Words have meaning, so let’s clarify a few things. Health Insurance is NOT Health Care. Health insurance in the USA has evolved over a number of decades, so let’s take an introductory look at where it comes from to where we are today.
This one will be a little long, but stick with me. Couldn’t fit it in the title, but this is a walkthrough of the history of health insurance in the United States. Be sure to click all the links for more info and humorous videos.
Health Care – Google definition – the maintenance and improvement of physical and mental health, especially through the provision of medical services.
Insurance – An agreement to transfer financial risks of defined causes of loss from one party to the other.
This is a prime example of “Those who don’t study history are doomed to repeat it.” Because regardless of what you think, this is not a new problem. Yes, according to studies, insurance premiums and health care costs in the U.S. have skyrocketed and consistently outgrow inflation and household income year over year, but the issue of health care costs has been a debate in the U.S. for over a century.
A Brief History of Health Insurance.
So where does health insurance come from? Early roots of health insurance can be traced in the U.S. to the mid 1800’s when employers began to buy accident policies for their employees in high risk jobs. Safety standards back then were certainly no where near they are today, so it was very common for a breadwinner to become injured and the family immediately had nothing.
Sickness or disability coverage was not necessarily around until the early 1900’s. Even then it only provided coverage for lost wages and not for medical expenses. Around the 1920’s hospitals began offering a fee-for-service program where individuals could build up an account for future services. This is where Blue Cross Organizations come from!
Social Security? What is that?
Here starts the fun. People also moan and beck that they pay for social security that they’ll never see because the government robs them of their retirement . . . yada yada. Yeah. Here steps in the Federal Insurance Contributions Act of 1935 (FICA). 7.65% of every dollar earned is paid into this fund, and your employer also matches that 7.65% for a total of 15.3% of your earnings paid into the FICA tax.
What is this tax? The technical acronym is OASHDI which stands for Old Age, Survivor, Health, and Disability Insurance. This is a tax implemented in to provide a floor of protection. Government disability? Paid from FICA. Retirement benefit (street name Social Security)? Paid from FICA. Added on in the 1960’s. Medicare and Medicaid (health insurance for elderly and poor)? Paid from FICA.
Here come the 1940’s and the rise of employer sponsored medical expense benefits. Because of restrictions on employee wages during WWII, businesses had to find ways to attract good workers without paying higher wages. Worker benefits weren’t introduced until labor unions lobbied to receive additional value for their labor instead of higher wages. Employers began offering means for people to pay health care expenses in the form of policies. In other words, more money retained in the worker’s pocket without paying them a higher wage.
Public Healthcare?
The first official public sponsored healthcare program was proposed by President Harry S. Truman in 1945. It was considered voluntary, but offering a way to help offset the high cost of health services. Strong lobbying by doctors and hospital associations shot this down, but social sponsored health insurance coverage entered the political conversation. Guess what argument was used to keep it from rolling . . . it was categorized as socialism . . . sound familiar?
Because health care costs were still higher than the average household could dish out, another change was implemented to the social FICA program. (As mentioned above) in 1965 an amendment was proposed to the FICA program to add health benefits for the elderly. After studies it was argued that simply adding this costs to the current program was unworkable (imagine that, they had discussions before implementing laws . . .) so a compromise was reached by passing an addendum to the Social Security Act and increasing the tax rate. Click here for a history of the tax rates for FICA.
Loss of Health is Your Risk. Own it.
The debate between a universal health insurance program was hashed out by presidential candidates Ted Kennedy and Richard Nixon in the early 1970’s. Click this link for a video excerpt.Sound familiar? 40+ years ago . . . practically the EXACT SAME POINTS. . . thanks Obama . . . ?
Now what does all this have to do with our modern state of health insurance, health care, and the title of this article? Something I’ve said in many of my articles and will continue to do so. To understand insurance costs, you have to understand your own risks.
The idea of socialized risks is only workable if people understand the math involved. Now let me give you a breakdown of why people think health insurance today is so expensive, and some personal tips on how you can best plan.
Why Pay More for the Same Service?
In my line of business we see all types of companies and risk tolerances. One thing I’ll never forget that I learned in school was the professor saying “you don’t buy insurance on losses you know you are going to have for two reasons. 1. Doing it without the company’s knowledge, which is called fraud. 2. The costs of risk ends up being you will pay for the claim, and you will pay for the company’s mark up (most cases 30-35% of the claim amount) for them to handle it for you.”
I don’t know about you, but if I had the choice between paying the regular price for an item, or 133% of what it costs . . . I’d rather pay regular price.
Health insurance costs in the U.S. have skyrocketed is because cost of risks sharing has been brought down to such to such low level services . . . essentially we are paying 33% more because someone else has to be involved.
Health insurance was not designed for the common cold, it was designed for unaffordable accidents. Some professionals refer to group policies as “Hospitalization Coverage”, and even some historical accounts refer to the origins of this insurance as “Hospital Insurance.”
Pay Yourself to Pay Yourself.
The more times money has to exchange hands, the more has to remain in every hand but the purchaser, yours. This is why a lot of providers will offer a different price for cash payments. Money received today is worth more than money they have to wait for claim submissions to receive.
This is why high deductible plans cost less. By taking on more of the front cost of risks yourself, you are able to save the handling/markup for the company having to be involved in your small claims. Insurance companies don’t issue policies because they want to pay high claims. They issue policies because they are a business and expect a margin. I.E. if you use the policy the way it was intended, you will pay more per year in your health care costs because they have to make money.
H.S.A.s or F.S.A.s are a great way (and tax efficient if done properly) to budget for known health care costs within your deductible. Also a form of personal budgeting and risk retention. For more information on H.S.A.s, click here.
Perfect example – many pharmacies will have different prices for drugs cash VS insurance claim.Reason being? If they have to take time to enter the claim request in the computer, or make phone calls, that is time they have to pay employees for those actions when they could be filling other prescriptions. More overhead to involve the insurance company.
Here is a key distinction we have to understand. A private insurance company is not the same thing as a social benefit program. The Affordable Care Act was a law that dictated to private insurance companies what they must do. It is not a social health care program.
Don’t Assume the Safety Net Will Always Catch You.
I could go on with this for a long time, but the thesis statement of this whole article is this: Health Insurance is a vehicle to transfer risks of certain covered costs associated with health care. It is not health care, it is a way to help pay for unforeseen health care costs.
No different (in principle) than your car insurance. You buy insurance for unforeseen risks (wrecks), but you still need to budget for maintenance, small repairs, and wear and tear.
Ultimately YOU are responsible for your health care. Your physical and mental well being. Does charity play a part in our society? Do social protection programs play a part in our economy? Absolutely. But assuming that someone else will take care of you is reckless and irresponsible. What happens when you assume? You make an ass –u & me!”
And again with the tell tale idiom “Those who fail to plan, plan to fail.”
Other articles to follow later commenting on social programs and personal risk retention (budgeting).
For part two on how to plan for healthcare costs. Click here.
Does this help paint a better picture? Leave your thoughts, questions, and comments below.