and as we will later see health reform. The simple fact that the simplest economic principle of “there is no free lunch” applies to insurance in that the more that is covered, the more the premiums cost. What is covered, and just as importantly what is not covered by an insurance company relates to maximum pay out, deductible (there are other factors that will be discussed later).

Maximum pay out of insurance policies.
Any adequate insurance policy should have a maximum pay out that accurately reflects the needs of the individual. For life insurance the policies pay out should be about 7-10 times the annual income of the insured individual. This ensures that the amount of money paid to the family will be enough to compensate for the lost wage. It is obvious to see that if a doctor making $250,000 thousand a year has an insurance policy of $250,000, that it won’t last his family at the style of life they were enjoying before he died. Contrast that with a janitor who makes $25,000 a year. A $250,000 policy invested wisely would take care of his family in the event of an untimely death.
              When the maximum of policy is inadequate to deal with the amount of money needed for something, this is what is referred to as being underinsured. Underinsured individuals have insurance and pay monthly premiums, but the policies they have are not an adequate safety net in case of a catastrophic event. This is true of the minimum requirement for insurance for auto insurance.
              Auto insurance in the state of Missouri has a minimum requirement for what drivers carry. That minimum is $10,000 property, $25,000 bodily harm, $50,000 total accident. That means if someone who is driving with minimum insurance totals your car, the maximum you can recoup from their insurance company for your car is $10,000. So if you drove a new car worth $25,000, you are simply out of luck for that other $15,000. To recoup the fifteen thousand you would need to sue them, and then try and recoup from that individual personally.
              A lot of people who love to blame insurance companies will then argue that the insurance company should have to pay more than that $10,000 for your car. After all it isn’t fair that they totaled your car and you have to be out $15,000 grand. But the fact is that the insurance company sold a policy based on a maximum of $10,000 pay out for property.
The person who bought the policy’s premiums reflected that total payment. It is bad public policy to have people underinsured, but it is illogical to fault the insurance companies. The fault rests on state legislators who set the minimums. If the legislature decided that the minimum should be higher then insurance companies would sell policies based on those minimums all the while calculating the risks of accidents.

              A deductable is the amount of money that an individual has to pay when an insurance pay out is made. The individual is responsible for every dollar until the deductible is reached. For example a $100 deductible for a $2000 car repair means that you have to pay the first $100, but the insurance covers the next $1900.
Where the deductable is set has two affects on the policy and the policy holder. The affect on the policy is that the larger the deductible the cheaper the premium. The affect on the policy holder is that if they are directly responsible for the amount of money (first party payer, versus third) it makes them more judicious in how the money should be spent.
              A high deductible decreases the cost of a premium because it essentially states that an insurance company is not going to be responsible for minor things that go wrong. If policy A is a $25 deductible for a car and policy B is a $1500 deductible. Policy A will have higher premiums than policy B. that is because the insurance company will now be responsible for paying for a litany of minor damages between $25 and $1500, and because that costs something, it will be reflected in the policy.
              The end result is that the person who has purchased policy A has less money in their pocket but a more comprehensive insurance plan, while the person who purchased policy B has more money in their pocket but is less covered. Once again it’s the basic principle that everything costs something, coverage costs money. The more coverage, the more it costs.
              There also becomes the important economic factor of who pays for what, and how judicious will a consumer be depending on what the deductible is. And this has to do with the difference between a third party payer and first party payer (this will become incredibly important when we delve into health insurance reform). Lets compare some minor incidents and see how it relates to the action taken by the individuals.
              Both policy holders have a accident while driving through a parking lot, while backing out of the grocery store they run into a light pole damaging their car in a superficial manner, but not structurally damaging the car. The auto-mechanic gives them an estimate of $700. Who is going to get their car fixed?
              Policy A holder will almost certainly get his car fixed. His burden of the $700 repair cost is only $25. What incentive does he have not to get his car fixed? Almost none financially. There is the slight disincentive of having the hassle of getting your car fixed, but besides that getting his car fixed is almost free to him.
              Policy B holder is looking at a repair bill of $700. Since his deductible is $1500, it won’t come into play at all. Policy B has to decide whether or not $700 is worth fixing his car over. It is easy to conclude that people who hold the B Policy are far more likely to let small things on their car go with out being fixed.
              Most people who are unfamiliar with insurance will then conclude that the people who hold Policy B are getting a raw deal that it is unfair, or that Policy A is by fair the better policy. This is a natural reaction, although an errant one. The people who purchased Policy B are paying less in premiums than the people who purchased Policy A. And while the coverage is different, and it would not be an error to say that Policy A is ‘better’, it is better but it also costs more. Coverage costs money, and more coverage costs more.
              Understanding these basic principles is key, because they are the components of health care and health care reform. The issue of costs (aka premiums) will relate directly to deductibles and maximum health payouts. We will have to keep in mind that the more comprehensive the policy the more expensive. And if policies become too prohibitively expensive, people become unable to buy them. The role of deductible and ownership of health and decisions about costs will also be explored.

