The Worst Health Care Insurer of them All

The Biggest Headache of an Insurer, the one that denies claims and does not allow doctors to practice in the best interest of its patient: Medicare and Medicaid.

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.

Deductable
              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.