ObamaCare and Risk

by Bill O'Connell on November 19, 2013

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As we watch ObamaCare crumble before our eyes, like the cityscape in the movie Inception, I can’t help but wonder how we got into this mess. It is not just that ObamaCare was an awful fix to the problem that preexisted it, but that the solution so thoroughly misunderstood the problem.

You hear terms bandied about like health care and health insurance and the media and ObamaCare supporters use them interchangeably, but they have very different meanings. Health care is what we want from our doctors, health insurance as it is known today is a misnomer.

The Concept of Risk

To talk about insurance you first have to understand risk. What is risk? Risk is something that might happen, not something that has happened and it is usually understood as something bad. Consider you are a general contractor building a house on a schedule and a budget. You are faced with a number of risks. Risks such as the impact of weather on your schedule, and the risk of someone getting hurt on the job.

When faced with risks you can decide to take certain actions. If the likelihood is small, you may just accept the risk and deal with it if it shows up. If the risk is manageable, such as delays due to weather, you may budget some additional money for overtime to get back on schedule if you face a delay or pocket the money or give it back to the owner if it doesn’t. If the risk is large, such as a lawsuit from an injured worker, you can transfer the risk to someone else. The most common way to transfer risk is through insurance. The insurance company bundles many unlikely events together knowing they may have to pay on some of them, but not many. In return they calculate that payout, their overhead and profit, and spread that cost over their many insured, who pay them premiums. As the general contractor, you have a predictable expense in the form of premiums, and the risk is transferred to the insurance company if somebody actually get hurt.

Risk versus Certainty in Health Care

The insurance concept works well where there are rare but expensive events. The concept breaks down completely if you are dealing with certainty.

What is the likelihood that you will contract a disease that will be very expensive to treat versus what is the likelihood you will go to the doctor? The former is a risk, the latter is not. Based on probabilities and costs, an insurance policy can be developed that can protect you from a financial catastrophe if you do contract such a disease and the cost of the premium will be less than the cost of treating the disease. Where you will lose is if you stay healthy. You pay the premium but never need the insurance.

Where the concept falls apart is when dealing with certainty. If you go to your doctor for an annual physical that is a certainty. Whatever the cost of the examination, it will have to be paid. You may believe you have great health “insurance” so you don’t pay for doctor’s visits or you pay a modest co-pay, but what you don’t pay at the doctor’s office you pay with your premiums and you pay a lot.

Let’s say a good physical costs $250 to perform. If you go to the doctor and pay that directly it will cost $250. If, however, if it is “free” through your insurance provider, the insurance company has to shell out the $250. For them to do that takes a lot of paperwork both on their part and the doctor’s office. Add to that the insurance company’s overhead and profit and the cost may rise to $500. Because this is a certainty, everyone has to pay for it, it doesn’t get spread over a wider group of people, so in your premium you pay for it as $500 rather than $250. Even if it is paid by your employer, that is really your compensation, so you are still paying for it.

Consider all the other “free” stuff that is packed into ObamaCare, like birth control pills. You have a widely available product that costs around $10 per month and by pushing it through a third-party payer (i.e., the insurance company) the cost gets driven up to $15. Why is this a good thing? It is not, and it is one of the reasons that health care costs are skyrocketing.

True Insurance

If we focused on true insurance, what we need to protect us from financial catastrophe and get insurance for that, but pay for certainties out of our own pocket it would not only cut out a lot of inflated costs, but it would bring the power of consumer shopping into the mix putting downward pressure on providers. Ask yourself why the cost of Lasik and cosmetic surgery costs have steadily fallen while the quality of customer service has risen and you will find your answer. They are not covered by most insurance plans.

Add tort reform to this, so that doctors are not practicing defensive medicine by ordering every test under the sun “just in case”, and we might really start to bend the cost curve down. But if we believe that replacing the insurance companies with one big government bureaucracy is the answer, enjoy your ObamaCare. You are well on the way to having an all-inclusive health plan. Unfortunately, that has nothing at all with you being able to get good health care. The are not the same. There is a free market solution to the problem. It is not ObamaCare.

