April 1 2013

ObamaCare: Why It Isn't Insurance

Charlotte Hays

One of the problems with talking about ObamaCare is that many people don’t understand what constitutes “insurance” and how “insurance” works.

Kathleen Sebelius, I’m talking about you.

On this very important issue, Meghan McArdle has a must-read piece in (of all places) the Daily Beast explaining what insurance is and what Kathleen Sebelius thinks it is. The distance between the two is great.

The subhead sums up:

Kathleen Sebelius thinks insurance isn’t really insurance unless it covers routine expenses. This is exactly backwards.

Sebelius doesn’t understand how insurance companies must operate to remain solvent, how risk pooling works, or how premiums are calculated. Nor did the people who designed ObamaCare, and that is why your premiums are going up dramatically. But what we’re dealing with isn’t really insurance.

Insurance was designed to cover catastrophic, unpredictable events. Think Lloyd’s of London, the insurance company, and the bell tolling when a ship it has insured sinks in movies. That is insurance. Coverage of normal, routine things isn’t insurance. Lloyd’s didn’t cover getting the decks swabbed down.

Indeed, as John Steele Gordon explains on the indispensible Commentary blog, insurance has origins in maritime catastrophes:

Insurance began in the 17th century when merchants wanted to protect themselves against the loss of a ship and its cargo. By paying a small amount upfront, they each protected themselves against the loss of a huge amount. This is called risk pooling, one of the truly great economic ideas. By spreading risk, it made it much easier to assume risk, and assuming risk is one of the prime drivers of an economy.

Thus insurance, properly understood, is meant to protect against a catastrophic loss that would be financially ruinous, such as a lost ship. It didn’t pay for a parted topsail halyard. And that’s why if your grandson throws a baseball through a living room window, you call the guy who fixes windows, not the insurance company. It’s when the roof blows off in a storm that you call the insurance company.

Doesn't sound like ObamaCare, does it?  As McArdle explains ObamaCare is really a prepayment plan. Would that the folks who designed it had known what they were talking about! Ditto the Secretary of Health and Human Services. In their ignorance, they made it almost impossible to obtain genuine insurance for catastrophic events:   

Obamacare has, unfortunately, sharply curtailed the ability to offer these plans [for catastrophic events]; very high deductible plans are now effectively illegal.  Which is a great shame, because these plans, combined with a dedicated health savings accounts, were showing real promise at controlling costs.  

A liberal policy professor at the event explained this as a result of the toxic political environment surrounding policy these days; since Republicans wouldn't cooperate on Obamacare, Democrats stuck the knife in one of their favorite programs.  

But Sebelius' answer suggests another explanation: the Democratic opposition to castrophic plans was not strategic, or vengeful, but entirely heartfelt.  The Secretary of Health and Human Services genuinely believes that health insurance should do more than just, well, protect your ability to keep paying the mortgage.  Unfortunately, "more" is very expensive and inefficient.

If you could wave a magic wand and solve the problems with the nation’s medical system, that would be great.

In effect, that is what the people who gave us ObamaCare tried to do—wave a magic wand. But it didn’t work because they did not grasp some of the basics (i.e., what insurance actually is).

Because of the poisonous brew of ignorance and ideology, they have saddled us with what Gordon calls “an economic and humanitarian disaster waiting to happen.”

ObamaCare is such a jerrybuilt system that it will likely fall of its own weight.

But I dread the suffering between now and then—and I sincerely hope that what comes next will be the genuine health care reform that was needed three years ago when this monstrosity was forced upon us by a Democratic majority determined to realize their pipe dream, come hell or high water.

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