Thursday, November 27, 2014

Gambling Against Yourself

Note: I wrote this ages ago... before the provisions of the Affordable Care Act (the ACA, a.k.a. "Obamacare") came into effect. I never got around to clicking "publish", probably because I hadn't finished marking it up with links. I'm not going to do that now, but I might at some point. Some of the explanation of "how things are" apply to that point in time and may now be obsolete. I'm posting it now only because I wrote it and I'm taking ownership of my statements. 

The nature of insurance is that people who don't use it pay premiums that are used to pay off the bets of the people who do. 

Waitaminnit.... did you say BETS?

Sure. At its core, insurance is an elaborate betting system.  For instance, take term life insurance... every month you bet the insurance company that you're going to die. They bet you won't. Now, if you don't die then you've lost the bet and your stake (the premium). However, if you do die, you win the bet and the insurance company pays off on the odds, which are usually pretty good. Unfortunately, you're dead, so the payout goes to your heirs (the beneficiaries). The difference between "insurance" and "gambling" is that in insurance you're always betting against yourself. It's always in your best interest not to win. I didn't make that up. If you win and it's determined that you have a vested interest in winning, then you have committed "insurance fraud". For instance, you buy fire insurance with the understanding that the continued existence of the building is worth more to you than the payout. If those values are inverted, then you might commit arson and burn down the building for the insurance money. What was a perfectly legal bet now becomes a crime.

But insurance isn't exactly the same as gambling, though it is a bet. As with all bets, the odds are adjusted in accordance with the likelihood of the event. In gambling events, like horseracing, it's typical to fix the betting amounts: you place a $2 bet at the window. But in insurance it's typical to buy according to the value of the payout: you buy a $250,000 life insurance policy. But the odds are still respected, and serve to adjust the other end of the equation. If your horse is likely to win, the payout will be smaller. If you're likely to die, your premium will be higher. But in insurance this is less likely to reflect the actual odds. People with a very low chance of payout will pay statistically higher premiums so that people with a higher chance of payout will may pay statistically lower premiums than they otherwise would. This keeps the range of premiums within a psychologically acceptable range aligning with peoples' perceptions of equitability or fairness, while still allowing the "house" (the insurance company) to make it an economically viable bet. Basically, they spread the costs around. This is called an "adjusted community rating".

Healthcare 'insurance' is interesting because it typically includes features that have nothing at all to do with the actual insurance (the "bet"). For instance, when you buy auto insurance, it's restricted to specific events: accident, theft, etc. It doesn't include regular maintenance. The owner of the automobile is expected to change the oil, transmission and steering fluids, keep the radiator in good repair, regularly replace the belts and tires, keep the windshield clean and unobstructed, make sure the lights and horn work, etc. These are the owner's responsibility alone. Even though it could be argued that it is in everyone's best interest to institute some form of prepayment, and for convenience's sake tack it onto the insurance policy's premiums to encourage the owner to take advantage of "free" maintenance, this isn't commonly done. Regular maintenance is accepted as a normal and responsible part of automobile ownership. Some companies now offer prepaid maintenance plans that are separate and distinct from insurance policies.

Prepayment plans encourage you to do things in your own best interest that would cause the insurance company to lose the bet. They're literally there to pay for services that you expect to use rather than those you hope never to need. Blue Cross began as a prepayment plan, encouraged by American Hospital Association (AHA) in the Great Depression, so as to maintain a more steady flow of income. At that time, people were not likely to utilize their services, and the relatively painless small payments, coupled with the allure of low-cost visits, encouraged increased healthcare spendingThat's what prepayment was for. It was later marketed as preventative medicine for cost-cutting.

Blue Shield began as a similar prepayment plan dealing with individual physicians, and merged with Blue Cross in 1982. For a long time both were non-profit and tax-exempt, but that changed with the tax reform of 1986. These use community ratings to spread the costs a single risk pool and thus charge everyone similar rates.

