20 January 2003
To: The HPAlumni eGroup

Years and years ago I bought insurance to cover a thing (not health related, thanks for asking) and paid my premiums like a good customer. About three years later I got a letter from the company saying that my insurance "group" was going out of business and they sent me a check for a portion of the current year's payment I had already sent them.

It turns out that the insurance I was sold pooled people together based on some very specific characteristics of the thing being insured (an auto). When items very similar to mine started having problems and making claims, the group just folded up. I foolishly thought I was in an insurance pool with a great deal of diversity so that the risk was spread around. Unfortunately that was not the case.

I believe that a company who makes up these little insurance pools does it to compartmentalize the risk so that when claims rise within a certain group they can stop the problem from affecting the overall company.

It could be argued that these little insurance pools allow the companies to offer the lowest prices to their best risks. However, that isn't insurance - taken to an extreme, put every insurance holder into their own pool and call it a personal savings plan.

Now turn to health care and I think you'll see the same scenario holds, just substitute "me" for "thing".

Unregulated, insurance companies will dice their policy holders into the smallest groups that can be assigned similar risks and charge an appropriate fee. As they learn more about their policy holders (such as when they get sick and file a claim) the companies will reassign policies to other groups and adjust the rates you pay.

As an example, I've heard that people on COBRA are horrible health insurance risks because they choose to have many elective procedures done while they are out of work; procedures they delayed while they were working. Any smart insurance company would want to charge more for someone who is recently laid off. Another example may be the Life Insurance being discussed in this group. A smart insurance company would jack up the rates, causing people who can obtain insurance elsewhere to flee the group plan to get the better rates. Who's left in the group? Those that are unable to get insurance anywhere else - sounds like a good reason to jack up the rates even more. (Perhaps I'm too cynical?)

We'd all like to belong to a large insurance pool so that our risks are shared across many people and our rates are low. The healthiest among us might prefer to be in the smallest pool possible of similar healthy people so that they can pay the lowest rates possible. The insurance company doesn't really care, it just wants to make the most money it can and take market share away from its competitors.

I am not a big fan of regulation, but some industries need legislated limits to add some leveling to the playing field. As an extreme example, an unregulated insurance company might keep all its assets in high yielding junk bonds so that it can lower the policy holder's rates. Of course, if too many claims come in, the company pays what it can and then folds up.

By using government regulation to limit insurance companies in some ways (the way insurance companies can slice up their policy holders, the amount of liquid assets they must maintain) insurance companies are forced to compete in other areas such as efficiency and customer service.

So, what can you do about this as an individual? One action is to stop going to the doctor until you have another group plan. A better idea is to read your voter's pamphlet very closely before the next election.

One man's early morning thoughts,
Jim