Tuesday, June 23, 2009

Healthcare Reform: The Business of Insurance

Before we can even talk about healthcare reform, it's vitally important that we understand how most healthcare insurance policies operate. Health insurance is a business and it works according to same principle as all insurance: The individual buys an insurance policy for a set amount of money and the policy is a protection against individual payment for a health calamity. For example, let's say that I pay for insurance in the amount of $500 a month. I could just place my $500 in the bank as a hedge against my need for healthcare. But instead I pay it to a company. For their part, the company promises to pay up if I get sick and require medical care.

The company is betting that I will be well and thus the amount I pay in premiums will not be used to keep me healthy. I am hedging against the fear that I will need more healthcare than I could otherwise afford.

Many of us find this arrangement morally dubious and it may very well be. But if you have insurance, whether it's with a not-for-profit or traditional business, that's the arrangement. You are betting that you might get sick, in which case the company will pay out money to get you well. The company is betting that you won't get sick and therefore they can hold the cash paid in premiums.

For obvious reasons, it's in your best interest to stay well. The company feels the same way, of course, because if you get sick it will cost them money. The company is looking to hold onto premiums. This, of course, is where the problems begin. The company prefers not to spend money on treatment; individuals hope that they won't need costly healthcare. But should the need arise, they expect to have their care covered; that's why they pay premiums in the first place.

Healthcare costs have not kept pace with inflation; not by a long shot. Whereas yearly inflation in the U.S. has typically been 1 – 3% per year, over the past 30 years, healthcare costs have risen as much as 5-15% per year. It doesn't take an accountant to figure out the problem. If we seek to ensure the entire nation within the framework of the current healthcare system, we will go bankrupt.

As this debate moves forward, we need to find ways to reduce the cost of healthcare. It may very well be easier said than done....and it will be the subject of my next post.

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