Friday, December 3, 2010


I hope you all will forgive me if I take a moment to review something that should be rather elementary.

When politicians speak of “insurance”, you must be careful not to fall for their favorite trick:  lying.

Let’s take this phrase, which has become incredibly popular:

“You will not be denied insurance on the basis of pre-existing conditions.”

Sounds wonderful, right?  I mean, that’s the whole problem with those pesky insurance companies.  Denials.

Okay.  So here’s where it gets a bit weird.  What exactly do you think insurance is?  It is a way of diffusing risk.  The first step in “insuring” someone is to assess their particular level of risk.  For example, when you apply for life insurance, they are certain to ask you if you smoke.  Why?  Because people who smoke die sooner than those who do not.  They take the information you provide, then assess your risk and assign an amount they feel will cover that risk.  That is your premium – the amount you must pay to have them insure you.  The idea is that the premium should be less, in general, than the costs of having something bad happen to you.

So when people talk about removing the pre-existing condition concept from insurance, they are actually talking about something other than insurance.  No insurance company will insure your car, for example, after the wreck has already occurred.

So what will happen?  If insurance companies are forced to cover pre-existing conditions, this must simply be added into their computer program that spits out an amount of money that will balance that risk.  It is quite literally impossible for this NOT to raise premiums.

Insurance that has no mechanism for assessing and pricing risk is not insurance.  It is welfare.  Words are important.