Tuesday, September 15, 2009

Leeching the System: The false heroics of guaranteed insurance.

Imagine for one moment that you, like me, are in a pretty average financial position. I live mostly paycheck to paycheck, I have more debt than I'd like (fortunately, mostly from my education) and it's a little hard for me to save a whole lot, but I can still manage the occasional movie-night and I'm at least not that far "behind".

Now... The trouble with this position is that I'm not really set up to deal with any major emergencies. I'm sure many others know what this is like.

If my car breaks down and the warranty doesn't apply I would be in a right pickle attempting to get it fixed for any cost above a few hundred dollars. Recently a friend's car broke down and it cost over $1,400 to repair. I imagine for many people that kind of unexpected expense would be a little hard to manage. I know it would be for me.

Of course there are many possible ways that people deal with such problems. If it were me, I might hit up my folks for a loan. Some people might have a credit card handy for these kinds of occasions. Still others might ditch the car for a while, start riding their bicycle and taking the bus to work until they'd saved up enough to cover the repairs.

There is yet another option available assuming I know enough people in the same financial straits though... For instance, let's imagine that there are 10 of us all in a similar situation; it's you, me, and 8 of our relatively trustworthy friends. Knowing that any major car repair could be painful for any one of us on our own, what if I proposed the radical idea that the 10 of us together could pool our money and be better prepared for disaster?

Certainly none of us is planning to get into an accident, plus we all take pretty good care of our cars and don't expect any big things to break, but just in case something horrible happens, the fund would be available to that person for use provided it meets the terms agreed to by the everyone and written out in a predefined contract.

We set up a special bank account for it, we define the terms of use, suggest maximum payout percentages that help keep the fund from entirely going to the first person who has a problem, etc... Then the ten of us all sign our names to the agreement and as they say, we "pays our money & takes our chances".

So say we each agree put in $250 up front and start adding $50 each month after that.

Our total fund starts with $2500 in it. One year, and fortunately 0 qualified emergencies later - our fund has $8,000. We all feel pretty good about that. If no one encounters a problem, then the fund just remains untouched, expanding and generating interest... If any of us wants out at any time, well - then said individual can have the money he paid in back (minus any money he took out of course) prorated with interest. Good deal, huh? Sounds good to me!

But now imagine that my friend shows up with her broken Volkswagon.

It's going to cost $1,400 to fix, and she doesn't have the money. However, she had never paid in to our pool. She didn't save any money, she hasn't contributed at all to our plan, but say she asks that we pay for her car-repair just the same. Should we? Would you?

Most people, I think, would rightly understand that she has no right to our money - and that by demanding that we cover the cost of her repair out of the emergency fund we set up to help protect ourselves, she is directly harming the 10 of us who have been contributing our hard-earned savings each month and abiding by our contract.

Most people, I think, would understand that for whatever her needs, intentions or feelings might be - my friend would ultimately be asking permission to be a leech on the rest of us.

Now imagine that I, being the extremely generous human being that I am, might agree to let her take money from the fund. That's absolutely a choice I could freely make, and no one could stop me from doing so; after all I paid in to the pot and some of that money is mine to take out. Unfortunately though, my total contribution has only been $800 by the end of the year. Not exactly enough to cover my friend's needs. Do I have the right to take money from the other 9 of you without your permission? Would that be remotely fair or just? Is it ok for me to take your money against your wishes, as well as my own - thus leaving you with less ability to afford a possible emergency in the future? Again, I think most people understand that; no, I don't have that right, and that it would be quite an injustice towards the group as a whole.

Somewhat intuitively - and certainly upon a little bit of reflection - nearly every person of any age can recognize that in the above scenario, the 10 original risk-poolers did nothing untoward, nothing coercive and harmed no one. We were worried about our situation and worked together to come up with what we believed would be a good solution given our individual financial limitations. If someone came in and took from us, they would be reducing the financial buffer we created to insulate ourselves from uncertain, but potentially very serious problems. Naturally the specific circumstances might play a role in whether or not we consider this fraud, theft, or whether or not we all agree to be charitable... But essentially, if someone new came in mid-stream, knowing that they were going to take from our pool without ever contributing - that person would be harming the rest of us directly, would she not?