 

That’s my opinion; I’d like to know yours. Please comment below.

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  • Vicky Knox

    Are you fighting for my liberty, too, Bill? How do you feel about equal pay? What about extensions of unemployment benefits when few jobs comparable to pre-crash employment exist? How do you feel about comprehensive immigration reform? How do you feel about birth control coverage, when there’s no discussion of cutting coverage for more expensive ED drugs? After all, prescription birth control coverage lowers costs for insurers by cutting pregnancy rates by approximately 23%. Same can’t be said for ED drugs. ;-) Are corporations with millions and billions in cash reserves and scores of well connected directors (0-1 degree of separation) on their boards really the same as ordinary folks (6 degrees of separation, no clout, and little in the bank to support a media campaign or to lobby legislators)?

    • http://libertyslifeline.com William O’Connell

      Yes, I believe in individual liberty for all of us.

      Define equal pay. If you mean am I against sexual discrimination, I am. if you mean averaging wages of all women and comparing them to wages of all men and drawing a conclusion, that is not liberty, According to PayScale’s chief economist Katie Bardaro. “We’re trying to compare men and women with the same education, same management responsibilities, similar employers, in companies with a similar number of employees.” After controlling for these factors, “the gender wage gap disappears for most positions,” she said.

      I believe the popular number is that women only earn 77% of what men earn. Imagine I am a profit maximizing business owner hiring a new CFO. I can hire a man or an equally qualified woman. If what you believe is true, I should be able to pay the woman 23% less than the man. Why in the world would I hire the man? If I could cut my executive payroll by 23% by simply replacing every man with a woman, I would be crazy not to. And in a very short while the men would be willing to accept the same pay as the women. Show me a school district that hires newly minted college graduates and pays the women 23% less than they pay the men, and we’ll go investigate this unequal pay for equal work together.

      Denmark used to provide five years of unemployment benefits. With about six months left in the benefits people rapidly transitioned from benefits to work. Government budgets got tight and in 2005-2007, Denmark cut the unemployment benefits to four years. Guess what? With about six months left in the benefits people rapidly transitioned from benefits to work. What we need is not longer unemployment benefits but a growing economy so people don’t need any unemployment benefits they have jobs. Five years of unemployment above 7% is disgraceful. This president is duplicating everything that didn’t work in the Great Depression and he wonders why it is not working now.

      Define comprehensive immigration reform. If you mean blanket amnesty for anyone who can get across the border, no I am not in favor. I do believe that every foreign student who graduates from a US university or college with a degree in math, science, or engineering should have a green card stapled to their diploma. I don’t believe in allowing millions of people with a third grade education to come and stay here. I believe that people who have followed the process and waited patiently for a chance to come here, should not be forced to wait in whatever country they live in, while illegals can sneak in and live here, enjoy the benefits of this country, and then say there are too many of us to deport. We had amnesty for 3 million with the promise of tighter border control in 1986. We got the amnesty, the border control, not so much. Now we want to repeat the process with 12 million. Fool me once, shame on you; fool me twice…

      Birth control coverage is stupid. It is an item for which you can easily purchase a month’s supply for about $10 and you are going to add all of the costs of bureaucracy on top of it? If you read my entire post you would know I believe that for things that are a certainty, covering it under insurance costs more. Your argument about cutting pregnancy by 23% is curious. If that is true, why are single men being forced to buy insurance policies that include maternity coverage? Birth control pills cost money to produce. Doctors get paid to deliver babies. You may think you are getting free birth control but you will pay thousands for your premium that will cover the birth control pills and will pay to deliver your babies. There is no such thing as a free lunch. If it is a certainty, buy the birth control pills, the condoms, the ED drugs, and the annual physical directly. Limit insurance to rare and unforeseen risks and we may finally start getting costs under control.

      I believe in capitalism, Vicky,not crapitalism. Eliminate all the tax breaks, except one large personal exemption equal to the poverty rate and then everyone pays a flat tax rate. If you make more money, you pay more cash, but everyone should pay something to enjoy the bountiful benefits of this great country.

      Thank you for your comment.

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