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Louis DeBroux / Mar. 15, 2017

Making Health Insurance Insurance Again

A big part of the problem is misunderstanding what insurance actually is.

The release this week of the Congressional Budget Office’s scoring of the GOP’s ObamaCare replacement bill brought on immediate condemnation, hyperventilation, and Chicken Little the-sky-is-falling theatrics from all the usual suspects in the Democrat Party and the Leftmedia (but we repeat ourselves).

According to the CBO, the GOP plan would reduce the deficit by several hundred billion dollars, but add 14 million to the ranks of the uninsured in 2018. Pretty horrible, right?

Not if we keep in mind the CBO’s track record, which is not very good. By law, the CBO must score legislation statically (essentially net-zero formulations) rather than dynamically (factoring in human behavioral responses to economic changes). Unable to factor in human behavior, CBO projections are generally off by a wide margin.

In 2009, the CBO predicted ObamaCare would cost taxpayers $900 billion over 10 years, but just two years later the projected costs had more than doubled. Likewise, the number of Americans added to the insurance rolls was a fraction of projections, and a sizeable chunk of those added were lumped into Medicaid, which is a taxpayer-funded welfare program, not insurance.

Lost in the discussion of premiums, enrollment rates, deductibles and so forth is the fact that ObamaCare was never an insurance program. Rather, it was a quasi-socialist health payment program, a temporary bridge to what Democrats actually wanted — single-payer, government-run socialized health care. ObamaCare was never intended to work; at least, not as it was sold to the stupid American people.

As summarized brilliantly by Robert Tracinski at The Federalist, “The point of insurance is not that healthy people pay for sick people. … The point of health insurance is not to provide health care. The point is to hedge against financial risk. … You still set aside a certain amount every month, as you do with savings, but you control for the short-term risk of needing your benefits before you have fully paid for them. Some people will pay premiums for only a few months before they need the benefits. Others will pay for decades without needing them. You accept this because you don’t know ahead of time which one of those people you are going to be.”

“But you can make calculations about which one of those people you are likely to be,” Tracinski continues. “So you want your premiums to be correlated to your own level of risk and not just be a slush fund to be ‘shared’ with others, because that looks a whole lot like getting ripped off. If you find yourself required to pay extremely high premiums while you’re still young and healthy and with a healthy lifestyle, and therefore with a very low risk of using much of your coverage, then you may well decide you’re better off without insurance.”

By definition, ObamaCare can’t be called insurance because it prohibits insurers from basing premiums on risk factors such as age, race (certain races have higher likelihoods of contracting certain diseases than others), lifestyle (smoking, drinking alcohol, and promiscuous sexual behavior all significantly increase health risks), etc. So a chain-smoking 50-year-old man could not be charged much more than a 23-year-old female triathlete. Insurers were also not allowed to deny coverage, or charge higher premiums, for those with pre-existing conditions.

This creates a perverse incentive for both younger people who were unlikely to be sick and for people living an unhealthy lifestyle to go without insurance, knowing they could wait until they needed costly medical care before signing up. At worst they would have to pay a small penalty, which would be more than offset by the money saved from not paying monthly premiums for years.

Without cost being tied to risk, there is little incentive for people to be responsible and to sign up for insurance. In the end, the insurance companies, who salivated at the thought of government forcing everyone to buy their product, lost billions of dollars as they saw primarily sicker and older people signing up, without the young and healthy paying premiums to offset the costs.

That’s why 18 of the 23 ObamaCare co-ops have already gone bankrupt, and why major insurers are pulling out of markets left and right.

Fixing the failures of the health insurance market will require a return to free market principles. It will require insurance to be insurance, not a slush fund shoveling money from the young and healthy to the older and infirm. It means returning to a model where we pay for routine care out of pocket, and use insurance as it is meant to be used — namely, to deal with unforeseen, catastrophic health problems. How much would auto insurance cost if government required it to cover new tires, oil changes, and windshield wipers?

Real reform will require risk-based premiums, and addressing the issue of pre-existing conditions, which would be better addressed by moving those people into a high-risk pool subsidized by the states. That’s welfare, not insurance, but it would make risk assessment more reality-based and lower overall costs.

It will require a firm spine and some political capital, but our leaders need to have a frank discussion with the American people and disabuse them of the notion of an eternal, cost-free gravy train. We are at $20 trillion in debt, and rising. Major entitlements are the primary drivers. We can either responsibly address the crisis now, or wait until the house of cards collapses. Prudence and wisdom dictates that we act now.

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