Again, I believe most people understand this perfectly well. And so most people understand quite clearly who is harming whom, how it's happening, and can probably come up with a few possible responses... Very few of which would likely involve forcing the 10 of us to part with our savings.

But here's the rub: In matters of health care insurance, a sizable chunk of the national population seems woefully unable to grasp such basic concepts.

For instance, think about the presented situation in relationship to what President Obama said in his speech the other day on health care "reform":
"What this plan will do is to make the insurance you have work better for you. Under this plan, it will be against the law for insurance companies to deny you coverage because of a pre-existing condition."
Effectively, if you accept the analogy I'm making above, what the President is saying is that it would be illegal for the 10 of us who've created the car-repair risk pool to deny my friend the $1,400 regardless of the clear fact that we know in advance she would be siphoning off our collected resources and that this would be unavoidably at our expense.

We pay in each month. We know her car is broken and that if we let her in right now, she will immediately deplete our collective savings by almost a 5th. We also know that if we are unlucky and find that a couple of our own cars break down within that same year, this new law would mean that there are 1,400 fewer dollars available to treat our own illnesses repair our own cars. And remember again that the reason the 10 of us entered into the risk-pooling agreement to begin with was because individually we were all too poor to afford emergency repairs like that on our own!

Naturally theft or fraud is still wrong regardless of who it's perpetrated against - rich or poor. But the rich don't really need a risk pool... The awesome thing about being rich is being able to afford to pay for your own needs, be they large, small, expected, unexpected or completely frivolous.

But poor schlubs like you and me who would all need some help paying for big but uncertain expenses can't often whip out a briefcase full of $100 bills... So sometimes we have to think up other, more creative arrangements. With the risk-pool, no one was forced to pay in, and anyone could opt-out at any time... It was completely voluntary. But we all stayed in because we knew that with our combined resources, our own individual financial risk would be minimized enough to be bearable in the event of an emergency. We also all stayed in because we each believed that the probability of such emergencies happening was relatively low, and thus we would actually be able to afford to contribute to the pool.

But if such a law as President Obama proposes were passed, why keep voluntarily funding an insurance scheme knowing that as like as not, someone with no legitimate claim on the available financial resources can come in at any time and use them all up - thus leaving you stranded when you actually need the help?

If most of us were to just break down this situation as I've done above and understand how it applies to health care, we all can easily comprehend that a person with a pre-existing medical condition getting a beneficial law passed which forces existing insurance payers to cover his disease is a leech. We can also easily understand, as per above, that such leeches are draining money from the pool that was always actually intended to provide payment for the emergency care of hard-working, responsible individuals; this means moms & dads, grandmothers & grandfathers... Everyone.

And sure, sometimes, a few leeches here and there aren't a big problem and are often unavoidable... Sometimes it's just an accident of fate that a person might buy into an insurance policy and then get sick a day later, and while it's definitely unfortunate both for the sick individual and the people who are unfairly subsidizing that person's treatment - part of the point of risk-pooling in general is that you never really know when something bad might happen. So there's nothing fraudulent there, merely undesirable - and also relatively rare. However, anyone who signs up for insurance knowing that they are already ill and will be taking money from the system is being deceitful in order to unfairly stick other people with his debts - thus we rightly consider it insurance fraud and prosecute such people.

But Obama's speech makes the true leech not only a legally protected entity, but in fact the desirable position!

The result of such a foolish policy would be completely catastrophic as more people pass up paying the monthly fees of a health insurance plan when they are well, and instead only jump into the risk-pool when they experience the very type of emergency that we're all trying to hedge against. And because it would be illegal for an insurer to prevent them from doing this, there would be really no way to prevent such folks from draining the entire pool of money such that if and when some of us who've actually paid in got into trouble, there would be less money left to cover our needs, or perhaps none at all!

Of course, if we all properly understood the proposed legislation as protecting the leeches at the expense of regular hard-working folks who are not even wealthy enough on their own to handle emergencies out-of-pocket, no one would accept it.

So the proponents of such legislation don't ever let you view of these folks as the leeches of the system, destroying the security net for everyone else.

