Monday, October 19, 2009

How insurance works. And how Obamacare won't work.

Health insurance is complicated, don't get me wrong.  But, at the root, is a very simple concept . . . groups of healthy people pool their money together so that when one of them gets sick or injured then necessary medical treatment (which might be prohibitively expensive as a lump sum) is paid for from the pool of money.  The money is pooled together by an insurance company, which makes money by taking fees off the top and investing the pool itself.  And the system only works as long as more healthy people pay into the insurance pool than sick or injured people draw from it.

Why do healthy people pay into the pool before they need to draw from it?  Because if those people are not paying into the pool and then get sick, they are not generally allowed to buy into the pool after the fact.  If you didn't have to buy insurance while you were healthy and didn't need to draw from the pool but could wait until you needed to draw from the pool before paying any premium at all, why wouldn't you?  Where would the money come from?  Unlike the federal government, insurance companies can't print money.

But Obamacare is set to change the rules of insurance.  Under the latest version, everybody in America is "required" to buy health insurance.  But, if they don't buy insurance, they would face a tax penalty of only $200, starting in 2014, and gradually increasing to $750 in 2017.  (Link to story here.)

I don't know how many of you know what your yearly health insurance premiums are now but I doubt that there is one of you who pays less than $750 per year.  So, if Obamacare passes, and you're healthy, why would you pay into the insurance pool?  Instead, wouldn't you just wait until you got sick or injured and needed coverage.  Then, in theory, you could pay your penalty and get the coverage and treatment you needed?  Insurance companies would be prohibited from denying you coverage for the preexisting condition.

As John Martie, president and general manager of Anthem Blue Cross Blue Shield of Colorado (quoted in the story linked above) says, "people would come in, pay premiums for a few months while they were getting their cancer treatments.  . . . If enough people did that, the whole system would collapse."  Why wouldn't they? 

In fact, people would do just that and if Obamacare passes the resulting systemic failure would be inevitable.

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