Whatever It Is, It’s Not Insurance

Tom Emerick

Posted 5/9/12 on Cracking Health Costs

Discussions about covering “pre-existing” health conditions occur frequently among health policy people. One frequent thread is that health insurers should not be allowed to deny coverage to people with pre-existing health condition. After all, aren’t those the people who need health insurance the most?  Sounds reasonable, doesn’t it?  Problem is that proposition is really not reasonable.

Let me explain.  For any kind of insurance to work right, the “contingent event” can not have already happened before you buy it.  In life insurance, the contingent event is the death of the policyholder.  You can’t buy life “insurance” on someone who has already died.  For homeowners insurance, you can’t buy fire insurance after the home has burned.

Same for auto insurance.  Imagine a scenario in which you could wreck your car and then buy auto insurance to cover it.  I for one would drop my auto policy on the spot.  You probably would too.

In health insurance, the contingent event is a significant covered illness.  When a health insurance policy is forced to cover people who have “incurred” a covered disease, whatever it is, it’s not insurance.

What is it then?  Remember health insurance is a pool of policyholders run by a carrier which may or may not make profit.  If that insurance pool covers people who have incurred significant health problems prior to joining the pool, for whatever reason, it stops being insurance and becomes a wealth transfer from the other policyholders…a wealth transfer plain and simple, but not insurance.

This is the true reason that we can never quite come up with a good way to pay for care for the uninsured who have costly health problems in an insurance context.  When we want health insurance to cover people with pre-existing conditions, the proper thing to suggest is to stop providing insurance and replace it with some kind of wealth transfer mechanism.

Additionally, letting people buy insurance after they’ve become sick leads to what economists call moral hazard.  Some people who would otherwise have purchased health insurance will then wait until they’ve become sick to do so, thereby driving up premium costs and creating a destructive adverse selection loop.

Of course if everyone was forced to join a health insurance plan, this issue would disappear.

There are good people who have lost their health insurance and can’t qualify to buy a health policy. We need a solution. But let’s start calling it what it is. We’ll make better progress if we do.

One thought on “Whatever It Is, It’s Not Insurance

  1. For heaven’s sake Tom, first year students of insurance know many if not most illnesses, diagnoses, and treatment procedures fail most tests of an ideal insurable risk.

    So what do you want to call it? And what difference does it really make? Maybe the real problem is (judging from your use of it here) your expansive definition of “wealth transfer”?

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