If you would like to know what insurance really is, and why Obamacare (and much private “medical insurance”) is not insurance at all, but an economic and humanitarian disaster waiting to happen, you cannot do better than Megan McArdle’s delightfully jargon-free article in The Daily Beast.
Insurance began in the 17th century when merchants wanted to protect themselves against the loss of a ship and its cargo. By paying a small amount upfront, they each protected themselves against the loss of a huge amount. This is called risk pooling, one of the truly great economic ideas. By spreading risk, it made it much easier to assume risk, and assuming risk is one of the prime drivers of an economy.
Thus insurance, properly understood, is meant to protect against a catastrophic loss that would be financially ruinous, such as a lost ship. It didn’t pay for a parted topsail halyard. And that’s why if your grandson throws a baseball through a living room window, you call the guy who fixes windows, not the insurance company. It’s when the roof blows off in a storm that you call the insurance company.
But most medical insurance covers everything from hangnails to heart transplants. Have a sniffle? Your insurance company pays the doctor’s bill. This not insurance at all, it’s a prepayment plan.
Megan McArdle likens it to “grocery insurance”:
If you expect to buy $10,000 worth of groceries next year, [the insurance company] will not charge you less than that for a “grocery policy.” And if we all drive up the costs of grocery insurance by consuming more, the insurer can do one of two things: raise everyone’s “insurance premiums” to cover a filet mignon budget, or create a list of “approved groceries” that it will cover, and start hassling anyone who tries to file an excessively expensive claim.
Sound familiar?
This is why Obamacare cannot and will not work: it flies in the face of economic reality and human nature. As Milton Friedman explained, “nobody spends someone else’s money as carefully as they spend their own.” So if the doctor is “free,” people will go to the doctor more often. If it’s not coming out of their pocket, they’ll opt for the filet mignon test rather than the Hamburger Helper test.
As the costs rise, political opposition to tax increases and bureaucratic inability to control costs will force the alternative, rationing of health care. Sorry, Grandma, but you’re too old to be treated for that disease. But don’t worry, we’ll make you comfortable.
The greatest tragedy is that it is all so avoidable.
