LTC Bullet: The Death of Insurance

Wednesday, August 5, 2009


LTC Comment: The noble concept of insurance is under attack and near demise. Don't let it go without a fight. Full analysis follows the ***news.***

*** FREE REVERSE MORTGAGE COUNSELING from the National Council on the Aging ( Check it out here. NCOA is waiving its usual $125 fee for the service. Also available for free and downloadable is the booklet "Use Your Home to Stay at Home." Reverse mortgages are important to long-term care financing because when the bottom falls out of the government LTC "safety net," home equity is where most people will have to turn to pay for the care they need. Soon after Medicaid drops its half million dollar home equity exemption, reverse mortgages will become a major LTC funding source. Then LTC insurance will take off as the only way to protect home equity from the ravages of high-cost LTC. ***

*** LTC-TV. Why all the doom and gloom about LTCI sales? What can we do about it? The Center for Long-Term Care Reform's new LTC-TV series tackles those questions. Check out episode number one here ***

*** VOTE BY AUGUST 7 DEADLINE FOR STEVE MOSES as Long-Term Living magazine's "Person Making a Difference in Long-Term Care" here. For the online system to accept your ballot, you must vote for one person in each of the five categories. Steve is listed in the fifth and last category, "Other," defined as "lobbyists, association personnel, consultants, friends of the industry." After you vote, be sure to retype the "validation code" in the appropriate box at the end of the ballot before you press "send." Thanks for your consideration. ***



LTC Comment: We usually stick pretty close to our long-term care knitting in these LTC Bullets, but something extraordinary is happening now that requires comment. The very meaning of "insurance" itself is being corrupted in what has come to be known as the "health reform debate."

For example, according to the Washington Post, these are the eight key points of the President's health reform proposal. Our specific comments are interspersed between them and our general analysis follows below.

1. Insurance companies will be prohibited from discriminating against those with pre-existing conditions.

LTC Comment: Great, no one will buy health insurance until they need care. Apply the same principle to fire insurance and people won't buy it until their houses are in flames.

Yet, the insurance industry has bought into this corrupt idea, as I explained in an LTC E-Alert titled RIP, LTCI last November:

"The media this morning is full of it (in more ways than one): AHIP (the trade association America's Health Insurance Plans) has agreed that health insurers should take all comers, no matter how sick. All they ask in exchange is that government compel everyone to buy insurance.

"Leave aside the fact that mandates don't work: we have about the same percentage of uninsured drivers whether auto insurance is required or not. The real problem with forcing people to do anything by government fiat, is manifold: loss of freedom; stifled entrepreneurialism; moral hazard; induced demand; AND explosive costs."

As several commentators have pointed out, many trade and professional associations sold their souls for a seat at the health reform table only to find out they'd become the entrée. Now cast as "villains" by House Speaker Nancy Pelosi, health insurers must fight bad reform ideas from a position of weakness. (See this article in today's New York Times.)

Economist Art Laffer nails the underlying problem AND the solution in today's Wall Street Journal: "How to Fix the Health-Care 'Wedge'." (Online subscription required, or pick up the hard copy.)

2. The plan will implement yearly caps for out-of-pocket expenses, deductibles and co-pays for the insured.

LTC Comment: Smart insurance buyers purchase coverage with the highest deductible they can afford in order to get the maximum catastrophic protection for the minimum premium. Such smart insurance buying will no longer be allowed if Point #2 prevails.

3. Preventive care such as yearly checkups and early-detection/prevention tests (like mammograms) must be fully covered.

LTC Comment: That would be like forcing your car insurance to cover oil changes and lube jobs. Imagine how much it would have to cost.

4. Those with or who develop serious illnesses can not be dropped from coverage.

LTC Comment: Insurance that covers people who already have serious illnesses isn't insurance; it is wealth transfer from healthy people to sick people. Here's how Merrill Matthews of the Council for Affordable Health Insurance ( explains it:

"Rescissions occur when an insurance company -- any type of insurance -- cancels a policy because it has discovered that the applicant made material misstatements, whether intentional nor not, on the insurance application. Rescissions are rare but necessary to protect insurers and their clients from the costs of people who are looking to game or defraud the system by applying after they know or suspect they have a medical condition but failing to note it on the insurance application. In most states, a rescission can only be executed within two years of receiving coverage." (Press release, 8/4/9)

5. Gender discrimination will not be allowed.

LTC Comment: Then men will subsidize women, or vice versa. Justice demands premiums based on actual claims experience. Anything else is sexist.

6. Annual and lifetime caps on the amount of coverage a person may receive will be prohibited.

LTC Comment: Caps on coverage are undesirable, but what if someone can't afford the deductible they'd have to pay in order to afford unlimited, lifetime coverage? Will it somehow be more affordable to shift the cost of infinite coverage to everyone?

