Monday, June 25, 2012


No matter what the Supreme Court decides this week on the constitutionality of the Affordable Health Care Act, the plan is still doomed to fail.

One of the first things I learned when I went into the insurance business almost 40 years ago was that insurance was simply the prepayment of claims. It is paying in advance to cover some future bill or expense. For example, if a young person purchases a $10000 life insurance policy, the insurance company calculates that by the time of death the insured will have paid in enough to cover the death benefit.

Medical insurance works the same way. In fact, medical insurance only had its origins in the 1930s during the Great Depression. At that time hospitals and physicians were finding it increasingly difficult to collect from their patients, many of whom were out of work. As a result we had the birth of the “Blues.” Both Blue Cross and Blue Shield were products of the depression. In short, people would enroll in these plans and pay a monthly or quarterly premium that over time would build up enough of a reserve to cover their future claims. This idea seemed to benefit everyone. Doctors and other health care providers would no longer have to go after their patients like collection agencies; and the patients would not have to come up with a large amount of cash to handle large, unexpected medical bills.

However, to avoid excessive or frivolous claims that raise the cost for everyone, most medical insurance policies included deductibles or co-insurance to reduce or eliminate small claims. This was right out of Insurance 101 since actuaries were well aware that the most cost effective strategy was to make the patient bear part of the cost out of pocket.

However, the use of medical insurance to cover future health care costs only took off after World War II. The war had finally taken the country out of the depression and the economy was booming. In a major change the Federal Government allowed corporations to purchase group medical insurance plans for their employees. Employers were not required to provide health insurance but the government altered the tax code to provide a great incentive.

Unlike other forms of compensation the cost of the medical insurance would not be considered taxable income to the employee. This was important especially to high salaried employees at a time when the highest tax rate was 70%. In other words, employees covered under such a group insurance plan could now have most of their medical expenses paid with tax-free income. It was a no-brainer. Instead of giving all employees a $1000 taxable salary increase, the employer could give them a $1000 tax-free benefit that would cover future health related costs.

The employer sponsored plans were incredibly attractive to all concerned and sparked a veritable revolution in health care in this country. Employers could deduct the cost of their plans as an ordinary business expense while employees could rely on their pre-tax medical insurance plan to cover major medical expenses. Since these were group insurance plans all employees had to be covered even if they had pre-existing medical conditions. Increasingly these group insurance plans came to dominate the market.
Nevertheless, the basic principle of insurance still governed these group plans. They all involved a pre-payment of claims most often through automatic payroll deductions.

No matter what the Supreme Court decides on the constitutionality of the Affordable Health Care, it is doomed to fail because almost half the people in the country will not have to pay premiums. Those who fall below various income thresholds will receive vouchers or tax credits that can be applied to the purchase of medical insurance policies. It is a welfare rather than an insurance plan.

Why did the Obama administration even bother with insurance and the potentially unconstitutional individual mandate? Why didn’t it just decide to pay all medical bills, and call it a social welfare rather than an insurance plan? Isn’t this what exists in Canada and Europe?

Actually, when I visited my cousins in Italy a few years ago, I found that rather than a single-payer plan, they had two plans. In the first place, they participated in the National health insurance system that would potentially pay all their medical expenses. However, I was surprised to discover that they all had bought private medical insurance as well.Why?

It seems that if you had a problem, you could go to the doctor who worked for the government. If you needed surgery or some major diagnostic test, he might tell you to come back in six months for the procedure. He would also tell you that he had a private practice and could do the procedure for you next week if you paid privately. When people talk about National of socialized medicine, they fail to mention this two-payer system. ###

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