Another editorial about the health insurance debate

It seems the hot topic around the U.S. Blogosphere lately is health care. I have done a post or two about it myself. There is a large commotion about it around the country, with protests and so forth. A common reason many bloggers and others give for wanting to go with a government-run health program is that they paint private insurance companies as big bad ogres who band together to overcharge and underpay.

As a person who seeks clarity so he can make logical, non-emotional decisions, I wonder how many out there actually stop to remind themselves just what insurance is? Or what the benefits of free enterprise are? Or what the proper function of government is?

Before one even considers what insurance is, or is supposed to be, one needs to remind himself of the basic differences between capitalism and socialism, and which is better at what. On the same subject is reminding ourselves the difference between a for-profit enterprise, and a non-profit enterprise. Armed with a clear definition of these things, we are better equipped to make unemotional choices.
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1. Capitalism and socialism. Just a reminder: capitalism is simply when things are mostly run by private people, or by private people who form groups, whose primary motivation is profit rather than altruism. Government’s job is to watch and to regulate. Always, the government's main job is to watch out for the people who must do business with these private people or groups of people. Socialism is where the government itself acts as the “business” and the money to run the "business" comes from the people, like it or not. Socialism is often necessary for very large undertakings, or when there is a need for something but little or no financial incentive for the private (profit-driven) sector to do the thing. It does not follow that government-run operations are more frugal or responsive to consumer needs than are privately-run operations.

2. Non-profit enterprises. Some people are under the impression that “not-profits” don’t turn a profit. This is because the name is somewhat misleading. People also assume that non-profit organizations are simply altruistic and working for the public good. This is also not always 100% true. The misconception is from the names, and from a tax standpoint. (This paragraph is only referring to non-profits in the USA - other countries have their own definitions and systems.) When a for-profit company makes a profit, those profits are taken by the owner or divided by the shareholders. Taxes are paid on those profits by the individuals or by the corporations. A non-profit doesn't call its profits by the name of “profit”. It refers to profits, instead, as “surplus funds.” These surplus funds are sunk back into the core operation - for example to double their executives' salaries - and make sure, in the end, all funds that have been collected have been properly “spent” so there is no “profit” to pay taxes on. You have to get permission from the government to be a non-profit and you have to abide by their special regulations. With regard to health care, many health care organizations are non-profit from a tax standpoint. Although many health organizations are charitable or otherwise altruistic, It doesn’t always follow that non-profits are more frugal (or even more public-minded) than are profit organizations. Some are, but it is not an automatic assumption.

3. Insurance is one of the oldest businesses ever conceived, begun, probably, with the Chinese shipping businessmen in ancient times banding together to spread the cost of a disaster over many people. That basic concept and purpose of insurance hasn’t changed. Today, groups of people band together and put money in a pot periodically, for the purpose of reducing the impact of occasional losses. Those who have a loss, take money out of the pot. It doesn’t matter if the potential loss is your car, your home, your life (your family’s loss of income) or your health, or the threat of a liability lawsuit that would ruin you financially. It’s all the same principle. Insurance companies exist because it is inconvenient and not economical for individual persons to search out other people in like situations, and determine how much to put in the pot. It is also inconvenient and uneconomical for individual persons to take time from their regular jobs to investigate and pay claims to people in their group who have losses during the insurance contract period (the period for which premiums - the money in the pot - are covering.) It does not follow that having one big company with no competition, in the form of the government, will mean you will put less money in the pot, or that your claims will be processed more fairly and more promptly.
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In summary, I believe the government better serves the people by watching and regulating (governing) than it does by running enterprises directly. Other people disagree with this thought very much. I believe greed is inherent in capitalism, and that collusion and corruption take place when government doesn’t do its job of oversight. I believe this lack of the government doing its duty tends to allow the marketplace to become perverted and individual citizens suffer from the resulting unfairness. BUT I believe the problem lies more with the government’s lack of doing its job of regulation (governing) than with many private companies competing for your business.

I believe that many big enterprises, like universal health insurance, are STILL not big enough to warrant the government taking over the enterprise directly. Let the government run big things like courts and armies. Let the other big things be run still by private enterprise, many private enterprises competing with one another, but acting under the same government rules as all the others.

I believe if the government is unable to properly regulate the private marketplace, it is unreasonable to expect the government to properly regulate itself in the same operation.

Without competition, there is no incentive for either good service or price competition - or an incentive to save money in daily operations. The government has never proven it’s ability or desire to control costs, and it never will.

Instead of criticizing greedy and uncaring insurance companies, we might be better served by insisting, forcefully, that our government do its job of governing them. That way we still have the benefits of competition that we would lose if government were to simply take over.
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A few further words about insurance companies.

If you are a person who has just suffered a loss, for example you've had your home catch on fire or you have a major sickness, your main concern is payment. The only thing you care about is that the insurance company act promptly and treat you fairly.

On the other other hand, if you are a person who has insurance and has NOT suffered a loss, your only concern is keeping your premiums as low as possible.

This creates a continuing dilemma for insurance companies at both ends of the spectrum.

First, how does the insurance company decide how much money each member has to place in the pot each premium period?

Insurance is a business of predicting the future and of hedging bets. This is true whether it is run by a private insurance company or by the government acting as an insurance company. The main difference is that the government is not accountable for cost containment and has an unlimited supply of captive premium-payers. It cannot be run out of business if it is imprudent or incompetent.

Insurance, like all other businesses who survive in the long-term, must also be in the business of controlling expenses.

Predicting the future is largely a matter of keeping records of what has happened in the past and properly interpreting those records. This is what your tv weatherman does. In the insurance industry, these records are called actuarial records, and are gathered and interpreted by people called actuaries. Based on the interpretation of these predictive records, certain rules arise. For example, it soon becomes obvious that not all risks are the same and therefore not everyone can be charged the same price.

These rules are enforced by people called underwriters. They make sure that people who apply for insurance are properly investigated and placed in the proper rate categories so the risk can be determined and fairly rated. That is why your teenage son doesn't pay the same for his car insurance as a 45 year old rural couple who live on a farm. Insurance prices (premiums) are based on perceived risk. It is a numbers game, pure and simple.

Also, if an insurance company is prudent and fiscally competent (and lucky), they will not have huge losses that have to be made up by increasing your premiums after the fact.

There are many ways an insurance company can control their costs at the other end, and thereby offer cheaper rates to ALL of its customers. Like other businesses, they can keep an eye on business operation costs such as utilities and employees. Insurance companies also invest the premium dollars (short-term for casualty insurance, long-term for life insurance) and use the investment profits to help keep premiums lower. Another way that insurance companies strive to keep costs down is by the prudent investigation of claims and the wise disbursement of claim dollars. This they owe both to their business and to the premium-paying public. However, this last is a sore point with the current government health insurance crowd. They assume the government would somehow treat them better when it comes to paying claims.

A more humane approach to paying health-care claims is needed, whoever does the paying, rather than the current cut and dried rigid insurance company rules. Again, this is an opportunity for government, and for government to do what it does best - regulate and govern: Use public input to make up rules, and then enforce those rules. The function of government would seem simple on the surface.

I am resisting the temptation to talk about industry lobbyists, which are another method businesses (including insurance companies) use to keep costs down and thwart rule-enforcement, so I will stop here.