7. Young adults will be eligible for coverage under a family plan until age 26.

LTC Comment: So childless couples have to pay higher premiums in order for families to pay less? Where is the equity in that?

8. Insurance companies will be prohibited from refusing to renew coverage for any reason, as long as a policyholder pays premiums in full.

LTC Comment: So, if it turns out the insured didn't mention multiple serious health conditions before the policy was delivered, the rest of us have to pay premiums to support their fraud?


Our Analysis: The true purpose of insurance is to replace the small risk of a catastrophic loss with the certainty of an affordable premium.

Insurance is not appropriate for high probabilities or small losses. We all need preventive health care, dental check ups, and routine automobile servicing. It makes no sense to spread those risks through insurance. It behooves you to pay for them out of cash flow so your health doesn't deteriorate, your teeth don't rot, and your car keeps running smoothly.

Likewise, to be fair and equitable, insurance must be based on each individual's characteristics as actuarially determined and objectively underwritten. Otherwise, you're just redistributing wealth from healthier people to sicker people. That's tragic because it punishes healthy behavior and rewards unhealthful activities.

I published an article titled "The Inherent Individualism of Insurance" in 2002 that explains the meaning of insurance and shows why "social insurance" is an oxymoron. Read it here. Following are a few clips to give you the flavor of the piece.


Excerpts from Stephen A. Moses, "The Inherent Individualism of Insurance," The Navigator, November/December 2002,

As human beings, we fear chaos and confusion and fight against them. We appreciate order. We celebrate reason, logic, and science because they help us bring order and manageability to our experience of reality. But no matter how rational and focused we are, we remain vulnerable to unexpected events that can throw our lives into turmoil. A slippery sidewalk, an unanticipated illness, a drunken driver, a freak storm, or (who knows?) an errant meteor. Besides, "the best laid plans of mice and men oft go astray." We need a tool to help us mitigate the consequences of uncertainty in day-to-day life, just as reason and logic help us to bring order and predictability to cognition. Fortunately, we have such a tool: it's called insurance. Insurance cannot repair the damaged or heal the sick, but it can alleviate the economic consequences of unpredictable negative events like accidents, natural calamities, and illness or death. . . .

Government efforts to improve on private insurance fall into two major categories. First is the regulation of private insurance through "prior approval," restrictions on risk classification, and mandated coverage (that is, the company must offer certain types of insurance in the state if it offers any). In the second category are the "social insurance" programs that government itself provides. . . .

I call this process the "welfarization" of insurance, that is, the transformation of private insurance by government intervention from a market-based product into a tool to improve the condition of some people in relation to and at the expense of others. . . .

Insurance performs the critical economic functions of spreading risk and of pricing risk. If we do not price risk fairly and objectively, we end up with a system that rewards high-risk (including irresponsible) behavior and punishes low-risk (including responsible) behavior. One of the main differences between social insurance and private insurance is that, although both spread risk, only private insurance prices risk in a meaningful way. Private insurers have a legal and fiduciary responsibility to their insureds. They must price insurance coverage at a level sufficient to accumulate reserves that will be adequate to pay carefully anticipated claims rates. Private policyholders possess legal contracts, enforceable in a court of law, that assure them recourse in case of dispute, malfeasance, or insolvency by the insurance company.

Social insurance, on the other hand, offers none of these protections. Social Security and Medicare, for example, are notorious for growing exponentially beyond their original cost projections. Socially insured people have no legal recourse or protection against increases in premiums (payroll taxes), decreases in benefits (program cutbacks), or the imposition of means tests (welfarization).

In America's mixed economy, social insurance is usually considered a safety net and not a first line of financial defense. When savings, investments, pensions, and private insurance prove inadequate, we look to social insurance to pick up the slack. Unfortunately, however, the very existence of compulsory social insurance debilitates the effectiveness of these private financing vehicles. People save or purchase insurance if they perceive they are vulnerable to a large financial loss. Social insurance distorts that perception. By creating an illusion of low risk, it reduces the demand for private insurance protection. . . .

The question, then, is not whether social insurance should become private. That is like asking whether drunk drivers should become sober drivers. Of course they should. And social insurance thus needs to be fought through a well-grounded moral crusade, carried to the voting public through lectures, articles, and other means. But until politicians show an inclination to give up their demagogic joy rides, the uncertainties generated by social insurance will remain a personal threat, compounding the uncertainties that are inherent in life. Although we cannot entirely escape the cost of government intervention, we can gain a measure of independence by refusing to rely on government's offer to help. We can and should use genuine insurance-private insurance-to build a wall of private protection between ourselves and life's uncertainty that depends as little as possible on government promises and programs.