Wells Purmort, a longtime and well-respected Sarasota insurance-agency owner, explained to us earlier this year the genesis of property insurance in America.
Benjamin Franklin was among the first to form an insurance company in the mid-1700s in Philadelphia.
As Wells told it, after a fire destroyed a neighbor’s home, leaving the family homeless and property-less, the neighbors, compassionate and worried about similar events, pitched in as a group and helped their neighbor recover.
After this incident, the neighbors decided to protect each other from being wiped out. The neighbors agreed to a plan that included:
• Each neighbor contributing money each month to a disaster fund that would be used to help each other recover in the event of calamity.
• Each neighbor employing a chimney sweep to reduce the risk of fire in his home.
• Each neighbor agreeing not to plant trees near his home, another step to reduce the risk of fire.
The neighbors also agreed that at the end of each year if the insurance fund had a surplus of disaster money, they would vote either to return some of the excess money to each neighbor on a pro-rata basis or keep building the fund for future disasters.
In short, the neighbors knew that to keep their fund solvent and reduce the risk of disaster, they needed rules and policies — rules that required everyone to pay his pro-rata premium and everyone to abide by prescribed behavior.
Now apply that historical model to health care:
In a non-government interventionist market, health insurance worked the same way as property insurance did in the 1750s.
Groups of individuals formed what previously were known as mutual health insurance companies, similar to mutual property insurers. Members pooled monthly premiums to provide for each member in the event one or more of its members suffered catastrophic health events.
Health insurance was not intended to pay for such services as routine doctor checkups, X-rays or prescription drugs or massage therapy.
And like a mutual property insurer, mutual health insurers managed themselves to minimize risk and keep the pool of premiums solvent.
This, too, required policies and rules. With their own money at stake, the mutual insurers’ members were careful about admitting new members. Thus, it followed that the members looked favorably on applicants who lived healthy, low-risk lifestyles.
If, however, an applicant who was a heavy user of alcohol and tobacco, rarely exercised and was overweight or, say, was involved in risky behavior such as skydiving or auto racing, or already was stricken with multiple medical complications, the mutual insurers’ members would either reject the individual or charge a higher premium commensurate with the risk. The insurers’ duty was to provide for and protect all of its members, not risk the members’ money on reckless or likely catastrophic cases that could leave other members unprotected.
This practice makes economic and moral sense. But out of it arose the conundrum of how to provide catastrophic insurance to those who are born with or contract serious diseases or who are too poor to afford insurance.
One way to ameliorate this was for health insurers to spread risk among as many people as manageable but without threatening the solvency of the insurance funds. The more members pooled together, the less likely multiple, large costly events would wipe out an insurer and the more able an insurer would be able to adjust rates and make insurance less costly and more affordable for extreme cases.
But then Congress created Medicaid and Medicare, two taxpayer-subsidized entitlements for the poor and senior citizens, respectively.
And as Congress is wont to do, over the years it expanded the services for which Medicaid and Medicare would pay. This increased utilization and cost.
Other factors added to the cost: Demographics; seniors living longer than expected. Medical advancements; the cost of high-tech procedures and equipment. Lawsuits; a mushrooming of multimillion-dollar malpractice awards driving up the price of insurance and health care. Special interests; Congress and state legislatures forcing insurance companies to offer coverage for routine doctor visits, massages, chiropractic visits, medical devices, etc. Societal expectations; an accepted belief that everyone is entitled to maximum medical care, no matter the cost.
All of these factors drove up the cost of health insurance. And all this, of course, has caused many Americans to choose not to buy health insurance or to be unable to afford it.
This is where Obamacare comes in.
The above diagram gives you a sense of the economics of health insurance under the Affordable Health Care Act.
Nearly 50 million Americans currently uninsured (according to Census data) are now mandated to buy health insurance. If they say they can’t afford it, taxpayers will subsidize the cost.
In addition, everyone must be accepted for insurance; no one can be rejected because of any medical conditions.
While a 20% increase in the number to receive medical insurance may not sound extraordinary, just imagine if the cost of anything you purchase or use increases 20%. It’s a jolt to your system. It will be a particularly harsh jolt to the U.S. health insurance system.
The theory of the Affordable Health Care Act is this: If everyone in the United States is paying a health-insurance premium, the increase in collected premiums from those previously uninsured will help offset the cost of medical insurance for all of the high-risk individuals who will now be insured.
Great in theory.
But here’s where AHCA, aka Obamacara, falls apart:
The 63.9% of Americans paying for their own private health insurance are mandated to pay higher taxes to cover the subsidies given to the newly insured — and that is on top of the taxes they are paying to cover the costs of Medicare and Medicaid taxpayers are already paying.
Making matters worse, Obamacare expands the medical services that must be offered in all health insurance plans. All of these expansions have economic consequences.
Here is a big one: Whenever you offer a desired consumable for free, it is abused and overconsumed.
Likewise, lower the cost of a desired consumable — such as the cost of borrowing for mortgages, the cost of flood insurance or the cost of medical care — and the result also will be increased, if not abusive, consumption.
With more people covered by below-cost health insurance, more people than ever will be demanding and consuming medical services.
And yet — and here’s another flaw in the law — while health-care consumption is sure to increase, gobbling up the health-care insurance premiums and taxes the privately insured are paying, the supply of
health-care providers is not rising fast enough to meet the demand. Doctor shortages are a certainty, resulting in still higher prices and costs and longer wait times for medical care.
As Americans have seen with the rollout of the Obamacare exchanges, the scale of government intervention and coercion into health care and health insurance has completely distorted the concept of insurance. Confusion reigns.
So go back to the beginning, when insurance was voluntary — between private buyers and sellers managing their risks. Insurance worked far more efficiently, affordably and equitably than it does now.
Ever since government has intervened — i.e. Medicaid, Medicare, Obamacare — efficiency, effectiveness and affordability have evaporated.