Instead, they postulate scenarios where the parasites are sympathetic, downtrodden and single mothers who happen to have the misfortune of being a little hard on their luck when they got an unexpected illness. They craft elaborate anecdotal narratives designed to ply our sympathies. And it works!

We all care about mothers.
We all care about human misfortune.
We all believe that people who've gotten dealt a bad hand could use a bit of help.

If we didn't, these types of stories would have no influence. But they work without fail, and they prod people to forget that as sympathetic the person in need might be, they are the ones taking and not giving back - that they are the selfish ones.

Ultimately, this is why merely telling the story of the sympathetic mother isn't enough. At some point, everyone knows that the world is full of unfortunate situations and bad cases, but we can only do the best we can to address them all. Sometimes, there's nothing to do but accept that there are consequences to never planning ahead and try to help out as best we can through charity or individual acts of generosity. We know this because we recognize that one person's misfortune doesn't give them the right to impose misfortune on other innocent people.

Therefore, in addition to the providing archetypal examples of the underdog hero - every good story needs a villain! It's not enough to say that in this case, the leech happens to be a young mother who we should care deeply for. Of course we should care - and we do - but we can't justify pushing her problems onto someone else equally deserving. So crafters of such narratives must also pose that the reason she can't afford her care is because the evil wealthy insurance executive denies her claim unfairly, exploitative male oppressors caused her to get sick in the first place, or even that the very system itself keeps her from earning a fair wage. In truth, almost any variation will do. So long as the leech can be turned into a victim of bad men or circumstances and wind up heroically triumphing over an unjust system - and as long as those who've paid into the system are the evil oppressors, hell-bent on keeping sick people from getting the medicine they desperately need, President Obama's insanely unjust, immoral and economically destructive ideas will seem noble and righteous to many people.

But the truth is so different... In truth, the villain is - and must always be - the person taking without giving, collecting without contributing. The true villain must be the aggressor, not the victim. I dare say in spite of compellingly emotional narratives, deep down everyone knows who the villain is.

Finally, let me say that I am most certainly not giving the behavior of some insurance executives a pass, nor am I supporting the status quo. So sure there are instances of unjust recision or fraudulent dereliction of contracts on the part of the insurance companies - just like there are plenty of people around scamming the system to get paid for injuries they always had or never had. People sometimes lie, cheat & swindle each other, but that's a human nature thing, not an "evil insurance executive" thing. These cases are clearly criminal, and they need to be treated (and prosecuted) as such. However, in the vast majority of cases, it really isn't any more philosophically complex than the example of 10 buddies combining their cash and hedging their bets.

What this means is that if people with pre-existing conditions get the legal privilege of joining existing insurance plans when otherwise they wouldn't qualify - they aren't taking from some faceless tuxedo-wearing rich guy (not that it would matter ethically anyway), and they're certainly not sticking it to the infamous insurance executives. Instead, they're taking from my grandmother and yours. They're taking from you, and me, and everyone else who sets aside a bit of their monthly pay to prepare for a possible, if hopefully avoided future risk.

This isn't heroic. It's monstrous.

There are so many reasons why health care resources are as limited as they are today primarily owing to egregious government interventions over the last 70 years, and there's much to be done about that. But if we start rewarding the leeches of society at the expense of all of the responsible people, we're all in some really deep trouble. The insurance industry won't survive that. Large-scale risk pooling as we know it can't survive it. As a result, the average person's ability to handle the existing high cost of medical care will plummet.

This may all come across to some as unsympathetic, but those who have pre-existing conditions must either find an insurer who will cover them voluntarily (and pay the attendant higher premiums) if they can afford it, or they need to mobilize the generous resources of private charities, family, friends and various communities to help relieve their financial burden. If they don't do this, then they are simply - and quite unfairly - pushing their costs onto other people... Regular people of all races, ethnicities, genders, professions, incomes and standards of living. The sooner we cut through the emotionally charged anecdotes & broadly scripted narratives and start addressing the substance of these issues; the sooner we start understanding that the villains & heroes created by so many supposedly fighting for "universal health care" are exactly the opposite of reality.

The bad guys aren't those who've worked hard and prepared for the future, to the contrary - they're the innocent ones in all this. The true villains are those so selfish as to demand something for nothing and to impose that demand on others by force of law.

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