Putting the insurance business out of business

As we were saying last week, most political decisions are based on "narratives" -- histories of how we got here, reduced to easy-to-grasp stories a few sentences in length.

The problem is, if we get the narrative wrong, bad outcomes grow far more likely, since we'll be working to solve the wrong problem, or even applying larger doses of the medicine that got us here in the first place.

Let's review one more narrative now in current circulation:

Many -- even "moderate" Republicans -- have been heard of late to say, "There are sections of Obamacare that need tweaking, maybe even repeal. But there are some provisions that should be kept, that we can all agree make sense, including the ban on insurance companies refusing to cover people with pre-existing conditions."

To say this provision is popular is unexceptional. It sounds nice to say anyone who gets sick should receive free medical care, with the money coming from ... somewhere.

Unfortunately, this single stipulation destroys the whole economic basis for "insurance," turning medical insurance plans into nothing more than pre-paid medical service accounts, which will be either vastly more expensive or subject to rationing and other Draconian restrictions once the new (government or government-controlled) purveyors figure out their real costs, as the British and others have learned.

Why?

The first modern insurance contract was signed in Genoa by 1347; the first modern insurance company founded in 1688 at Lloyd's Coffee House in London, where merchants, ship-owners, and underwriters met to do business. The basic model grew out of the risks European merchants faced as they made their fortunes -- or lost them -- sending trade ships to the Orient.

They knew that -- let's round the numbers for simplicity -- 5 percent of their ships might be lost to storms, rocks or pirates. The problem was that nature doesn't destroy precisely one ship in 20 every year, rationing out her bad news to each owner in turn. Some years you might escape without loss, but then a year might come when you lost five ships in one season and went to the poorhouse.

So, some genius went to his fellow merchants and said, "Let's each put 6 or 7 percent of the value of each of our ships into a pool when it sails. If we lose one in 20 the owners can be made good out of the pool, leaving 1 or 2 percent over for administrative costs. That way we share our risk, reducing the chance of a single disastrous year for any one of us."

Assuming your primitive "actuaries" figured the loss rate correctly, it worked.

But what if you were part of such a "mutual assurance group," one of your "partners" paid in 6 percent of the value of a ship called the "Star of the Orient," and a week later came in and "filed a claim" contending the ship had been sunk?

What if you subsequently learned the ship had indeed been sunk ... but a full month before your colleague "took out his insurance policy" on her?

That would be fraud. No insurance enterprise -- which spreads among participants the risk of future misfortunes which cannot be precisely predicted -- could long survive if people were allowed to buy "insurance" against unhappy events which had already occurred, paying in (say) $6,000 to get back a guaranteed $100,000.

But this is the practice in which the government will now require insurers to engage when it requires them to "insure against the risk" of someone contracting, say, a brain tumor, when a physical exam and routine check of that person's medical records reveals they already have one at the time they apply for "coverage."

The only sensible response to such a mandate is to charge an exorbitant annual "premium" which will add up to all the medical costs that person is likely to run up in the year to come, plus administrative costs -- no longer "insurance" but really "pre-paid medical coverage." If the government orders you to provide the "coverage" without raising the "premium" to those levels, the state has just, in effect, put you out of business.

Sure, seeking to survive, firms can shift costs by charging healthy patients more to help cover the care of the profoundly sick -- but only for so long. Eventually, the whole scheme, based on a fraud which we are barred from calling fraud, must self-destruct.

Especially when people realize they can put off buying "insurance" till they're sick -- as they surely will.

Now, if the insurance company is refusing to issue coverage against other risks, totally unrelated to a pre-existing illness -- fire insurance for your house, say -- that's a different matter, best served by allowing more competitors into the market to bid for that still-profitable business. But the narrative above contends "we can all agree" that insurance companies should be made to cover pre-existing conditions.

When in fact we don't all agree, since it won't work, since that's no longer "insurance."

Certainly it's not a happy thing that one can't sign up for fire insurance on a house that's already burned down. But the laws of physics, economics and mathematics cannot be repealed by the central state, as they must eventually learn.

Unless, of course, the whole point is to drive the private insurance firms out of business.

Vin Suprynowicz is assistant editorial page editor of the Review-Journal, and author of "The Black Arrow." See www.vinsuprynowicz.com.