As you could work our yourself from the very concept of an "adjusted community rating", prepayment plans are a really good deal if you're going to be using a lot of healthcare. Not so good if you're very low risk. The yearly costs of a good prepayment plan can very widely exceed the out-of-pocket costs of several routine office visits per year paid in cash. Also, the costs associated with routine visits are inflexible and fixed ONLY when billed through insurance because they're governed by contract. A doctor is free to negotiate payment for those who are self-pay, usually to the patient's benefit. Some doctors set up their own prepayment plans at a deep discount as a means of establishing recurring income and patient loyalty, as well as a nice way of providing for those patients for whom commercial insurance is too expensive (much as the original Blue Shield did). For the young, healthy individual it is almost always cheaper to buy classical insurance at a very low premium for hospitalization and catastrophic events, and to pay out-of-pocket for routine maintenance, as you would with auto insurance. Health savings plans recognize the fact, and encourage their own use by being tax exempt. However, they're often "use it or lose it"; you must use the money in the plan before the expiration of term. The advantage to the term administrators is that they get to confiscate a lot of unused money every year. If you're really not paying out that much in healthcare, you're still economically better off just banking the money and paying the taxes, and using it when it's actually necessary. The one way to make that untrue is to remove the option and force prepaid insurance. That's what the ACA does.

The reason the ACA enforces participation in plans that are plainly economically detrimental to the individual is because it is necessary when Adjusted Community Rating is factored in to make it "fair" (by which is meant "equitable", and which disguises the true goal of making it economically sustainable). Such a scheme cannot survive in a commercial environment if you have a lot of people sucking benefits out of a system without a whole lot of young, strapping people pumping more into it than is being sucked out. So for it to work at all they have to make people buy plans that make no sense for them to buy. Now, a friend of mine describes this as follows: "Mandatory insurance, therefore, is just to prevent freeloading or gaming the system." But note that actually paying your doctor real spendable cash and discharging your debts can hardly be described as "freeloading". What he calls "gaming the system" can just as readily mean "making sound economic choices".

But what about the poor?

In a free market system, every doctor does a certain amount of pro bono work. The cost of doing this is borne in small part by the doctor himself, and in large part by his other patients. They pay higher costs, and the increased disposable income allows the doctor the financial latitude to provide that pro bono care. Is this perfect? No. Doctors aren't evenly spread geographically, and those that practice in poor areas have few insured and/or wealthy patients who can offset the costs. Also, doctors are physically limited in the number of patients they can reasonably accomodate. The overflow of patients (with insurance or without) go to hospital emergency rooms. As you can read just inside the door of every U.S. hospital that accepts Medicare and Medicaid funding, the facility is required by law to provide emergency treatment to patients regardless of their ability to pay, and regardless of whether they have insurance of any kind. This has been the case for decades.

But this isn't perfect either. An emergency room is there for emergencies, and they're only required to give you treatment to stabilize your condition so you can find a doctor for your (stabilized, non-emergency) condition. Most reasonable people would agree that a cold or minor ailment isn't really an emergency. After all, a cold is going to go away in seven to ten days no matter how you treat it. Nevertheless, emergency rooms are filled with uninsured patients with minor ailments. Part of this is because they don't have any place else to go, if their local doctors are not taking patients. But part of this is because we force them in there with stupid regulations. For instance, schools require a doctor's note to excuse an absence, though every parent knows what a cold looks like, and that the child shouldn't be in school. Nevertheless, this regulation forces people into expensive medical appointments for no more reason than requiring a rubber stamp approval to stay home. And since (as we've already noted) doctors have busy schedules, they find it difficult to work such appointments in on short notice. Where are you going to go? To the E.R., of course. Thus the educational system, by distrusting parental judgement, causes the cost of healthcare to rise. This is government in action. Almost all multi-symptom cold medications contain the same four-or-so ingredients. Mom didn't need a doctor to tell her which one to buy, and little Johnny is going to be at home regardless. The only thing the school has done is to force someone to drop $100 into the doctor's bank account.

