Saturday, September 12, 2009

Dealing with risk: health insurance? health care reform?

My profile on this blog says I've had lots of jobs "growing up," two of them were in the insurance industry. I worked for several years for Kemper Insurance in a claims office. I also worked in the Risk Management Department of Santa Fe International, an energy company. Besides the on-the-job training, I also took company offered classes, especially at Kemper. (Currently I serve as a member on my school district's Health Benefits Committee.)

So what? (So health-care reform.)

Today, there is a lot of debate about improving health care in the US. I'm surprised how much of that talk surrounds health insurance, as if insurance is going to solve our health crisis. (We need a large dose of wellness: diet and exercise. But I digress.)

Insurance is one way of dealing with risk. It is one of three ways to manage risk. Risk is inevitable, but we have choices in how to manage it. (Life is risky, whether we are talking cars, appliances, life, or health.)

So how can you deal with risk?

1) You can assume the risk.
2) You can get rid of the risk.
3) You can transfer (insure) the risk.

Option 1) After my first wife died, I took a severance package and "retired" for several years. I became a Mr. Mom in order to give stability to my kids. I was offered a COBRA but declined it. It was too expensive. (I could have had more money if I'd filed for unemployment. But I didn't file because I wasn't looking for a job. I was insured, but I wasn't going to lie to get the money.) I assumed the risk of family health problems for about two years. (And nothing big happened.)I also assumed the risks (and consequences) of not having an income for two years. (We survived; however, my retirement (401K) took a major hit.)

In the "old" days, people assumed a lot of risks. And they survived. So did I.

Option 2) You can get rid of the risk. This works better on a car or house than it does on medical expense insurance. You can sell your car or house. Then you don't need insurance. My youngest daughter sold her car to lower her monthly expenses. I don't have renter's insurance; I have home owner's insurance. I got rid of my apartment. (When I lived in an apartment, I assumed the risk. I didn't have much to lose.)

Option 3) You can transfer (insure) the risk. My cars are insured: that's required in California. My house is insured. My life is insured. My appliances are not: they break, I suffer the loss. I just replaced my dishwasher. It died and I didn't have appliance insurance. I went without a dishwasher for a year. Then I bought a new one.

My dad and mom used to warn me about families that were insurance poor. They used too much month-to-month income transferring risks and paying a premium. (I read last week that of the $6,000 dollars that a doctor charges these days for pre-natal care and the birth procedure, $2,000 is to pay his malpractice premium. (Tort reform anyone?)

In my opinion, too many people want to transfer the risks of life without paying the premiums. They want Cadillac coverage at rock bottom prices. It doesn't work that way. Some really good mathematicians (called actuaries) calculate the projected costs to be shared by a pool of premium payers to cover projected losses.

The types of losses covered are predefined. The caps (the most they'll pay) are predefined. Who can get into the premium paying pool is predefined. If losses are to be shared, then these definitions must be in place.

If you change what losses are covered (like pre-existing conditions), or if you remove the caps that must be paid out of the collected premiums, or you change who can get into the pool... then the math requires that more premiums be collected.

You can't have more for less. The math precludes it.

It's all about managing risk and making choices.

Once I chose to change jobs, not lie about my wife's pregnancy (she'd been to the doctor once), and I assumed the risk of my son's birth: cost? $3,000. Sense of well-being from being honest? Priceless.

Later I chose not to change jobs after my first wife was diagnosed with cancer. The medical cost risk was too great. I wanted to keep that risk transferred. (My insurance didn't cover some of the experimental aspects of one therapy. I made a choice, assumed that risk, and paid for the treatment: for over four years.)

Life is full of risks, including health risks. Sometimes you assume the risk, sometimes you get rid of the risk, and sometimes you transfer the risk by purchasing insurance.

Being grown-up means that I take responsibility for making the choices. Being grown-up means I need to educate myself to know what my options are.

If we, the American people, want to transfer all our health risks to a government run plan, it will come at a cost. (And just like some of the families my parents warned me about, we might become insurance poor. As a nation, we could use too much month-to-month income transferring risks and paying a premium.)

Personally, I'd rather manage my own health risks. It's part of growing up. (Besides, I'm pretty good at math, and I know a bit about Risk Management.)


  1. A lot of what has gone down over the last year has robbed companies of the chance to "grow up," which usually happens when one does what is known as "living with the consequences."

    I went without health insurance for a year and a half once. Stayed healthy. Don't have renter's insurance. No calamities yet. Sometimes, ya just gotta cross your fingers.

    Great post, Don.

  2. Another great post Don. I agree that we have choices about how to handle risk. We should be able to take ownership of our own health decisions. My husband also appreciated your thoughts there Don. Thank you!

  3. @Saphron: I agree with you about robbing companies of the chance to "grow up." As I was driving to a restaurant tonight, I thought about how the underwriters at banks followed the lead from the government agencies such as FANNIEMAE. The government started buying loans that were "too" risky: the agencies opened the pool of insurable individuals. They let in poor risks, people with financial "pre-existing conditions." The result was that the poor risks nearly broke the bank. (So far 92 banks have failed.) If you ignore the math (actuarial and underwriting science) and include everyone in the risk pool... people drowns. Even at the public pool, you don't let in non-swimmers.)

    @September: I'm glad you and your husband liked the post. The post helped me think through and share what I know about risk management. When my district got together a Health Benefits Committee, I was able to ask for and get the presenter to share with the rest of the committee what I call Risk Management 101. That's kind of what this post is. These concepts help us to understand insurance, what it is, what it isn't, and why health care reform won't work if you violate the math on which insurance is based.

  4. I don't know how you got so smart, but you absolutely got the most brains in the family. (Don't tell Chris I said so). I learned more from this posting than I have from all the charge and counter-charging going on in the news. As a part time worker who buys her own insurance, it's nice to get a clearer viewpoint. And I, too, have learned that a lower income and assumption of more risk is often worth it in the long run. Love to Leslie, too. Iowasister68.

  5. @IowaSister: Thanks for commenting. Reading your input on Wednesday morning was better than a cup of coffee. That day I found an interesting quote via Google News from the Washington Post. I lost the quote, but the writer noted that what politicians are just now beginning to grasp is the increase in premiums that many of the suggested reforms would cause.

    I found this today:
    It's an article entitled, You have no idea what health insurance costs. (One of his points is: if you knew what it's rising cost really is, then you'd care about intelligent reform that's currently do-able.

    Leslie says, "Hi!" back.