Why Individual Health Insurance Premiums Skyrocketed

It seems like everyone who buys their own insurance wants to know why health insurance premiums are up so very much since the Affordable Care Act (aka “Obamacare”) was passed.  I’ve heard some people asking “Am I paying for someone else’s healthcare?” and the short answer is “Yes; that’s how insurance works”, but long and detailed answer is a bit more complicated.

In order to understand the issue completely, it’s important to have a basic understand of how insurance works.  Insurance started in farming to protect farmers, and examples from farming are easy to understand and less emotionally charged, so it makes a good place to explain how insurance works.  (I’m writing in broad strokes here, but the important parts to understand are all there).

Insurance is designed to protect people from financial losses by spreading the costs around to many people.  As a group, people are able to bear larger financial hardship than they can as individuals.  With insurance, everyone pays into one purse; then they take from it according to their need.  Normally, only a very few people suffer big losses, so insurance is a little like a lottery where many people buy a ticket but only a few might “win” big.

Farmers have a constant worry that their crops might fail before they can be harvested – there could be a drought, or a storm, or wandering cows or something else that destroys their field of crops.  If a farm loses all its crops for a year, the farm will probably not be able to meet its financial obligations and be lost.  Because the consequences of that failure are so harsh, farmers buy insurance on their fields to protect themselves financially in case something turns their livelihoods to ash.

It is important that the farmer not be in control of these losses in order for them to be insurable – that the loss must come from something beyond the farmer’s control that happens by chance.  The protection purchased should also never be greater than the loss – you cannot buy a $1,000,000 insurance policy on a field that only has $1,000 worth of crops in it.  There should never be a hope of gaining from the insurance; it exists only to soften the blow if there is a loss.

Equally important is the fact that insurance must be bought before anything bad happens.  If a farmer could wait until after his field was lost to buy the insurance, he would just wait until then to buy into the policy.  If that were allowed, though, there would never be enough money in the purse to cover the losses, since nobody would pay premiums in, but everyone would sign up when they have losses.  That would deplete the insurance company of all its money, so people are required to sign up in advance, or get left out when they suffer a loss.

Having all the rules set in advance helps prevent abuse of the system that normally comes from having one source of money that many people can take from.  Health insurance suffers from a system that violates both of these concerns, and the Affordable Care Act made the problems worse.

First, people can control (to some extent) whether they have health care costs or not.  You can’t control when you get sick, but you can decide whether you want to make a doctor’s visit or not.  When employers were buying insurance for their employees (and slaves before that), the decision to actually see a doctor was beyond company control.  When individuals buy insurance for themselves, they tend to see it more like an investment, and want to get “their money’s worth” out of their policy.

The second (and biggest) issue is the way the Affordable Care Act requires insurers to cover preexisting conditions.  While I do believe that insurance companies were too extreme in their refusal to insure people with preexisting conditions – literally anything other than perfect health made a person ineligible for any individual health insurance at all – covering all preexisting conditions leads to the opposite problem, where people who have become sick and need treatment buy into the program without paying into it.  Covering preexisting conditions has widespread popular approval, but it is part of the problem.

There is a third issue is one that doesn’t sound very nice, but it is the question of how much your health and life is worth.  Can you put a price on your health?  When we deal with financial systems like insurance, everything comes down to money – we cannot pretend that money is no object when it is literally the only object being manipulated by the insurance company.  Insurance companies used to have “lifetime limits” on insurance to avoid the situation where one person’s terrible-but-not-terminal health could bankrupt the whole company, but the Affordable Care Act also eliminated lifetime limits on most plan benefits.  That means there’s no limit to how much one person can spend on healthcare, regardless of how much they could have earned to pay for it.

There are lots of other problems with the system that we have, but these are the ones driving premiums up the most.  People who get extremely sick are forced by circumstance to see doctors, and the entire country is paying the bill without end. Insurance companies have been losing money hand over fist trying to cover the preexisting conditions, because legitimate claims for existing diseases must be paid, but the insurance companies only have limited funding to work with that come (in part) from a time before those people paid into the system.  When the purse runs out, it’s empty for everyone.

Part of the point of the “individual mandate” was to cut down the impact that “preexisting conditions” would have by pushing people to buy insurance when they are healthy to avoid the penalty, but it is not enough.  While many preexisting conditions are minor non-issues, major issues (like cancer treatment) can be monumentally expensive.  Those few cases of individual people who must make use of their insurance tend to be the ones that require the most care and expense, and use the vast majority of the insurance money.

There is a potential direct solution to this problem, which would be to have the government subsidize the insurance companies that have these ridiculous claims issues because of preexisting conditions.  Rather than having people disclose preexisting conditions in order to deny them coverage, having the government reimburse companies that suffer losses from preexisting conditions is one possible way to fix the problem.  Although insurance companies do already negotiate prices with doctors in advance, another indirect solution is to force doctors and drug companies to charge “reasonable” rates for their services – something I know our government is loath to do, but it has precedent with other important life commodities like bread.  A third option would be to offer some sort of “government insurance” program to people who would otherwise be uninsurable to insurance companies, like extending Medicare or Medicaid to everyone who has a preexisting condition.  Then, letting companies refuse to sign up those people would not be an issue and premiums could come down (Whether they would is a different question).

And of course, letting the sick die to save money is an option, but it seems clear that’s the situation we are trying to avoid.  That is exactly where we will end up if nothing changes.

What is clear to me is that if insurance companies continue to be forced to pay for all preexisting conditions, then either plan premiums must skyrocket or those insurance companies are going to be destroyed by astronomical losses.  If either of those two things happens, then the effect is that nobody will have insurance at all, since anyone who could afford the premiums won’t need insurance to pay their doctor bills.  That’s not entirely disagreeable either, since it would force people to consider the cost of their healthcare, driving prices down; but it also would mean that some people will not see doctors even when they need them, and the poor would suffer more than the rich.  Make no mistake; the rich also suffer when there are fewer doctors around to choose the “best” from.  That says nothing about how expensive care might be a thing of the past, since there is no profit in providing a service that nobody can hope to afford.

What is clear to me is that it does not make sense for an existing, established, and carefully managed business to be utterly destroyed because the government imposes a burden on it to care for people who are not really customers.  The details of the issue are a little arcane, but the root of the problem is coverage for preexisting conditions and the untenable cost of covering them, and that is what needs to be addressed directly to fix rising insurance premiums.

So to summarize:  Insurance companies collect money from everyone who pays premiums, and uses that money to pay claims.  People who are already sick will definitely use more money from the policy than they pay in.  Without any limits, forcing insurance companies to pay for care for those people will inevitably bankrupt the company.

Forcing coverage for preexisting conditions without limits or extra funding to cover them is the biggest problem with Obamacare, from an insurance perspective.  That’s why some insurance premiums for individuals cost over $1,000 a month in some places this year, and you can expect them to continue to rise.

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