Insurance is not a product but a financial service. Unlike others, the selling point of insurance is risk. People buy insurance because they want to get compensation in case something bad happens such as an accident, a natural calamity, or a serious illness. Companies like to sell insurance because they receive monthly payments beforehand in the form of premiums. They take the risk that bad things don’t happen frequently. Even if they do, only a small portion of the insurance pool requires compensation, which will give them enough profit margin to survive. In fact, the profit margins are big. The health insurance industry in America made a combined profit of over $13 billion in 2016, up 46% from the previous year.
What makes health insurance a viable business? Most importantly, the market must be big to cover millions of people with diverse health conditions spread out across the land. It won’t work if only senior or sick people buy health insurance. All buyers must recognize the fact that those in good health subsidize those in bad health, usually the young subsidizing the old. In return, when the young get sick or older, they will be taken care of if they are contributing to the insurance pool. Thus health insurance is basically a long-term social service providing a safety net for everybody. This raises the question if the government should take over health insurance as a single payer for all health services. In most developed countries, their governments have already monopolized health care where private insurers are permitted to operate at the periphery covering enhanced services or special conditions.
In America, health insurance still rests in private hands. The reason is that most American companies have long been providing health insurance to their employees through private insurers. When a citizen reaches the age 65 or above, he/she is automatically insured under Medicare provided by the federal government. Since 2014, Obamacare has been enacted to subsidize those aged under 65 who are self-employed or unemployed for the purchase of private health insurance if their incomes fall below the poverty level. By early 2017, Obamacare has expanded to cover more than 11 million people out of 56 million uninsured due to rising premiums. In addition, local governments at the state, county or city levels provide some forms of subsidy to low-income families through public hospitals or special services. Thus in America, private health insurance applies to the majority of the people under 65 years and above the poverty level, that is, the majority of the middle class. When premiums rise rapidly, the middle class will be increasingly squeezed.
What is the biggest danger to private health insurance? Premium inflation is the one. When premiums rise too fast, the young and healthy tend to drop out because they will take the chance of not getting seriously ill. This leaves the insurance pool with older and sicker people, which forces the insurers to raise premiums further to reduce their risks, which in turns causes more dropouts. The result is a continuous death spiral until the premiums become too high for any middle-income person to afford. Then the time will be ripe for the government to take over, or some radical disruption such as a revolution. This is what has been happening in America since the 1990’s. What is the cause? The insurance companies are too greedy without the common sense that they are digging their own graves. When premiums keep rising, the other parts of the health care industry such as the pharmaceutical companies and the hospitals will begin raising their prices, too. All of them are able to raise prices by bribing legislators to relax the regulations.
Before the passage of Obamacare, there was a big discussion about whether the federal government should tax, subsidize, and force everybody to buy health insurance to prevent the insurance pool from shrinking. The issue was settled in June 2015 by the US Supreme Court which ruled that it was legal to do so. However, it left the loophole that private insurers could still continue to raise premiums while receiving government subsidies. So it set into motion a runaway health care inflation that cannot be sustained by government subsidies except price controls on the private health care industry.
The American scene is complicated by the power of the health care industry with huge resources to bribe politicians and legislators to act in their favor. The health insurers can get away with continuously raising premiums, offering less coverage, restricting access for people with “pre-existing conditions”, increasing “deductibles”, and employing other kinds of dirty tricks. It is almost impossible to clamp down on prices. Politicians like to advocate increasing competition by freeing the marketplace via deregulation. This will only worsen the situation because there is no free market for health care in America where only a few big companies collude and dominate. Right now, the people being squeezed most are the middle-income self-employed under 65. Those employed by companies are not immune. Although their companies are bulk buyers of health insurance with the ability to get a better deal from the insurers, they find that their employer-provided health plans are getting smaller in coverage and higher in “deductibles”. It has taken more than 30 years to come to this sorry state. The worst is yet to come for the end is not in sight unless the government imposes price control rather than subsidizing for the short-term benefit of those in need.