Marketplace of Ideas Blog

Forward Investment Advisors chairman Ray Unger has some salient points about President Obama’s health care plan (such as it is, given that Obama has said he wants Congress to fill in the blanks):

When you boil down health care, it’s about three players: the consumer, the provider and the payer. Unlike other markets — say food, shelter or iPods — consumers are the payers. But health care costs include an unusual risk. A catastrophic illness or accident could bankrupt the consumer. Many generations ago, however, a system was devised to protect consumers from such a financial calamity. It was called “pooling.” Consumers could level this risk by pooling with other consumers to share in whatever catastrophic loss a few might suffer. And, voila, health insurance was born.

The bedrock of insurance is the ability to accurately predict losses. This is done via statistical analysis of past losses. The goal is to match these losses with the premium income. This loss/income match is called the “pure” premium. Added to this pure premium is the “load,” the costs of administration, litigation, marketing, and yes, profit to those who supply the capital and take the risk if losses exceed the premiums.

For this paradigm to work, however, insurance companies must know their expected losses and raise the premiums if the expected losses go up. By accepting consumers with pre-existing conditions, and not allowing insurance companies to raise their premiums, insurance companies would suffer chronic losses and go out of business.

In essence, Obama’s “fix” on including consumers without regard to pre-existing conditions means today’s insurance paradigm is kaput. His proposal to offer government-sponsored insurance will mean that taxpayers will underwrite these unexpected, and most certainly, higher losses.

I recently interviewed an orthopedic surgeon and asked him about this fix. He put it quite bluntly, that unless all consumers pay something toward their health care needs, consumers will go on a shopping spree. He told me about patients who routinely request and are given MRIs, other expensive tests, and medical procedures without regard to cost. Why not? As long as somebody else is paying the freight, why not send tons of cargo through the system?