For the sake of argument, let’s say that every privately owned home in the country is going to get old, have its electrical system go bad, catch on fire, and burn to the ground. And let’s say that you own one of these homes. Since you know that it’s going to burn to the ground, and you know you are going to need to rebuild it to have a place to live, how do you plan for this?
Let’s say that you have a survey done and they tell you it will cost $200,000 to rebuild your home. Do you start saving a little every month in a special account? Or do you buy insurance?
Now, turn it around. Let’s say you run a business that offers home insurance. You know that every house will age and die. You are going to have to pay out on every claim. If you know you are going to have to pay me $200,000 eventually, how much do you demand in monthly premium payments?
What should be obvious here is that the classic insurance model doesn’t work for things that are inevitable. The reason home insurance is affordable is because most homes don’t burn down. The insurance company takes in many small premiums and pays out only a few large claims. But we all die. Almost all of us get sick before we die. Almost no one goes to the grave without consuming expensive health care and pharmaceuticals. Most health care spending is done in our first and last few years on this planet. The way private health insurance companies make money is twofold. First, the government covers the elderly, many of the children, and high-risk individuals like our armed forces and veterans. The government also covers many people with disabilities that require ongoing care. So, the private companies are left with a pool of the healthiest individuals, who make relatively few claims. Second, they charge you money throughout your whole working life so that the expense of covering your decline and death is spread out and may be less than what you pay in (and if you live past 64, they don’t have to pay out at all).
Going back to our house analogy, you would be a fool to pay more than $200,000 in premiums if you know that the cost of rebuilding your house is only $200,000. And the insurance company would be a fool to charge you less than $200,000 if they know they will have to pay at least that much out to you.
When you buy home insurance, what you are really doing is hedging against an unexpected catastrophe that could wipe you out financially and leave you homeless. But, you know for certain that you are going to die and you know to a near certainty that will get sick and require very expensive care before you die. End of life care is so expensive that the only realistic way for most people to pay for it is to set aside money with each paycheck for their whole working lives. The only insurance you might want is against your getting sick early in life before you’ve earned enough to pay for your care. But, assuming that you live into retirement, you should have already paid for all the end-of-life care you are going to need.
When every citizen pays into Medicare throughout their working lives, but not every citizen lives long enough to consume that investment, then we create a pool of excess money that can be used to smooth out and equalize the cost of growing old and dying. That way, we’re all insured against catastrophic costs that can bankrupt our families.
Medicare isn’t really insurance. It’s buying health care on the installment plan, with a touch of insurance against catastrophe. So, why do we need this middle of life period where we are forced to buy health insurance? We pay for something that we are already paying for in our Medicare deductions. The insurance company takes our money and hopes that we live long enough that they can pass us off to the Medicare system. If we do need expensive care before we turn 65, then they try to find technicalities to avoid paying our claims. If they believe we’re a risk for making a claim, they just refuse to cover us at all.
From the consumer’s standpoint, this system doesn’t make any sense. It’s as if we know that our house is going to burn down before we die, so we lay-away a little money each week to pay for rebuilding our home. But we only get access to that money if we live to be 65 years old. Since it is possible that our house will burn down before we turn 65, we are forced to pay premiums to a private insurer in addition to our weekly lay-away. And if we reach the age of 65, all that money is just gone.
Why would we want to perpetuate such a system.
