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Saturday, July 17, 2021

Health Insurance: How Does It Work?

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We never have to wonder how home or automobile insurance policies operate in practice. It must be very difficult to figure out how to manage a system of individual mandates, single payers, and more and onerous for the buyer. Now that Congress is once again discussing how health care operates in America, maybe it’s time to try to understand why it’s different from any other country. “health insurance” is a mere one-and-half of the three of the components that we would call “insurance”. I’m going to try to boil it down the information you need to handle health-related proposals to a collection of four simple questions that you can understand.

To get our bearings, let’s start by defining “insurance.” insurance, as we know it, was invented in the Netherlands in the 16th century. Although the good news was that you might return the value of your investment in a few voyages, the bad news was that it would require several trips to the bottom of the ocean.

To simplify things, let’s say it will take you ten round-trips to get shipwrecked or lost before you could break even the ship. If the shipwreck were to happen on your eleventh voyage, you would have enough saved up to purchase a new one and continue travelling. On the tenth trip, your ship would have sunk.

This sparked the interest of several more rich men, who offered an “insurance contract,” where the shipowner paid one-twentieth of the ship’s value before it went on its voyage, and they were compensated for any loss or damage afterwards. Both parties generally benefitted: on average, the insurer received a percentage of each voyage’s overall fee, and both benefited from making a potentially unpredictable expense predictable.

This is the most basic form of insurance: You only know to expect a big bill in the future, but have small ones to pay each month. In essence, the homeowner’s policy today is the same as it was a decade ago.

Over the years, several refinements have been made to this definition. We especially need to improve our understanding of probability modelling and actuarial science: to become technical experts in calculating probabilities. In the example above, the insurance company was charging one-tenth of the ship’s total cost, with an extra charge to account for each voyage. But if he guesses wrong, he might find himself out of business; high prices would put him out of business, and his potential customers would go to the other nearby rivals (not always his customers). Too optimistic an estimation, and he’d be on the verge of bankruptcy by the next week. It took a lot of bright minds to come up with just how necessary these events were.

Actuaries eventually learned that not all voyages are created equal. Shanghai to London is a lot less risky for trading projects. A well-provisioned ship is less of a liability than one in disrepair, particularly if a fellow crew member happens to sneeze. Teachers with experience are better than no teachers at all. Insurers could and could — but don’t always — varying charge levels of premiums for various coverage. It is impossible to guarantee that everything will go as planned because there are such varying probabilities associated with an insurance policy.

Both of these situations have something in common: everyone is aware of the item insured and can negotiate fairly. You also want to make sure that a specific expense you don’t know how much it would be ahead of time, like your car’s insurance, is there. How is it possible for an insurer to determine the value of a policy? And if it’s tragic, how much will they pay overall?

These risk factors should be included in an insurance premium, provided that the actuaries can calculate the total cost and determine the probability of various expenses. If you know that out of every 1,000 millionaires, ten will owe $1 million; then your payouts should be priced at $1 million-plus a charge per year, per customer. Even if no one of the ten is expected to pay $1 million in premiums, anyone will still benefit.

At first glance, it appears that this type of “catalyst insurance” is similar to conventional insurance; it lets individuals cover a certain number of incidents, rather than specific occurrences, over a number of their lifetimes.

Catastrophic insurance is, however, only partially covered by the insurance process: It has a basic issue. Multiply the one-in-thousand chances by two, and you’ll get something closer to reality. 90% of people have a 1:1000 chance, 10% have a 1:100000. Then 90% of the population would pay $100, and the remaining 10% would pay $10,000 because that’s how chances work.

What this translates to is that “safe” customers are also funding “unsafe” customers. All insurance is predicated on no one being able to know which pool someone else belongs to. Once risk is understood, it will be different. When an insurer ceased taking free insurance coverage, it wouldn’t take long for the competition to jump in and protect the other 90% of the population for a mere $1,000. Pretty quickly, the other insurer will be out of business, and they’d be left with 90% of their initial customers; they’d have to bump up their premium to $10,000 to stay in business.

All end up being charged the same as if it were ordinary insurance. insurance policies which cost more than anyone could afford are unlikely to be used

There is no way to stop this except to avoid fully free markets. If health insurers were not allowed to raise premiums or reject applicants on the way, you could guarantee that everybody was covered, regardless of how much they paid.

You’ve implied that we’ll cover this risk, and everybody has to bear the costs. This is a kind of levy, so it can happen as seen before, with private insurers being obligated to pay or anything else is a shared responsibility with no individuals having to pay. It all depends on the circumstances.

The upshot is this: catastrophe insurance (which imposes huge financial burdens on everyone) shifts to time-limited insurance (when it’s determined a person’s risk). If the total cost of coverage is higher than what people could afford — like cancer care or injury liability — then the risk will no longer be covered.” Rather than increasing everyone’s premiums to help cover this (we couldn’t even call it “insurance” Insurance” anymore), we must decide that payment is only going to be used for social decisions. It translates to “everyone is helping to pay for something when they get something back from Y.”

When people have something they’d like to protect against, they consider it extremely unlikely to think about it in the same way we think of tax terms. Do you think it’s worthwhile?” Who will pay for the costs? Who will get the benefits? Do you want to pay more for insurance premiums or taxes? For any catastrophe insurance, whenever we think we have found a way to segregate the risk, we must ask this question: If it fails, will it break the group?


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