In effect, the business model is a gambling enterprise where the insurer is gambling that only a minimal number of claims will ever need to be paid, whereas the insured is gambling that they will be filing claims that need to be paid. Consider the case of life insurance where premiums
tend to be quite low when the individual is young because the insurance company is betting that you won't die, while you're betting that you will.
The latter position may seem counter-intuitive, but if you really believed you wouldn't die, then there would be no incentive for you to obtain life insurance, so the point remains.
One of the key factors that goes into insurance is that most of the protected resources have finite limits on value (including life insurance), so there is a clear ability to calculate the odds and costs of a pay-out and the period of time over which such a risk extends. When this is coupled with a high number of insured individuals that may never file a claim, then the pattern is set so that revenue flows in from premiums and is offset by claim pay-outs.
It is easy to see that it is in the insurance company's best interest to minimize the real risk they are absorbing, hence the strict controls regarding individuals that have had car accidents for car insurance, or aging individuals regarding life insurance (and pre-existing health conditions).
Even so, we've seen how the insurance companies may have difficulties honoring their commitments when too many claims occur at the same time, such as with Hurricane Katrina. A curious consequence of such mega-catastrophes is the dependence on federal money to supplement insurance industry capacity. Personally, I'm not clear on why an industry should be allowed to profit by selling policies which it requires federal assistance to honor, which brings us to the health insurance industry.
The first problem we encounter is that there is literally no cap on the amount of money that might need to be paid out. Consequently there is no reliable mechanism for correlating the premiums paid with the potential claims being filed. Therefore there is increased business pressure to ensure that the preferred individuals are those with minimal health risks, so pre-existing conditions are ruled out. In many cases, the paid claims far exceed any expectation of recovery based solely on the premiums paid during the life of the insured.
More importantly it is virtually guaranteed that every insured individual will need to file a claim at some point in their lives, so there is little or no margin wherein premiums can be collected to help offset the costs of coverage by individuals that will never file a claim. It's kind of like being a car insurance company where every person you insure will be guaranteed to have a crash during the life of the policy and often, multiple crashes.
It doesn't take much imagination to see that such a business model is doomed to deficits, since it is impossible to construct a scenario where one can reliably make a profit unless one is absolutely ruthless about ensuring that risks are minimized.
However, this brings us to another point regarding insurance. The purpose of insurance is not to allow a company to make a profit, but it exists precisely to offset risks that an ordinary citizen could never handle. In effect, paying a smaller loss now in the form of premiums, against a larger loss later (claims). Therefore we have to confront a fundamental issue about insurance companies, especially in the realm of health care. If they cannot reasonably cover the risks that an average individual is going to encounter, then there is no reason why they should be allowed to profit by only taking the "safe bets".
We might all be better off eliminating the health insurance companies and negotiating directly with doctors, hospitals, and pharmaceuticals to obtain better prices. In fact, a strong argument could be made, that the costs of health-care are artificially high because the health industry knows that their bills will be paid by insurance companies. If they had to bill ordinary citizens for these services at the ruinous rates charged, there is little doubt that most would never get paid, and the health industry would have to rethink the supply/demand relationship with its "customers".
In effect, the insurance companies act as a buffer that can neither fulfill the obligation to the insured effectively, and prevents the health industry from directly interacting with their customers and therefore any "competition" or price adjustments never occurs. This is another
instance of where businesses enter into a market to profit from customers, while extending their maximum efforts at avoiding delivery of their services.
While some may argue that it is an unfair charge to make because insurance companies can't be expected to absorb the risks of high claims payments when they can never recover those costs through premiums. If we accept that argument, then the overriding question that follows is;
why is there so much resistance to providing coverage to those the insurance company doesn't want to cover anyway?
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