WHAT ARE YOU PURCHASING IN THIS GAME OF THREE CARD MONTE?
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.
HOW IT WORKS FOR AUTO AND PROPERTY INSURANCE.
Most people are familiar with how this works in terms of auto and property insurance. The insurance company offers you insurance at a particular price and imposes conditions based upon its determination of its level of risk given the value of the property you are trying to insure, where the property is located, how often you have put in a claim in the past, and how likely a loss is based on historical precedent. If something happens to your home or auto you submit a claim, the claim is evaluated, and if the loss is covered, you are reimbursed for your loss after you meet your deductible.
During most years, the majority of people who hold policies will not have a loss, and those premiums will go to pay for the losses of the small sub-set of policyholders that do experience a loss. The difference between what the insurance company pays out in claims and what they collect in premiums is its profit.
By the same token, most years the insurance company is able to accurately estimate losses. In a good year an insurance company pays out less than it thought it would in claims and it makes a greater profit. In a bad year there is a natural or man-made disaster that causes the insurance company to pay out much more than it collected. Some portion of its profits from earlier years is held in reserve to pay for these greater-than-expected losses. Insurance shields you from potentially devastating losses by paying a relatively small amount each year.
NOT QUITE THE SAME FOR HEALTH INSURANCE.
Health insurance doesn’t work like this. It is not merely a hedge against the risk of financial loss if you have a catastrophic illness or accident. It provides coverage for all manner of routine medical services. Your insurance covers doctor visits, specialist visits, physical therapy, routine blood tests and vaccines, just to name a few.
In this case, a health insurance company isn’t just making an educated guess about how many of its members will need costly medical care in any given year. The insurer must also price in the cost of expensive and foreseeable routine care. Health insurance companies make money by taking in more in premiums than they pay out in claims.
ADD ANOTHER LAYER OF COMPLEXITY
Moreover, the Affordable Care Act (ACA), also known as “Obamacare,” made two fundamental changes to health insurance.
- It requires insurers to cover people regardless of how sick they may be.
- It requires everyone to carry health insurance regardless of how healthy they may be.
Thus, unlike other forms of insurance, commercial health insurers are not allowed to evaluate their risk – and consumers are not allowed to evaluate the reward of carrying insurance. Under these circumstances health “insurance” is a way for private companies to manage the interface between patients and the healthcare system, rather than a hedge against unanticipated loss.
MORE LIKE A CONVENIENT MIDDLEMAN.
Your health insurer will be involved in administering, evaluating and negotiating every interaction you have with the healthcare system. Your insurer will determine which doctors you can see, what it will cost, which treatments are covered and under what circumstances, which hospitals you may go to, and the type and quantity of medication that is covered.
This responsibility means health insurance companies are more like healthcare managers, which is exactly what government-run healthcare programs such as Medicare, Medicaid and CHIP are charged with performing. The only question that remains is which entity is most efficient and effective at managing care?
WILL YOU PICK A WINNER?
While the jury is still out on this question, most people are left to their own devices to evaluate their healthcare coverage options – either from their employer, or individual plans offered through the healthcare marketplace or directly from insurance companies.
Unlike auto or property insurance, where you likely will not have to call in that coverage, almost everyone will utilize some sort of healthcare service this year. Making sure you have all the information you need to make the right decision for you will make this purchase less of a gamble.