What is insurance? Why does it exist?
No one thinks their house is going to burn down, but nearly everyone would be in dire straits if this happened to them. What if you’re one of the unlucky ones? What do you do to protect yourself against this occurring?
In comes insurance
Insurance companies formed to pool risk, protecting people in case of unforeseen disasters. They know that most houses won’t catch on fire, but at some point, a small percentage will. Therefore, to ensure peace of mind, a homeowner can pay a small monthly premium. The insurance company (we’ll call it Gecko) then combines all those small premiums to pay the few unlucky families who suffered a catastrophe.
What happens when you buy insurance?
When you purchase fire insurance, Gecko is making a bet; they are betting that your house won’t burn down. After all, this is why the company exists. There’s profit to be made in pooling risk because it’s a service people want. However, if Gecko made bets they thought they were going to lose, their business would be a losing proposition. They’d be hemorrhaging money and wouldn’t be in business much longer.
“Hello Gecko, this is Bad Luck Bill, my house burned down, so I’d like to buy fire insurance”
Bad Luck Bill’s burned-down house has a pre-existing condition - it's in ashes. Gecko can’t make bets they know they are going to lose, so they can’t cover pre-existing conditions.
People buy fire insurance because it’s a small price to pay for huge peace of mind. However, if Gecko allowed pre-existing conditions, Gecko’s operating costs would be many magnitudes greater. The price of the fire insurance would have to be increased significantly to account for the much larger expenses.
Can you imagine how expensive fire insurance would be if Gecko were forced to allow people to buy insurance after their house already burned down? The price would be absurd. Furthermore, why would anyone pay for fire insurance their entire life if they can just buy it after disaster strikes? No one would buy fire insurance until their house had already burned down. The industry would cease to exist.
Once you allow people with pre-existing conditions to purchase your insurance, you’re no longer in the business of insurance.
You can’t get fire insurance after your house burns down, you can’t buy car insurance after you total your car, and you can’t buy health insurance after you’re diagnosed with cancer.
If you have a pre-existing condition, you’re uninsurable. I know that this sounds harsh, but this is a matter of fact based on the definition of insurance. A company who is insuring pre-existing conditions, isn’t actually insuring them, because that company is no longer in the business of insurance.
If you’re “insuring” pre-existing conditions, you are not an insurance company. You are a middleman whose job now involves payment forwarding.
Insurance was meant for unforeseen disasters, not known costs.
You buy fire insurance in case of catastrophe, you purchase car insurance in case you total your car, and you’re supposed to buy health insurance in case of the unlikely event you need a major surgery or get very sick. These are all cases that you don’t foresee happening, at least not anytime soon, but there’s still a small chance that they will. If you’re one of the unlucky ones who totals their car tomorrow, it would put significant financial stress on you if you didn’t have insurance. You’re insuring yourself in the event of misfortune.
Imagine how expensive car insurance would be if it covered oil changes, tire replacements, tire rotations, windshield wiper replacements, windshield wiper fluid, car washes, and any other routine expenses.
To make matters worse, people would drive with less care because “insurance will cover it.” People would get the most expensive car wash because “insurance will cover it.” Most expensive wiper blades, no problem. “Insurance will cover it.” No need to shop around for the best price because “insurance will cover it.”
Car service providers would have no reason to provide good prices because consumers would no longer care about cost. Car insurance prices would skyrocket.
When insurance covers a long list of known expenses, it is no longer insurance. In this example, the car insurance company is no more than a middleman whose job is to forward your now-sky-high “premium” to various service providers.
Does this sound familiar?
Today, what many of us think of as “health insurance” is not actually insurance. Today’s “health insurance” providers are no more than payment forwarders. They take your sky-high premiums and forward them to various service providers.
At least in the US, many peoples’ “health insurance” cover routine, known expenses. The idea of shopping around for the best price is unheard of because “insurance will cover it.” In fact, in my experience, if you try to shop around, doctors and pharmacies often won’t even tell you the price of their services/products.
Healthcare providers have very little incentive to provide you with a great product at a reasonable price because their customers aren’t shopping around looking for better alternatives.
As you can see, the current system is broken. If health insurance were to return to what health insurance is supposed to be, I’m confident it would be a small fraction of its current cost. Healthcare providers would compete for your business and their costs would be transparent. As time passed, with many doctors and hospitals trying to get your business, prices would be driven down, the level of service improved, and speed of innovation increased.
