Imagine a world without health insurance. You’re a young entrepreneur and you notice that a perennial problem people face is how to protect themselves against the risk of incurring costly and unexpected medical expenses. For most, the apparent option — save enough money to cover any medical bill — is impractical: what if they get sick before they save enough? Or what if the cost of treatment exceeds a person’s capacity to save?
You realize that wherever there’s a problem, there’s an opportunity. You could convince some of the people in your town to purchase from you insurance that pays out in the event of accident or serious illness. But starting such a company would require a lot of work, a lot of financial capital, and complex actuarial and business skills that take a long time to acquire.
You would need to set rates to make sure more money is coming in than is going out; process claims to separate the legitimate from the illegitimate ones; and grow your client base. The challenges are enormous, but if you succeed, the value you provide clients would be huge and the profit potential should be as well.
After some careful deliberation, you decide to launch the business. You launch the first health insurance company. Your idea quickly catches on, and soon other health insurance companies spring up in your town and beyond.
One day, a man named Paul walks in to your office. “I’d like to buy some health insurance,” he says.
“That’s great,” you say. “I just need you to fill out a form with a little background information and your medical history.”
“What for?” asks Paul.
“So I can figure out how much to charge you for your insurance policy,” you reply. “I have to assess how likely each one of my customers is to get sick and set my rates accordingly. If I set them too low, I’ll go broke. If I set them too high, my customers will sign up with another insurance company, and I’ll go broke.”
Paul frowns. “That’s not fair. Why should I have to pay more for health insurance just because I’ve had two heart attacks and a stroke?”
“Because you’re more likely to have serious and costly health problems in the future.”
Paul jumps out of his seat. “This is highway robbery! I need health insurance and I can’t afford to pay higher rates.”
“I can’t force you to purchase my insurance,” you say calmly. “I would like to help you — part of the reason I started this business was to help people meet one of their most vital needs. But the fact is, I’m running a business, not a charity. I work — virtually around the clock — in order to earn profits by providing a service that people value. If you don’t think the value I’m providing is worth the price I’m asking, you’re free to go elsewhere.”
“But it’s not my fault I have preexisting conditions.”
“It’s also not mine.”
Paul sits down slowly without looking at you. “So what am I supposed to do? Just go without insurance?”
“I wish you’d come to see me earlier — almost all my clients plan ahead for just this sort of possibility, and I’ve come up with innovative ways to make sure that a serious, ongoing condition doesn’t become a barrier to people continuing to be able to afford their annual health insurance premiums. I insure them against changes in their health status, for instance. They can buy a second insurance contract that pays out should they become sick and more costly to insure in the future. Their annual health insurance premiums will rise, but the payout from the second insurance contract enables them to afford the increase in their annual health insurance premiums. And my competitors may have other solutions.”
“A lot of good that does me now,” Paul says bitterly.
“Well, I could offer you a low-cost insurance plan that excludes any illness related to your preexisting conditions.”
Paul balks. “What am I supposed to do if I get an illness related to my preexisting condition? Just lay down and die?”
“Absolutely not,” you say. “If you get sick, you might need to take out a loan or run up your credit cards. I assume you were willing to take on a big bank debt to buy your house — why wouldn’t you be willing to do the same to keep yourself alive? Or you could use your savings. Or you could ask for help from a friend, or a family member, or a local charity.”
Paul shakes his head. “You don’t seem to get it. I want health insurance that covers everything, and I don’t want to have to pay more for it. Your job is to pay for my health care and you’re not doing your job.”
“That is not my job. I run a profitable business that enables people to manage one of life’s risks by purchasing health insurance. None of my customers would choose to stay with my company if his rates went up because I allowed people who are already sick or very likely to become sick to buy insurance without charging them higher premiums. Why don’t you visit one of the other insurance companies in our area? Maybe they can help you out.”
Paul grins. “I’ve got a better idea,” he says, leaving your office.
The next week, you find a letter from the government. “From now on you must accept all customers, and at the same premium, regardless of medical history.” You close up shop.