I just can’t stand it anymore, listening to these idiots in Congress talk about insurance and healthcare costs. The more you listen to these people, the more you realize that most of the people representing us don’t have a clue about what insurance is and what’s required to make health insurance and health care more affordable. Either that or they don’t want to or don’t have the political will to do what is necessary to make sure that everyone has decent medical care.
Every time one of them starts talking about “competition in the marketplace” or that people should have the right not to purchase health insurance, or just get catastrophic insurance and pay dramatically less than people who are bigger users of healthcare, I just want to throw something at the TV, because these guys are missing what is obvious to anyone who has given any thought to the issue.
So in order to make this simple enough so that even a congressperson can understand, let me explain it as a parable (that’s a made-up story to make a point).
Someplace far, far away in a distant time in the past, a bunch of people lived in a town. They noticed that every so often, something bad would happen to a few of them. (It doesn’t matter what happened or whether it happened to their person or property.) This bad thing had a devastating effect on the family and ruined their lives. The problem was there was no way to tell for sure to whom this bad thing was going to happen. The only thing people knew was that periodically something bad would happen and when it happened, the family would lose everything they had.
At one of the town meetings, Joe Aetna suggested that each family put two days of wages each month into a common pot, and that the proceeds would be distributed to the one or two families that this bad thing happened to. All the townsfolk thought that was a pretty nifty idea, and because it was his idea, it was decided that Joe Aetna would collect the money, and when necessary, distribute it to the one or two families to whom this bad thing befell.
The system worked pretty well, and the afflicted families no longer became destitute. Eventually Joe had his daughter do the bookkeeping, and as the town expanded, he brought in his son and son-in-law to help with the collection and the processing of the payments to the unfortunate few. The town agreed that that Joe and his family would be given wages for their service which was deducted from the collections.
No one seemed to mind paying two days of wages per month, even though almost none of the townsfolk received any direct benefit in return. But then two things happened: First, instead of one or two families experiencing this bad thing, for several years in a row, it happened to more than a dozen families. Also, because there were so many more people having this bad thing, the cost of fixing the damage resulting from this bad thing doubled.
The first year Joe Aetna didn’t complain, even though he had to go in his own pocket to pay his family members who were working for him because the money he received from the townspeople (what Joe called “premiums”) didn’t cover the money he had to give over to the dozen families who had this bad thing. (For some reason, Joe called the payouts “losses.”)
Indeed, not only did Joe have to pay his family out of his own pocket, there was a shortfall in what was needed to pay the dozen families. As a result, he was forced to do two things which made him and the recipients of the money very unhappy. First, he had to give a big chunk of the wages he received for operating the fund to the unfortunate (he called them “loss payees”). Second, he only gave the current loss payees half of what the prior loss payee families had received. So while the unfortunate didn’t become destitute, they had to pay a painful amount of their own wages which left them with a lot less wages than the other townsfolk. (Joe called the payments the unfortunate had to make to the tradesmen a “deductible”)
At the next town meeting, Joe said he couldn’t do this anymore and told everyone that based on past recent events, everyone was now going to have to pay eight days of wages a month as a premium to ensure against this bad event, because 1. The bad thing was happening to more people, and 2. The tradesman fixing the bad thing were charging a lot more.
To justify the increase, he pulled out a ledger listing all the events for the past years, and how much he paid out, and he did some magic with numbers which sort of predicted what the future might look like. To give his ledger containing his experience more gravitas, he made up a new official sounding term, an “actuarial table.”
Despite the actuarial table, the townsfolk were outraged by the proposed increase. Another thing they started to realize was that there was a certain pattern or characteristics that were sort of associated with this bad thing. It wasn’t a hundred percent correlation, but if a family had these factors or did these things in the past, the bad event was more likely to happen, and hence they were more likely to need the payouts. Joe admitted this to be the case, and because he really liked making-up new terms, he called these things “risk factors” and “preexisting conditions.”
Some of the townsfolk started making noises that they weren’t going to pay into the fund anymore and they would just take their chances that the bad thing wouldn’t happen to them, especially the ones who realized that they didn’t have the risk factors or the pre-existing conditions.
One townsperson contacted his cousin in a neighboring village. In that village, Sammy Cigna was doing the same thing Joe Aetna was doing. So the townsperson in Joe’s village invited Sammy to offer a fund which would compete with Joe Aetna’s fund, to try to force Joe to lower the premiums.
The problem was that Sammy was having the same kind of problems as Joe. More of his townsfolk were needing payouts, even more than in Joe’s village, and the cost of fixing the problem had tripled!
In fact, because Sammy had recently told his townsfolk that he was going to have to raise the premiums to 10 days of wages a month, some of the townsfolk in Sammy’s town had contacted Joe Aetna about setting up a competing fund in Sammy’s town.
Both Sammy and Joe gave the same response to each other’s townsfolk. “No way am I going to double my losses.”
The situation in the towns was intolerable. The funds were about to collapse between the townsfolk who were threatening to stop paying and the unfortunate who felt they should be made whole, and Joe and Sammy spending their own wages. So it was decided to consult with the regional wise man. Joe and Sammy and a townsperson from both villages took the journey and laid it all out for the wise man.
The wise man pondered the problem a bit, and said he could tell them what needed to be done, and that it was really quite simple, but that it was going to be their job to get the townsfolk to do it, and that might be the hard part.
So Joe says, “Ok Mr. Wise Man, what do we have to do?
The wise man raises his thumb and says: “First, everyone has to pay into the fund.” “This fund which I’ll call “insurance” works by taking money from many people who won’t use the money, and giving it to the few who need it. If only the people who need it buy “insurance,” it doesn’t work. That’s not insurance. That’s paying for it out of your own pocket.
The wise man then raised his pinky finger and says “Second, the people in the land surrounding villages need to pay into the fund. They are less likely to have the loss, so it will lower the number of days of wages people need to pay in, and there’s always a chance the bad thing will happen to them, so they’ll get some comfort. You need the greatest possible number of people in the fund to lower what you’re calling the premiums.
Joe then asks, “Great, anything else?”
The wise man then raised his index finger and says, “Next, you have to talk to the tradesmen fixing the bad thing, and they’re going to have to reduce their cost by 3 days of wages. Since all their work is coming from the townsfolk, they’ll have to do it.
Sammy then asks, “Are we done?”
“No we’re not grasshopper” says the wise man, as he raises his ring finger and says “Joe and Sammy, you’re going to have to cut back one day of wages per month from what you’re charging; the townsfolk are going to have to pay an extra day’s wage, which is a lot better than the six extra days Joe wanted. And, finally, now that we see what some of the risk factors are, it’s going to be in everyone’s interest to cut back or stop some of that behavior, and if that happens, maybe you’ll be able to move back to the two days of wages premium you had before.”
Joe rubs his chin in skeptical contemplation and says: “I see what you’re saying, but some of the townsfolk insist they have the right not to pay into the fund, and a few of the tradesman say they have the right to charge what they want to fix the bad thing. What do I tell them?”
The wise man raises his middle finger and says, “that’s what you tell them.”
Rick Jaffe, Esq.