You can't insure what has already happened
I like Obama. He seems like a moral, intelligent guy who thinks a lot about the decisions he has to make. I would expect his policies to be well thought-out, reasoned from first principles.
That's why I was surprised to read the details of his proposed health plan. They make no sense. I'm not speaking of my opinion -- I'm speaking of logical, objective sense.
Obama's page on healthcare states the following:
Before I respond to this proposal specifically, let's review what "insurance" is. Bad things happen in the world: houses burn down. A lot of people invest a significant portion of their savings into their houses, and they'd be in a very bad place if the house were to burn down.
Disasters are unpredictable, and we don't know whether any particular house might burn down. We can estimate general risk, based on general factors, such as the temperature and the surroundings (dry brush nearby?). Consider the two possible outcomes after purchasing insurance:
The idea behind insurance is that we're betting something bad will happen. We're placing a bet such that we come out ahead if the bad thing happens. We're probably risk-averse, meaning we'd prefer to pay a few dollars a month to remove the (financial) risk, even if we don't expect it to happen. Or perhaps we're betting that the odds of our house burning down are large enough to warrant the cost of the insurance premium.
The insurance company charges a little bit more than the statistical cost of someone's house burning down, and so takes in a profit. The customers get piece of mind, knowing that there is no chance of losing their savings. This works out fine -- but it's entirely based on the fact that we don't know whether the house will burn down. That's the concept of risk.
If your house is currently on fire, will you be able to get any insurance company to sell you an insurance policy? Of course not. Since the house is already on fire, there is nothing to "insure" against. It's going to burn down, and someone will have to suffer that loss.
"Insuring" against events which have already happened is not only bad business, it simply makes no sense. When the house has already burned down, it makes no sense to after the fact ask an insurance company to sell you a policy. Hopefully now the direction of this essay is obvious.
Obama's healthcare plan is senseless because it requires healthcare insurance companies to give up their "pre-existing condition" clauses. But without those clauses it's not insurance!
The reason you can pay a premium of (say) $200 per month to have your healthcare costs covered in case you get sick and have a $10,000 hospital bill is precisely because it's not known whether you will get sick and incur the cost. If it's known in advance that you will get sick for sure, there is no basis with which to make a bet. The only thing to "insure" is other, unforeseen illnesses.
Forcing healthcare companies to remove pre-existing condition clauses is tantamount to forcing housing insurance companies to sell insurance to people whose houses are currently on fire. Some people currently can't get healthcare insurance because they're already to sick and there is nothing to insure. Requiring healthcare insurance companies to cover them only passes their financial burden on to everyone else, in the form of their premiums going up.
Insurance is about things that haven't happened yet. Anyone who disagrees is welcome to sell economic insurance against George W. Bush winning the 2004 Presidential elections, or against the housing crisis.
I strongly support healthcare reform in America. I do believe the system is bad, and I haven't made up my mind, but I probably support government-provided healthcare rather than insurance. I have no problem with that; I believe that people who understand such things well should go to work and build something better. We can discuss such a system and reason about it, again from our morals and first principles. I support working towards that goal, knowing from the beginning that we're operating outside the free market, because market efficiency is not our goal.
But I can't get behind government interference with the market in a way that is senseless and in staunch opposition to the principles the underlie that market. If you're creating a market, don't interfere with it. An insurance market is for insurance; there's nothing to insure when you already know the outcome.
That's why I was surprised to read the details of his proposed health plan. They make no sense. I'm not speaking of my opinion -- I'm speaking of logical, objective sense.
Obama's page on healthcare states the following:
Require insurance companies to cover pre-existing conditions so all Americans regardless of their health status or history can get comprehensive benefits at fair and stable premiums.
Before I respond to this proposal specifically, let's review what "insurance" is. Bad things happen in the world: houses burn down. A lot of people invest a significant portion of their savings into their houses, and they'd be in a very bad place if the house were to burn down.
Disasters are unpredictable, and we don't know whether any particular house might burn down. We can estimate general risk, based on general factors, such as the temperature and the surroundings (dry brush nearby?). Consider the two possible outcomes after purchasing insurance:
- Your house burns down, in which case you come out even.
- Nothing happens, in which case you've suffered a loss of the premium.
The idea behind insurance is that we're betting something bad will happen. We're placing a bet such that we come out ahead if the bad thing happens. We're probably risk-averse, meaning we'd prefer to pay a few dollars a month to remove the (financial) risk, even if we don't expect it to happen. Or perhaps we're betting that the odds of our house burning down are large enough to warrant the cost of the insurance premium.
The insurance company charges a little bit more than the statistical cost of someone's house burning down, and so takes in a profit. The customers get piece of mind, knowing that there is no chance of losing their savings. This works out fine -- but it's entirely based on the fact that we don't know whether the house will burn down. That's the concept of risk.
If your house is currently on fire, will you be able to get any insurance company to sell you an insurance policy? Of course not. Since the house is already on fire, there is nothing to "insure" against. It's going to burn down, and someone will have to suffer that loss.
"Insuring" against events which have already happened is not only bad business, it simply makes no sense. When the house has already burned down, it makes no sense to after the fact ask an insurance company to sell you a policy. Hopefully now the direction of this essay is obvious.
Obama's healthcare plan is senseless because it requires healthcare insurance companies to give up their "pre-existing condition" clauses. But without those clauses it's not insurance!
The reason you can pay a premium of (say) $200 per month to have your healthcare costs covered in case you get sick and have a $10,000 hospital bill is precisely because it's not known whether you will get sick and incur the cost. If it's known in advance that you will get sick for sure, there is no basis with which to make a bet. The only thing to "insure" is other, unforeseen illnesses.
Forcing healthcare companies to remove pre-existing condition clauses is tantamount to forcing housing insurance companies to sell insurance to people whose houses are currently on fire. Some people currently can't get healthcare insurance because they're already to sick and there is nothing to insure. Requiring healthcare insurance companies to cover them only passes their financial burden on to everyone else, in the form of their premiums going up.
Insurance is about things that haven't happened yet. Anyone who disagrees is welcome to sell economic insurance against George W. Bush winning the 2004 Presidential elections, or against the housing crisis.
I strongly support healthcare reform in America. I do believe the system is bad, and I haven't made up my mind, but I probably support government-provided healthcare rather than insurance. I have no problem with that; I believe that people who understand such things well should go to work and build something better. We can discuss such a system and reason about it, again from our morals and first principles. I support working towards that goal, knowing from the beginning that we're operating outside the free market, because market efficiency is not our goal.
But I can't get behind government interference with the market in a way that is senseless and in staunch opposition to the principles the underlie that market. If you're creating a market, don't interfere with it. An insurance market is for insurance; there's nothing to insure when you already know the outcome.
posted by Justin Crites at
8:37 PM
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