Is The ACA An Insurance Plan?

A lot on the Progressive side of the blogosphere are knocking themselves out promoting the idea that insurance is a process of various cohorts subsidising one and other. The young subsidize the old or the healthy subsidize the sick. It’s essentially a way to rationalize the lack of insurance underwriting inherent in the ACA. Jane The Actuary (I highly recommend her blog) takes this notion to task.

Marcotte really, really seems not to understand insurance.  She writes as if insurance means, “a large group of people paying into a system which reallocates benefits to those in need.”  That’s a fair description of social welfare programs, in which we pay into the system with our taxes.  That’s even reasonably correct for certain church and community groups.  But that’s not insurance.

Insurance is about paying a premium to protect against some unknown risk, based on your own likelihood of facing that risk.  Insurance companies collect information on individual characteristics to assess that risk in the underwriting process, and the means by which they manage to function as a business is that collectively only a small number of policies are collected on in a given time period, but, fundamentally, policyholder’s prices are not based on everyone’s risk, but on their own.

It’s true that an insurer cannot concretely identify all of one’s risks, but they collect the data that they can.  Car insurance is based on how risky you are as a driver (based on age, sex, prior driving history) and, if your policy covers theft, the crime rate in your area.  Life insurance is based, again, on age and sex, plus, for individual policies, health exams.  Worker’s compensation insurance is based on the riskiness of the line of work.

Requiring young men to pay the same premiums as young women, or smoothing premium levels between the young and old is absolutely not insurance.

Yes, it’s true that employers don’t require their employees to pay premiums based on age or sex.  But this is a business practice, to provide benefits at the same rate.  It has nothing to do with the issue of what insurance is.

Regardless of your position on Obamacare, you should disabuse yourself of the notion that it is an insurance product. It’s a health care entitlement molded along the lines of Social Security and Medicare. Its disregard for the fundamentals of insurance is the reason it will likely suffer the same funding ills that afflict those two programs.

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