In either event, the number of people who don't have insurance does not represent the number of people who can't simply can't get healthcare even though that's what ACA proponents want you to believe. A large number of them don't buy it because they don't want it; it's not an economically sound bet. Some are small business owners who would rather just pay the doctor cash for service. Some people would rather take the risk and bank the money. Some are foolish, and take the risk, spending the money rather than banking it. And a statistically smaller percentage are people who can't afford healthcare and need the insurance and can't get that either. However, a statistically smaller percentage is still a large number of people, so there can be no shortage of "personal stories" to put on display.

Note that the free enterprise system addresses the problem by shifting costs. The ACA addresses it the same way. The big difference is how the costs are shifted. Instead of doing it at the point of service, where a doctor can determine how much it costs for him to meet his expenses and stay in business, the ACA forces all the people who don't want insurance to buy it. It also forces all of the people who can't afford to buy it to buy it anyway. Of course, since they can't afford to buy it, the government offers "subsidies", which are actually pulled from the premiums of the people who can afford to buy it (meaning that their premiums are necessarily inflated), and in "fairness", to keep the premiums on any tier roughly equal, they pull more money than necessary, in order to meet the inflated premiums caused by the subsidies. So we can expect more money to be shifted than is technically necessary to cover the shortfall. The end result: everyone's premiums go up. Period.

What they'd vastly prefer is a single payer system, where there's one insurer (and that's the government or a government sponsored entity that's indistinguishable from the government) into which everybody pays and which pays every healthcare provider. In this sort of system the costs are fixed. They pay what they pay, and since they're the only legal payer and they write the rules, if you're a doctor who wants to get paid you shut up and take the money. That won't fly politically, so what they have is far from perfect.

For one thing, the penalties are lower than the insurance. So people aren't going to buy in. So everybody else's premiums go up (again) because budget expectations aren't met. You won't get punitive "taxes" (those are really fines, Supreme Court), until about the third year, so you get a couple of rounds of increases before people are actually forced into it, which means that by the time they actually try to buy insurance, the stuff they couldn't afford before is really unaffordable. But in actuality, you don't get punitive fines ever. In 2016, if you're a small business owner making $100 grand a year, your fee/tax/penalty will be $2,500 for the year. Divide it by 12. That's $208 and change per month. After all of the rigamarole and cost increases, it will always be cheaper to remain uninsured. So the only people who have incentive to buy into it are those who can't afford it and are subsidized. Where the subsidies would come from, God only knows, because nobody else really needs to buy in.

So the ACA doesn't just shift the costs, it shifts the entire problem. The "insured poor" become the "how-the-hell-do-we-pay-for-them poor". The "uninsured poor" becomes "the uninsured middle class", and they won't even qualify for subsidies. And the penalties won't cover the amount of the shortfall. And penalizing someone still won't make them insured. And because they're penalized, they are less able to buy insurance than they were before the penalties. Meanwhile, the system still won't be able to afford to cover the people it's intended to cover; but this time, the providers can't adjust the costs, because they're fixed. Goodbye common sense, hello underground healthcare system.

There is nothing "affordable" about the Affordable Care Act. Nothing. It doesn't mathematically add up. There will be some kind of forced change to the system, because as it stands it's just dumb and will collapse on its own anyway. Understand that I'm not saying that people shouldn't have healthcare. I'm saying that this law is just a really bad way of going about it. A system that can't pay for the poor and can't get sufficient money out of the middle class is worse than what we had.

Remember, for the populace this whole thing was a gamble. We weren't allowed to see what was in the bill until it was passed. If insurance is gambling against yourself, our country just rolled the dice and got snake eyes.

1 comment:

  1. One thing I should have included at the time is the ACA's method means that a doctor becomes very limited in his ability to adjust charges, and this means that some can only stay in business by adjusting costs (mostly hiring or firing) or adjusting his own income, and that some would find it prudent to retire early, further burdening those who remain.

    There are a few other things I'd've edited, but this one stands out because I have some friends who are doctors, and were seriously discussing this.