Remember when House Speaker Nancy Pelosi responded to a question on the Affordable Care Act with this: “We’ll have to pass the bill in order to find out what’s in the bill”? Polls at the time showed that most Americans were against the bill, but Congress passed it, so now it’s the law.
I’ve seen some headlines in the past few days which I treat with a major grain of salt. One referenced an IRS report that estimated the cheapest insurance plan for a family of four will be $24,000 per year. Another, from the Congressional Budget Office, says the number of uninsured Americans won’t fall below 30 million over the next ten years. So, the promise that this act would see to it that everyone will be covered, and that costs would go down, both seem not to be true.
Back in 2009, when this was all being debated, I wrote a column talking about the basics of how insurance works. Here are some excerpts:
The first thing to know about insurance is that it has everything to do with risk. People can buy all sorts of insurance to prevent risk, but then find themselves broke.
The risk factors that apply to the cost of healthcare are no different than those that apply to homeowners’ and car insurance. We pay insurance companies money, and in exchange, they make us feel secure. With car insurance, we don’t pay as much if we have a high deductible, which means we pay for some of the repairs. Also, we don’t expect our car insurance to cover new tires, windshield wipers, car washes, or oil changes. We don’t expect our house insurance to pay for new paint or siding. And, if we live near a river that floods, the only available insurance is from the government.
Somehow, over the years we’ve evolved into treating our health insurance in a different way. We think it should be inexpensive and all-encompassing.
But why does insurance cost so much? Well, car insurance cost a lot less when our cars were worth $3,000, like new Honda Civic back in 1977. Replacing a $40,000 car costs, well, $40,000, so the car insurance companies have to charge enough to cover your potential loss and make a profit.
Likewise, the cost of health care has gone up so much and so fast that health insurance companies are struggling to keep up. One example: the health insurance provider for the company I work for paid out more in claims for our company’s employees last year than they took in in premiums. So, they had to raise our monthly premiums for this year.
Some people have a hard time getting health insurance because they have risky lifestyles or pre-existing conditions. Insurance companies hire people called actuaries to help them calculate their risk. If you have had a couple of heart attacks, for example, the actuaries have a chart that shows how likely you are to have another one, and another chart that says how much it would cost them if you did.
Any insurance regulation that requires people with pre-existing conditions or risky lifestyles to be given insurance at the same rates as everyone else… well, that will cause everybody else’s insurance premiums to go up to cover the higher risks.
Of course, people can’t help that they have pre-existing conditions. That’s one reason most people think something should be done to help those higher risk people. But, I do know that any insurance company that is forced to ignore their actuaries and charge premium rates that cause them to lose money will go out of business.
Now, as 2014 approaches, we’re about to enter into the Affordable Care Act adventure. I wish you all good luck.