The Real Cost of Insurance

Tags: insurance, finance, capitalism

I can't help but wonder how insurance works in detail. I mean, I know the general concept is that the premiums we pay have to be equal to or greater than the amount paid by the insurance company in claims. Sometimes this premium that we pay goes up. Why does this premium go up?

If we continue on my logic above, the premiums would go up because the cost and/or frequency of claims have risen. Here's where I start to feel like insurance is a bad idea (in general, but in this article I'll be addressing medical and homeowners insurance respectively). Insurance is an industry built up on people's inability to save and plan for unexpected expenses. This is bad for two reasons: 1) It creates a mentality that someone else is paying your way, and that you are entitled to it. 2) It creates an insurable service provider mentality that they can charge more, because the person they are charging (in this case, the insurance company) has a LOT of money.

The above reasons can cause scenarios like the following:

A patient comes in to the doctors office with a pain of some sort that developed during the week. After inquiring, the doctor learns that this pain has been persistent for about a day, with no notable cause. Because the doctor pays a very large amount to his malpractice insurance provider, he is automatically thinking of all the tests that he can do to prevent a malpractice lawsuit as well as thinking of the maximum amount he will be able bill the patients insurance, to pay for his own insurance plus some for his pocket. The patient, who is in pain, wants the pain to go away. The doctor then explains to the patient all of the posibilities of what could be causing the pain, and that he would like to run various tests to get a better diagnosis on what it is. Despite his expressed desire to do a miriad of tests, he knows exactly what the cause of this is from previous practice. Since the patient is paying no more than a co-pay for any of this, the patient accepts to go through the tests. Thousands of insurance-paid dollars later, one of the tests comes back positive, and a one-time treatment is administered.

What's wrong with this picture? Everything. Because the patient has no accountability for the medical costs and the doctor can easily work up viable bills to the insurance company, the insurance company pays quite a bit more than what the actual service would have cost otherwise. Thus, the premiums go up, and it's more expensive for everyone.

A person with no insurance is a whole different story. The doctor will limit the number of tests he will perform as to not lose money, and try to diagnose and treat the condition as quickly and inexpensively as possible, knowing well that the patient might not be able to pay at all, or would need to go on a payment plan.

An experience we had just today illustrates this. This morning I woke up and turned the shower on. After a couple of minutes, I checked the tempurature of the water to see if it was warm enough to hop in. It was still cold. I waited a couple more minutes. Still cold. I went outside to see if Jessi had run a load of dishes. She had not. I then went to the garage to see if the pilot light on the water heater had gone off somehow. The garage was a swimming pool.

After a cold shower, I headed to work while Jessi attempted to contact the home warranty folks to get a plumber out as soon as possible. That afternoon, a warranty-company-contracted plumber shows up and begins to assess the situation. He noted that there was no water damage to the house and told us that he would need to contact the warranty company to see what they would cover. After he spoke with them on the phone in private, the warranty company called us and told us that they would cover all of the standard repairs, but that the plumbing contractor insisted on making some "plumbing code corrections" to our water heater arrangement. The plumber threatened to not do the repair unless the "code violations" were addressed. The warranty company said that this would cost us $550 out of pocket. (The warranty company claimed that they were paying $950 of the costs, putting the total at $1,500)

Dissatisfied that I was not able to contract my own plumber for the repair (and dissatisfied with the out of pocket), I decided to quickly check prices from Home Depots water heater installation service. They too wished to correct this "code issues", but to my surprise, the total cost for the code corrections, installation AND the water heater was $850 TOTAL. This put the warranty-company-contracted plumber over price by $650. (76% more expensive)

So what gave this warranty-company-contracted plumber the idea that he could charge 76% more than the competition for this service? Because the contractor understood that he could both overbill the warranty company AND pass some of the "responsibility" charges to the distressed customer.

THIS is why insurance can be a bad thing. Unfortunately, I don't have a solution. Maybe the solution could be as simple as having people just save up for things instead of relying on a mediator to rescue them in their time of need.

*Disclaimer* These are my only my thoughts and opinions on the matter based on my understanding of how insurance works, and personal experience.

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