How Insurance Works

How Insurance Works
              Insurance is a form of risk management. Its purpose is to guard against catastrophic monetary losses that policy holders could not cover themselves. Insurance became popularized in this country by Benjamin Franklin. He founded an insurance company and sold policies to protect homes in the case of fire.
              Benjamin Franklin’s company sold fire insurance to individuals. The individuals paid premiums to the insurance company which in turn invests the premiums. If one of the policy holder’s houses burnt down then they would be reimbursed so that they could rebuild their house. The individuals who bought insurance from Franklin had a pooled risk.
Pooled risk is when each individual has a relatively low likelihood of having a catastrophic loss (in this case their house burning down). But if that rare catastrophic loss does happen to them, it would ruin them financially. Therefore individuals pay premiums to insurance companies to guard against catastrophic losses. Insurance companies calculate out the relative risk of catastrophe and set premiums (which they invest) to a level that would allow them to pay out for catastrophes. If insurance companies set their premiums too low they go bankrupt; too high and people will shop elsewhere.
Of course there are other factors that make insurance more complicated. There is the fact that not everyone’s risk is equal. Most everyone is aware of this in how it pertains to auto-insurance. A forty year old safe driver pays much less in premiums for the same insurance that a sixteen year old new driver needs to pay. Why is this? It’s about relative risk. Statistically the sixteen year old is far more likely to be in an accident than the forty year old. Therefore the insurance company needs to increase its rates to cover against future losses.
Think about it this way. If there are two insurance companies All-State and State Farm. All-State is only allowed to cover new drivers ages 16-20, while State Farm is only allowed to insure people ages 30-45 who have never been in an accident. Which insurance company is going to be paying more money out? Which group is going to have more accidents? It’s obvious. This is the reason insurance premiums vary so much between individuals, because risk varies.
This sort of risk management is less obvious in all cases, but it has been around as long as insurance has been. For the simple fact that insurance can not exist without it. Benjamin Franklin refused to sell fire insurance to houses that were made purely of wood. He deemed that risk was too high, so refused to cover them. This process of assessing risk to determine premiums (or whether an insurance company will cover someone) is called insurance underwriting.
It is important to have a solid understanding of insurance underwriting to understand the health care crisis in the United States. Insurance underwriting is simplest to understand when thinking about driving records and insurance premiums for automobiles.
It is also important to recognize the benefits of insurance for the economy as a whole. Insurance offers a tremendous benefit to society because it prevents bankruptcies to individuals who suffer from rare events like having their houses catch fire. Instead of having every person whose house catches fire go bankrupt, people don’t have to. In that way everybody wins. It may not seem like the people who pay premiums but don’t get a pay out from the insurance company wins, but they do as well
The economy as a whole does a lot better without having its citizen’s crash into bankruptcy. If there was no insurance for anything, the risk of bankruptcy would be very real for everyone. This would cause people to spend less, and be far more fiscally conservative because we would need to save up for a rainy day. 

Future Energy Source for Cars

A lot of people wonder what the future of cars will be in the US. will we all be driving ethanol based cars. hydrogen cars, or what?

The most likely solution is what is already happening, what many families have already done. Its the most obvious solution that most Americans will take, the one your family has already taken, and many other families as well. People will drive smaller cars.

People are starting to, and will continue to drive smaller cars. We aren't going to turn into Europeans, driving tiny cars, but at the same time our gasoline isn't as expensive as theirs. the more expensive the gas, the smaller the cars will get. Since our gasoline in the US (post economic recovery) will likely be between 3 and 4 dollars for the foreseeable future, our cars will be smaller than they were when gas was in the 1.50 range. It is econ 101 really. Price goes up, people readjust to it.

as far as hydrogen goes. you'll be pushing daisies before that ever becomes useful, and as far as odds go, I feel the odds are about even that I drive a flying car, as I drive a hydrogen powered car.
There are various reasons that hydrogen is a fantasy, and people disagree as to what the biggest barriers are.
I'd say the biggest reason is that hydrogen cars today, cost roughly 1,000,000 to produce. you read that correctly, by the way. 1 million.
In addition, Hydrogen costs about 5.00 a gallon (with obvious conversions in a ratio of energy units, because you wouldn't be using gallons).
also, there isn't free hydrogen floating around. its not an energy source, for all intents and purposes its a battery, creating hydrogen in a source that can be used for energy, requires energy. there is some possibility that hydrogen could be used as a battery, transporting energy from one location to another, for example the US could produce tons of wind energy in the great plains, but has little use of it there.. so generate electricity, use electricity to create hydrogen, then transport and use the hydrogen... even this is years off because hydrogen is a bitch to transport. transport it as a gas, and you aren't transporting much, transport it as a liquid, and well hydrogen is really unsafe to have it as a liquid.

