Why Do We Look At Health Insurance so Differently than Other Kinds?

This national health care insurance debate has caused me to think very seriously about a big problem that I can't believe hasn't been seen by other more qualified persons than myself.

Why do we not look at health insurance the same way we look at, let's say, car insurance or property insurance? Consider this scenario. I'm driving home from work and I get into a serious accident which the police determine to be my fault. Although I survived the crash with only minor injuries, my car is completely wrecked. Further, let's say the car is a very new Italian car. Let's say it's worth more than fifty or sixty thousand dollars. So I get home, whip out the business directory and call up an auto insurance company. I hide from them the fact that my car is already totaled. I get comprehensive coverage. The following day, I call up the insurance company and make a claim for my totaled car.

Do you think the insurance company is going to pay? Heck no! Why not? Because the damage to the car existed PRIOR to the insurance purchase, and any insurance company that would be willing to pay for such damages is simply guaranteeing that they will be soon out of business. Why? Because if car insurance companies were required to cover pre-existing damages what would happen is that people would only sign up for an insurance policy when they had an accident.

This principle is known as "adverse selection". People who are more likely to suffer a loss (high risk) or who have already suffered loss (guaranteed risk) are much more likely to buy insurance than someone that is not likely to suffer a loss (low risk). Insurance companies survive when only a certain fraction of the people they collect premiums from actually submit a claim. As long as the claim payouts and the costs associated with running the business are lower than the premiums being collected, an insurance company will stay in business. When this fraction is exceeded, insurance companies can quickly find themselves with no cash reserves left. A recent example is the number of insurance companies that went out of business trying to pay out all the claims made in the aftermath of hurricane Katrina in 2005. (Incidentally, it is still very hard to find insurers willing to accept the risk for homes built in New Orleans.)

Back in the day when I sold insurance, I once tried to sell a life insurance policy to a guy whom already knew that he had diabetes. He didn't make any effort to hide it since the required blood test would have revealed the condition anyway. I told him that I could protect his family against his loss for any reason except a death related to the diabetes itself. His response was "If you cover me for diabetes related death I'll buy your insurance, otherwise, have a nice day." So he was willing to buy insurance so long as we covered the most likely reason that he would die. See the problem? He was only willing to buy the protection on the sure thing that will probably kill him. And that means that the insurance company would be guaranteed to have to absorb the loss. That's NOT what insurance is all about. Insurance is the idea that for a relatively low monthly cost being paid in by any one individual of a group an insurance policy can be obtained that transfer the risk of loss to the whole group. No insurance company or any other type of plan (including a co-op) will stay in business long if they have to accept responsibility for a sure risk.

I frequently ran into this problem while I was an insurance salesman. The problem is that people think that buying insurance is a gamble. They think they have lost the gamble if they pay for the insurance and never use it. The gamble is actually always on the other side... the insurance company and the group of people they represent. Every time the insurance company grants a new policy they are gambling that they will one day have to pay out a claim on that policy.

Since USNHC promises to prohibit the exclusion of pre-existing conditions it is logical to conclude that health care payouts are going to become much more frequent and these payouts will be more expensive. Much more expensive, since many people who want insurance for their pre-existing conditions will jump at the chance to get on an insurance plan that is guaranteed to transfer the risk of that condition. How can President Obama possibly think that he can control these kinds of costs?

Relevant sections of SR 3200 (Senate version of USNHC)
Title I, Subtitle B Sec 111: Prohibiting pre-existing condition exclusions.
Title I, Subtitle B Sec 112: Guranteed issue and renewal for insured plans.