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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