A Hole In The Stern (Or, What Is Insurance, Anyway?)

The Wall Street Journal has published an article “fact-checking” the President on his claimed examples of health insurance abuses in his recent address to Congress. As is so often the case when a speaker uses individual cases to illustrate claimed problems, the real stories behind the examples involve complexities and nuances that cannot accurately be conveyed in a sentence or two.

The article also highlights another consideration about the health insurance debate — namely, what is “insurance” in the first place? The Oxford American Dictionary defines “insurance” as “a contract undertaking to provide compensation for loss or damage or injury etc., in return for a payment made in advance once or regularly.” Traditionally, the insured purchased insurance to protect against the risk of an unrealized loss or injury that could occur in the future. The insurer would consider general statistical data and specific information about the risk to be insured and, based on its analysis, decide whether to insure against the risk and if so at what price. One sturdy ship ready to sail from London to the New World along a particular route was no different from any other sturdy ship following that route; the maritime insurer could examine its statistical tables on storms, piracy and mutinies and calculate what it believed to be the risk that the ship and its cargo could be lost. So long as the statistics held true to form, the loss of a single ship would not be a significant problem; if its actuaries had done a competent job, the insurer could use the premiums paid all of its insured shipowners to compensate for the amounts paid out on the policy covering the ship that was lost and survive to insure still more ships in the future.

When people complain about insurance companies looking into “pre-existing conditions,” they really are complaining about insurance companies acting like, well, insurance companies. A maritime insurer would want to know whether the ship it was insuring had a hole in the stern, or planned to sail unescorted into pirate-infested waters, because that information clearly would affect the likelihood of the insured-against risk actually occurring. Similarly, if an individual has an existing medical condition that requires that individual to take expensive medication every day, or dramatically increases the likelihood that they will need costly surgery, those objective facts must be weighed because they obviously affect the risks that are the subject of the insurance.

We can argue about whether health care really should be the subject of insurance in its traditional form or whether we should all just pay into a common pool and share the risk that a random individual in the pool will experience a particular health condition from cradle to grave. So long as we use the traditional insurance model to pay for health care, however, we shouldn’t be heard to complain about insurers looking into “pre-existing conditions.” They are just doing what insurers have always done.

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