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What is insurance? It is a means to protect oneself from uncertain losses of income, health and wealth. That is, it allows someone to pay a premium in exchange for a more predictable future.
The key here, of course, is that insurance is only valuable when future outcomes are not exactly predictable to begin with, when there is a risk that needs managing. For example, fire insurance is valuable, because who knows when and whether your house will burn down?
On the other hand, fire insurance does not cover new candles when you run out, as that would be a logistically burdensome way out of a fairly straightforward inventory management problem. There is no uncertainty or risk to be addressed, and hence insurance adds no value.
Let’s think of a different kind of risk: negative shocks to your health. One purchases health insurance to protect against those. For example, long-term hospital stays, especially for non-seniors, are quite unpredictable and enormously expensive, much like your house burning down. Annual check-ups and birth control, on the other hand, are pretty much exactly like the candles discussed before.
Now imagine a world in which the governments wants to force people to buy health insurance. What would such a mandate look like? Would it force people to insure against fires or against running out of candles? Well, conveniently, we have such a world – the U.S. today.
Under the Affordable Care Act, most Americans will be forced to purchase health insurance. But they will be forced to buy insurance that covers a lot of candles, like acupuncture in California. On the other hand, insurance policies that only cover the insured for massive health care bills – much more similar to fire insurance – will effectively be banned. And unlike similar bans on marijuana or cocaine, this ban on catastrophic health insurance plans will probably be enforced quite effectively.
“Why?” I can picture you clamoring at the skies, seeking an explanation from a deity who can read Democrat minds. Well, that is quite clear. The goal of these essential health benefits, the mandatory candles, is to redistribute income from rich to poor, through a cunning combination of community ratings, employer mandates, subsidies and tax exemptions.
How does that work? Under this regime, health insurance has to cover the candles, instead of allowing people to pay for them out of pocket, making insurance cost more for everyone. And health insurance will be heavily subsidized for the poor and large swaths of the middle class. The value of the subsidy rises with the comprehensiveness of the insurance plan. The price of candles for the poor gets reduced while taxes and insurance costs rise for the rich.
There you go: redistribution accomplished. Of course, you may think that some of the mandatorily covered preventive care will reduce costs for the system. Well, insurance companies have a way to accomplish that. They provide discounts for people with smoke detectors.
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