Is Health Insurance a Misnomer?

Posted on December 19, 2009

Like nearly everyone else, I’ve been following the health insurance debate closely, even though I fear that the ultimate outcome is sure to be depressing for those with a moral conscience.

Health Care Insurance is Not Insurance

One thing that hit me today, though, is that health insurance is really a misnomer, since the intent of the vast majority of health insurance has really nothing to do with insurance.

The point of buying insurance is generally to protect yourself financially from a catastrophic event. But, health insurance is now nearly completely removed from the catastrophic angle, even though part of health insurance is surely still catastrophic in nature. Basically, because medical costs have risen dramatically, one buys health insurance simply so that one can afford essential medical services, that are not even in the least bit catastrophic. So, in reality health insurance is not insurance at all, but a method of financing the purchase of highly expensive (or better yet, highly inflated) medical services. It should really be called Health Financing, instead of health insurance.

When framed in this manner, one can clearly see how absurd the healthcare insurance industry really is. Why are we paying insurance companies up-front to finance basic medical services that we will surely need in the future? Health insurance should only be for catastrophic events. If it was purchased for catastrophic events, then undoubtedly health care insurance costs would drop dramatically. In no other area of finance are consumers or businesses forced to pay exorbitant up-front fees just for the right to get financing. Usually financing costs are equal to 1% of the transaction, if the transaction actually proceeds.

Why Are Health Care Costs Rising? Answer: Finance Disguised as Insurance

How then will one pay for basic medical services if health insurance is only purchased for catastrophic? This is a complicated question, but obviously there can be a much better financing mechanism, as there is for every other high-expense item in society.

More importantly, the financing of basic medical services begs the question of why medical service costs are escalating so rapidly in the first place that we need to finance these costs?

This again is a complex topic, but I’d hazard to say that health care costs are rising precisely because of the ridiculous nature of health insurance. In other words, health care premiums are not rising because health care costs are rising, but health care costs are rising because health care insurance premiums are rising. This may sound crazy, but if you’ve followed financial markets long enough, you’ve surely come to realize that prices are simply a function of the availability of financing. As financing becomes readily available, especially fraudulent financing as typified by certain mortgages and as exemplified by health care “insurance”, the underlying cost of the asset or product being financed ultimately rises dramatically for reasons that are too detailed to get into here. This is a basic law of finance that few will readily admit to, but is evident for all to see. For example, why have stock markets around the world risen 60%+ since March? The answer of course has nothing to do with the corporate earnings outlook, and everything to do with the availability of 0% financing from governments to large banks.

Eliminating the Financing Mechanism from Health Care Insurance Would Cut Costs Immediately

In considering the above, the obvious solution to spiraling health care costs is to immediately force insurance companies to offer only catastrophic insurance. This will eliminate the financing of basic medical services, which would in turn dramatically reduce the costs of basic medical services. This may sound simplistic, but I believe it to be accurate. With diminished financing, healthcare costs for basic services are bound to drop significantly. For those honest individuals who may be hurt by such a price drop, the government could step in to help during the transition.

Is this Solution Realistic? Not in a World Controlled by Finance
Of course, I realize that the solution above is not realistic, simply because our entire government is held hostage by big business and Finance. The sole intent of these parties is to increase prices as quickly and as steeply as possible. Sadly, therefore, any economic solution that attempts to decreases prices and increase affordability is bound to be dead on arrival. Always inflation, never deflation, is the mantra of our government and economic leaders. So a simple prediction can be formulated: As health care insurance companies continue to drink from the fountains of fraudulent finance, health care costs will continue to skyrocket with or without health care reform. Expect a doubling or more of health care premiums in the next decade, even though incomes will basically stay flat.

At some point, health care costs will bankrupt a majority of families in this country since it’s inconceivable to spend such a large percentage of pre-tax income on health care premiums and still have money to pay for other real living expenses. Of course, the bankruptcy of the population is quite beneficial for the government and for big business, since as the mortgage debacle shows, as economic troubles deepen the government redoubles its efforts to hand out free money to big business and big banks.

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2 Comments so far

Thomas J. Costagliola December 21, 2009 10:25 am

Yehuda,

You have done a brilliant analysis tying rising health care costs to the availability of financing. I would note also two other reasons for rising health care costs and the steady bankrupting of American families due to medical expenses. The Medical Industrial Establishment has worked every angle to restrict supply in the name of safety and the health insurance industry has created a two tier pricing structure so that health care professionals charge more to those without insurance than to those with insurance. I agree with Milton Friedman’s proposition that the doctor’s monopoly on providing health care needs to be broken.

Regarding the solution to the problem, I really believe we need a significant devaluing of our currency so that the cost of everything else rises in relation to health care costs. Our real estate and other real assets in this country are just too cheap in relation to real estate and real assets in other countries, especially Asian countries. When an average 1200 square foot flat in the suburbs of Singapore, Hong Kong or Tokyo costs four times a comparable apartment in the suburbs of LA, New York or Boston and ten times as much as a comparable apartment in the suburbs Miami, Scottsdale or Minneapolis, I say our currency is too expensive, our land is too cheap. At the peak of the Japanese market, the land under the royal palace in Tokyo was said to have a higher value than all the property in California. The change in the yen-dollar exchange rate since then and Japan’s lost decade fixed only a small portion of that problem. This discrepancy in real estate values is also evident in what little real estate is for sale on mainland China. Since the Chinese Communist Government owns all the land outside of the cities of mainland China and controls the pace of construction in the country and the cities, they control the cost of living in China and make it much less expensive for the Chinese to buy life’s necessities compared to what Americans must spend. Our standard of living is going down and theirs is going up because we have let our dollar remain strong. Countries trying to solve their unemployment problems devalue their currency. This is what the US should do!

To solve our problems, in my opinion, we need low real interest rate loans, i.e. free money, for the masses in our country. This would put purchasing power in the hands of the people. This would also cause inflation but it is not clear that we in the United States would feel it. Though nominal rates are low in this country, we have extremely high real interest rates for individuals who need loans, individuals in debt and trying to refinance real estate or credit cards.

Inflation is a debtor’s best friend. US post World War II inflation to 1980 was the best thing that happened to the middle class. Since 1980 and the real beginning of the strong dollar policy that caused high real interest rates, the top 10%, those with the wealth, has gotten richer and the bottom 90% has gotten poorer.

The truth about our money is that it is all based on debt! One person’s loan is another person’s deposit. If everyone’s debts become harder to pay and total loans decrease, there is less money in the hands of the masses and ruinous deflation ensues, except for the protected classes. If every debt was paid off, or discharged, the only money in the world would be the physical currency that people hoarded and that brave governments were willing to print. Debt with high real interest rates is the bane of mankind and especially capitalism.

In one thousand years, fiat currency will probably turn out to be civilization’s greatest invention and greatest curse.

Thanks again for your post and please pardon my disjointed rant.

Thomas
Yehuda Fruchter December 21, 2009 11:08 am

Hi Thomas,

Very interesting points. In terms of money, I believe that debt is merely one aspect of money. There is also equity. There are combinations of debt/equity. There are other forms of currency.

What all forms of modern paper money have in common, though, is a promise to pay something tangible in the future, even though the likelihood of a tangible benefit is remote. So all our money is in reality based upon fantasies of the future.

Therefore, if you can tell a believable fairy tale you can create endless capital.

I’ll have more to say on this in a future post, but suffice to say that relying on fantasies to create money is both a great invention and curse, as you mention.

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