I have long been a proponent of insurance as a necessary protection against random, catastrophic events (ex. Death, illness, car accident, etc.).
Insurance companies have been able to successfully insure people against such events while still making a profit and remaining financially sound. No doubt, this is due in part to industry regulation, but mainly due to an insurance company’s reputation in the market place. Potential customers do not want to enter into a contract with an insurance company that is on the brink of insolvency and may be unable to meet their obligations, so insurance companies strive to achieve and maintain a solid standing with respect to their financial position.
However, insurance companies are able to “pick and choose” who they insure (in addition to being able to charge a higher price for those deemed to be a higher risk). This basically ensures their ability to turn a profit with minimal risk. But, this also results in some people being uninsurable and they are excluded from the opportunity of pooling resources to protect against catastrophic events (that’s basically what insurance is).
I realize this is unfair to those who are uninsurable, but on the other hand I realize that it is also unfair for insurance companies to be expected to insure someone who has not paid into insurance for most of their life and suddenly decides to get it once they have been diagnosed with a terminal illness or someone who possesses the factors that are associated with an untimely catastrophe.
I do not believe that the opportunity to participate in insurance is a God-given right (like freedom of speech, etc.), rather I feel that insurance should be a product just like any other where consumers have the choice to buy or not. However, there are not very many products out there that exclude segments of the population from buying because it would be unprofitable for the producer of the product. What would happen if an all-you-can-eat buffet refused to allow any person with a body mass index greater than 40 to enter? I bet there would be civil rights groups protesting about discrimination, yet that’s basically what is happening everyday in the insurance industry.
So how should the dilemma be remedied so that it is fair for all?
For sake of limiting the scope of this manuscript, the issue of those who cannot afford insurance is not included… that can be another article. Regardless of how we solve the described dilemma, this issue will still exist and will need to be remedied.
In the case of health insurance, one solution proposed is to have a government-run program to insure the segment of society that private sector insurers refuse to insure due to the unprofitable situation such insurance would pose. While this may be a noble idea, it will be very costly to the government (which uses taxpayer money to fund) since those in this category will be the highest risk of the societal pool. Not only that, it also requires the overhead of a bureaucracy to run such a program which typically is much more expensive than the overhead of a private sector equivalent. Granted, this does remedy the problem of offering insurance to those who are uninsurable, as well as keep insurance companies profitable (and should ultimately reduce the cost of their product); this comes with a very high price tag for taxpayers. In the end, any reduction in the cost of insurance would likely be tremendously outweighed by an increase in taxes.
Another solution proposed is to change nothing. In the case of health insurance, the debts of those who do not have insurance and who experience catastrophic events are merely absorbed by the others who pay for insurance. The creditors of such people just pass along the cost to other consumers to cover that loss. Going back to the example of the buffet… if people eat at the buffet but leave without paying, the restaurateur has to raise the price for everyone else in order to stay profitable. The result is that the consumers end up paying more for insurance in order to cover the cost of un-recouped debt (granted, without the additional cost of a government bureaucracy included). While this is basically how health insurance works today, it is not very dignifying for the uninsured (those who have to “dine and dash” from the buffet example); nor does it allow insurers to have a predictable, stable way to remain financially solvent without dramatic escalations in the cost of insurance. And in most cases, those who are uninsured wait until they are facing a catastrophic situation to get care which typically results in much higher costs that may have been able to be prevented.
Yet another possible solution is to require insurers to accept and keep anyone who wants to participate in the opportunity to get insurance. This would include people they would normally not have chosen to insure in the past because it would make their business less profitable. In turn, it would not be surprising if insurers found that they need to raise their price for everyone to cover that lack of profitability. Since there are many private sector insurers, there would be competition to keep their prices and profitability in check, but cost increases would not be out of the question. Assuming that such a change would encourage widespread participation, the average person might end up paying more for insurance, but they would no longer be paying for the debts of those who were uninsured (think “dine and dash” in the buffet example) since there would be very few if any uninsured people. If, as in the case of health insurance, the debts of the uninsured are passed along to the insurer, it is possible that it would be a “wash” and insurance cost would remain the same or better yet be reduced. This solution allows everyone the opportunity to participate in insurance as well as provides for the ability of insurers to remain profitable and solvent. It also has a high probability of actually reducing the cost to individuals by eliminating the bureaucracies that currently exist for the purpose of recouping the debts of those who were uninsured at the time of a catastrophic event.
Now, before deciding on any possible solution, one must consider that insurance relies on the ongoing participation of all who wish to be insured. It is not fair to the insurance company (not to mention the others who participate on an ongoing basis) for someone to wait until they are faced with a catastrophic event, then purchase insurance only to drop it once the risk of catastrophe has passed. I also do not think it is fair that everyone should be required to participate in an insurance arrangement. It is likely that there will need to be an “opt in” program where if you choose to “opt in” to an insurance arrangement, you must participate on an ongoing basis otherwise face exclusion from any future insurance arrangement. If you choose to “opt out” then you would never be allowed to “opt in” in the future and can never be entitled to the benefits of pooling resources to protect against catastrophic events. Likewise, if you “opt out” you would be denied services if you cannot afford them yourself.
I believe that if you have scenario where the insurance industry must extend and continue to extend the opportunity to participate to everyone, where costly bureaucracies are eliminated from the equation (with the potential of reducing overall cost), where those who “opted out” would run the risk of being denied services and where it is not a government-run program, there would be very few people who would not “opt in” despite the requirement of ongoing participation. Additionally if, as a society, we choose to provide assistance to those who cannot afford insurance, the price tag for such assistance would likely be a lot lower.
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