Monday, August 13, 2012

Insurance VI

I've danced around a lot of issues that involve insurance companies; things like how they were started, early intervention by governments, but one of the elements I've merely hinted at is one of the most important aspects of insurance. What do insurance companies do with the money they are paid to protect their customers from risk?

Insurance companies, and, especially health insurance companies, are among the most regulated of industries in the United States. Politicians know when to take advantage of their electorate. Insurance was several hundred years old, when the Great Depression hit. And yet, prior to the Twentieth Century, few people ever had need for insurance. Hedging against risk was a novel idea for most people. When it came to medicine, having a doc within miles of your home was rare. Much closer were people who were experienced with injuries, and their personal experience in how to treat the injuries presented. Health care wasn't an expression one would have heard, an hundred years ago. Doctors? Sure. But most "doctors" were simply men or women of experience. They didn't have any form of recognized training. In terms of what we refer to as "science," medicine was distinctly unalloyed with any form of scientific inquiry that we would refer to today. Gentlemen scholars, such as Joseph Lister, were ridiculed by his contemporaries.

The science, it seemed, was settled.

Disease was not a thing that any company would want to address, in terms of offering insurance. Disease, for the most part, was an enigma.

By the mid-20th century, insurance had matured. When we look at the procedures being offered by modern medicine in the early part of the 20th century, most of what we viewed as the domain of medicine was the treatment of trauma, and the treatment of disease. It wasn't until the Great Depression that insurance was widely adopted. It was a sop to the wage limits being imposed by the government. Can't pay a man what he's worth? Give him an incentive. Health insurance to cover you, and your family. And we'll pay for it.

One of the greatest, unintended consequences of moral provision by any government.

The Grange Movement spawned insurance during the Depression. Farms were going under, and legislatures were looking at ways to compel damages. Protection came from insurance companies. If you had insurance, you had a company on your side. With enough coverage, you actually had an advocate on your side, willing to provide for legal counsel if, or when, you found yourself on the wrong side of the legal ledger. Protection became a racket in the 1920's and -30's. "It would be a shame if your business burned down" was a hellavu closing line, when it came to protection.

There were, at the time, associations that were created, in order to counter the worst of the protection rackets. Companies were formed to afford insured parties protection against the protection rackets.
And loss, but if you lived in a metropolitan area, chances are, you learned from your friends and neighbors that it was better to find a way to indemnify yourself against loss, than to fall prey to the rackets.

The demand for insurance was increased due to these types of forces; exposure to risk, protection against loss, and external forces that would create economic havoc. While all this is going on, during the 30's, a the same time, the number or tortuous claims was increasing in the courts system. As racketeering rises, tortuous claims were raised, too.

By the 1940's, insurance in the United States was on a course of expansion never seen in a single industry. Millions of young boys were exposed to insurance for the first time, through their service in the military. The idea that ones death could result in a payment to ones kin was an unheard of sentiment. When the mule kicked you in the head and you died, you died. Simple. Your kin either moved in to help you farm, or you eventually would lose the farm. The ebb and flow of gain and loss isn't a recent chapter of the human condition. It's been going on for millennia. Bad things happen to good people.

(There was no EST in 1935.)

What was created was the first mutual fund that was created without restriction.

Money began pouring into insurance companies, who were more than willing to provide coverage, with limits to the insured. Medical, health insurance was a new commodity, one that hadn't existed previously, and therefore, had no externally imposed constraints upon the companies that issued the coverage. The simplest way to make money for health insurance was to sell policies. And then take the money. And then take more money.

If the beneficiary of a health insurance policy got ten percent of the value of the policy's cost, how could he or she complain? The cost was borne by the employer. The benefit was a delayed payment to the employee. The disconnect between the payer and the beneficiary was a total disconnect. No matter what the amount the  beneficiary received, it was above and beyond the costs that an uninsured purchaser of health care would have received.

For a guy with a family, finding out that an insurance company would pay twenty dollars for the cost of putting a cast on his son's broken arm, that benefit, which he never felt the cost, was immeasurable.

But health insurance wasn't driven to compete. It was coddled and enhanced.

It was never in the health insurance industries portfolio to deal with health care costs. Not that it couldn't be.

The industry was never set up to deal with anything more than their profits. Not a bad thing. So, what stops an ethical company from getting into the health insurance market, and driving the costs of health insurance down?

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