Ethanol is just a way for congress to jerk off the farm lobby, pardon my french but ethanol from corn is a giant waste of time. in terms of burning potential you end up with less energy when you convert gasoline into ethanol (you don't really convert it, but you need to put energy in to get ethanol, and converting corn into ethanol is a negative energy product).. some say its positive but they are factoring in you get some food byproducts, which is true.. but from a fuel perspective, you don't gain any energy.. you can get energy from converting sugar into ethanol, which brazil does quite effectively.
Ethanol as corn masquerades as being for US energy independence, and god knows a lot of other things.. in reality its just a sweet farm subsidy.

As far as coming up with a real solution to our growing gas problems (and in a broader sense: energy usage). the best one is often the simplest. And a good one is pretty simple. Its electric cars and batteries.
Now the answer isn't 100% electric cars, because that technology is years off, and implementing an infrastructure for that to be effective would take time. But making cars electric for the first 20 to 40 miles would do a great service to the air we breath, our pocket book, the price of gasoline, and our dependence on oil.
Most people only drive small short trips on a regular basis. they just go to work and back, etc. the majority of driving in this country is short trips like that. Put a small electric motor in the car, like the ones that are currently in the prius and modify it so that it can be plugged in and you reduce the amount of gasoline (drastically) that people are using.
reduce the amount of gasoline people use and the price of gas goes down
electricity is cheaper than gasoline, and electric motors are about 4 times more efficient than internal combustion engines
using electricity instead of gas, would improve air quality.. even if the electricity is produced from coal

Judicial Activism, Gay Marriage

Some people may try to convince you that the proposed constitutional amendment to ban civil unions and same-sex marriage is an attempt to protect us from “activist judges''? But what does that mean?
Judicial activism traditionally referred to Judges who ignored both precedent and the constitution and made a ruling that they thought best for everyone. What the term now refers to is a judge who makes a ruling that whoever is shouting loudest (in this case conservatives) disagrees with. But in most cases judges are not guilty of “activism''? they are simply exercising their oversight prerogative and doing their sworn duty which is to uphold the constitution.
Who are these “activist judges''? anyway? Could they be the supreme courts of Georgia and Tennessee that rejected challenges to broaden the scope of marriage to include homosexuals? Or the Supreme Courts of New York and Washington who just recently did the same. Maybe the “activist judges''? wear robes in liberal Connecticut where the Supreme Court just voted to uphold a statute that prohibited homosexuals from marrying. Or the “activist judges''? in Massachusetts, who are the center of all the controversy, who just recently approved a ballot initiative that would put the issue in front of the Massachusetts voters, the same issue that will be on the ballot in many states across the nation this fall, including my home state Wisconsin.
This proposed amendment is not an attempt to stop judicial activism. It is an attempt of one group of people to make the actions of another illegal simply because the majority disproves of what the minority is doing. It is an attempt to publicly and permanently invalidate thousands of relationships in the state because some people find the lives of homosexuals to be unnatural.
Had conservatives in the 20’s and 30’s adopted the same strategy of amending the constitution so that “liberal activist''? judges could not overturn the laws they passed the courts never would have put an end to segregation (Brown v. Board of Education) or anti-miscegenation laws (Loving v. Virginia). It is wrong to attack the judiciary just because a few make decisions that you may not like. And to scream “activism''? just degrades civilized discourse and ruins honest debate. If it were not for “judicial activism''? many of the rights and freedoms that we all take for granted would not be there.
After all judges do not have the final say in our political system because we live in a democracy; a democracy that cherishes its vast freedoms. Because our laws reflect the will of the majority only the people who are in vast minorities are at risk for having their freedoms trampled on by the majority. In this case it is the 90% of Americans who are heterosexual who run the risk of trampling on the 10% who are not. We must all ask ourselves this: who among the ninety is willing to stand up for the ten in the face of adversity and say “These people have value, and we should treat them that way.''?
To pretend this is a stance against “judicial activism''? is dishonest and ridiculous.