On The Value Of Real And Imagined Pet Insurance

When I saw a headline stating that one of the hottest new benefits some of America’s largest companies are offering to employees is pet insurance, I thought it was a great idea.

IMG_3790Of course, initially I thought it was casualty insurance.  How appropriate, I thought, to finally recognize the obvious catastrophic loss potential found in every otherwise innocent looking dog.  Whether it’s chewing through an expensive handbag and countless pairs of shoes, or knocking over a bottle of dye that leaves an indelible stain on brand-new Berber carpeting, or experiencing gastric or intestinal incidents that permanently ruin fancy throw rugs after eating an entire wheel of brie or trying to consume an “action figure,” the misadventures of our pooches can have a profound impact on the pocketbook.  Why not offer insurance that properly recognizes that dogs are an awesomely destructive natural force, like hurricanes or tornadoes?

But the insurance that’s being offered is pet health insurance — and that’s an even better idea.  Under the options offered by the plans, the cost per pet ranges between $10 and $57 a month, depending on the coverage and deductible.

Having such coverage surely would help when pet owners have to make decisions about costly medical care for their companions.  It’s an awful, wracking process when a family on a budget has to decide whether to to spend thousands of dollars on surgery and medication on a beloved family pet whose remaining life expectancy would be short under even ideal conditions.  No one wants to try to put a dollar value on the life of a pet that has become a member of the family, and having some help in paying the bills that would allow that life to continue would make the decision so much easier.

Doubts About The In-And-Outers

Massachusetts has its own version of “health care reform” legislation, which is similar in some ways to the federal “health care reform” legislation.  For that reason, the current Massachusetts experience may be a precursor of what we could soon be facing on a national scale.

Yesterday that Boston Globe ran an interesting article that should cause concern among all responsible citizens.  The article addresses the phenomenon of what might be called “in-and-outers.”  “In-and-outers” are people who come in to the health “insurance” system only when they already need immediate health care, rack up health care costs that far outstrip the amounts they pay in premium, and then go out of the system when their need for health care ends.  The rest of the time, they pay a monthly penalty that is less than the monthly cost of the premium would be.  During the few months they are in the system, their average health care costs are far greater than the average health care costs of the long-term participants in the health insurance system. This phenomenon — which has created an imbalance in Massachusetts totaling in the millions of dollars — also could occur under the federal “health care reform” legislation.

Polls show that one of the most popular concepts in the federal “health care reform” legislation is the provision banning insurance companies from denying coverage to people who have pre-existing conditions.  As I’ve written before, I think this may only be because people don’t fully understand the point of exclusion of pre-existing conditions, which addresses one of the fundamental underlying concepts of insurance.  In reality, pre-existing condition exclusions hold down costs for responsible people who buy insurance to protect against future risk by preventing people from “gaming the system” by buying insurance only when, for example, they learn that they need knee surgery or have some other condition that requires expensive short-term treatment.  “In-and-outers” aren’t buying “insurance” against future risk because the risk is already realized.  Instead, they are buying a subsidy for their health care, and sticking the people who stay in the insurance pool long term with most of the tab.

This phenomenon isn’t fair, but it is predictable.  There always will be people who will try to maximize their economic benefit and take advantage of other people, without regard to fairness.  If the federal “health care reform” statutes don’t recognize and account for that reality of the human condition, it will be a significant problem for the rest of us.

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.