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January 16, 2013 at 06:21 AM
My comments today are a follow up to Michael Kitces’ thoughtful analysis of the challenges and potential benefits that employers, advisors and their clients will face as Obamacare begins to take effect, including the implications of dissociating healthcare from employment. As a former claims adjuster for two major property and casualty insurance companies a lifetime or two ago, I got a sort of “bottom-up” view of how the insurance industry works in the real world, which has proven valuable in helping advisors sort out insurers and their products over the years—including our current health care situation.
As a claims adjuster, I experienced how insurance companies go about “managing” their “claims exposure,” or in plain English, how to keep down the costs of paying their insureds. In principle, it seems a conflict of interest to have people prepay to be reimbursed for some future catastrophe or loss by a for-profit company—at its discretion. Yet back in the day, despite occasional speeches by visiting home office executives about reducing “frivolous” claims (which sounded ominously more ambiguous than “fraudulent” claims), I found the insurance industry and its employees surprisingly concerned about paying their insureds everything they were owed. (Of course, some insurers are better about this than others, and the adjusters all know which are which.)
On a macro scale, of course, the insurance business makes a lot more sense: there are some catastrophes, such as when your house burns down, that while infrequent are financially ruinous when they do occur. So by many of us paying a fraction of the cost of a new house, we can create a fund to reimburse the unfortunate few who suffer such losses. We’re happy for insurance companies to make a profit for offering us this service. Thus, insurance works well for homes, and cars and boats and airplanes and anything else that only occasionally suffer damage.
Which brings us to health care. Unlike property insurance, which dates back at least to Renaissance-era shipping companies, health insurance is a relatively new business, originating in the mid-20th century. Until then, doctors could do relatively little for their patients, and the costs of most treatments were limited as well. What’s more, people didn’t live very long: when Social Security was created in 1935, the average life expectancy at birth for those born in 1930 was 58 years for men and 62 years for women (see this interesting archived article from the Social Security Administration on life expectancy back then.)
