Florida Conservative

A Conservative Take on Florida and U.S. Politics

Why Do Insurance Rates Go Up?

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Doctor SymbolWhy do insurance rates go up?  The answer is pretty simple:  We overconsume each year and then have to pay for it the following year.  Even though insurance companies are routinely demonized, the truth is they’re neither good guys nor bad guys.  They’re just trying to provide a marketable product (healthcare cost certainty plus guaranteed coverage) while making a couple bucks. 

Unfortunately, overconsumption isn’t exactly an easy issue to fix since it’s caused by so many different factors.  Let’s review the three of the biggest contributors below.

(1) Fraud – Auto insurance rates are really high in Florida for two reasons:  uninsured drivers and insurance fraud.  In both cases, people illegally “use” more insurance than they actually deserve.  Both are tough to eradicate in the current political climate because many uninsured drivers are illegal residents and have no incentive to insure their vehicles (Who can blame them?).  Reducing insurance fraud would require tougher penalties and fewer incentives (e.g. court judgments, settlements, etc.) to go after insurers.  My guess is the Florida Bar Association would fight pretty hard to maintain the status quo.

(2) Regulation – Let’s be clear about regulation.  Minimal regulation is good while overregulation is bad.  I love the idea that insurance companies can’t discriminate based on skin or hair color but I’m not too keen on required coverages.  For example, it would be a good idea for everyone to maintain flood insurance, right?  Such insurance could have protected those affected by Hurricane Sandy, near-annual Midwestern river flooding, etc.  But what would the result be?  If flood insurance costs $200 annually per home, that’s only $20 billion each year assuming 100 million homes in the United States.  Some might even say $200 per home isn’t a big deal.  Really?  The citizens of New Orleans would be pretty happy (since someone decided to build most of their city below sea level), but the citizens of Denver would be paying an extra $200 for literally nothing.  How is that fair?  What about earthquake insurance?  California would love for everyone else to help pay for their insurance, but Florida doesn’t have many earthquakes.  That’s why I strongly believe required coverages should be minimal to allow individuals to make their own choices.  I’ll choose fire insurance but decline hurricane coverage because I don’t live within 50 miles of the ocean.  I’ll consider flood insurance but skip earthquake coverage.

(3) Moral Hazard – The biggest contributor to overconsumption is how much regular people use.  The good news is that we can control how much we use.  The bad news is that we don’t.  A moral hazard comes into play because my own actions affect me very little.  The picture below comes from a letter I got in the mail last week.  My dentist is just trying to drum up some extra business that appears “free” to me.  It’s a win-win, right?  For the two of us perhaps, but thousands of other plan participants lose. 

If there are 1,500 plan participants and I find a way to use the average $750 in dental benefits that would otherwise be lost on January 1st, everyone else has to chip in an extra $0.50 next year.  Who wouldn’t be willing to pay $0.50 to get $750 in benefits even if it means other people have to pay a bit more?  That sounds great (and a lot like our latest Presidential Election)!  Since everyone is in the same boat, however, I’m also going to get hit with $0.50 times the 1,499 other people who don’t want to “lose” their benefits.  I will now pay $749.50 and get $0 in return.  That sounds less great to put it mildly. 

Because our current healthcare system feeds off copays and large repayments from very few payors, it’s perfectly designed to cause usage and rates to rise each year.  The only way to fix this mess is to make people responsible for themselves up to a painful but manageable limit (e.g. $5,000 per person) while providers insure the rest.  That would make sure people are covered for cancer treatments, lengthy hospital stays, etc. while discouraging the frivolous use of healthcare coverage.

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Written by floridaconservative

December 4, 2012 at 10:00 AM

Posted in Healthcare

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