It struck me quite suddenly how the sub-prime lending meltdown with all the associated money madness that nearly caused a market meltdown resulting in bailouts that angered most and a recession that’s hurt many, is connected to Health Care.

Many years ago (30 if you believe some stories), the government decided it wasn’t fair that certain people couldn’t afford to buy a house. After all, it is the American Dream. Someone probably even mentioned it was “a right” to own your own home.

Naturally, the government had to do something. So it forced banks to lend money to people who were at high risk of not paying them back, people who had little or no money for a down payment, no collateral, etc. These people would lose little more than their credit rating if they simply walked away and paid nothing back to the banks.

To manage the risk financial institutions were forced to take on these mortgages, they came up with all the monkey business we’ve heard about. The assumption was that by grouping high risk mortgages together and buying securities (credit default swap, etc.) on them, they could sell them around and reduce their individual risk.

This was all well and good until the risky mortgages started to show why they were risky. So many people were defaulting on their loans, some because they couldn’t afford them, others because they were totally irresponsible, more yet because they were convinced they could afford them. The result of all that buying and selling of bundled debt and securities on that debt was lower individual risk, but unacceptably high systemic risk.

So it all fell apart and only ridiculously large sums of money from governments around the world kept the economy from collapsing (or so we’re told).

So goes Health Insurance (not the same as Health Care). Health Insurance is a bet. When you buy health insurance, you’re betting you’ll get sick. The insurer is betting against you. If you get sick, you win the bet and the insurance company pays. If you don’t get sick, the insurance company wins and you pay (your premium).

Insurance companies disallow preexisting conditions because it isn’t a fair bet. If you’re betting you’ll get sick when you’re already sick, that’s cheating. There’s probably ways the insurance companies take advantage of this rule, unfairly excluding people, particularly those who were cut off of their insurance just when they got sick, but that’s not the issue here.

Each bet insurance companies make is a risk. They try to balance the risk by charging appropriate premiums so they can pay out potential insurance claims, pay their employees, and make a profit in the process, which is the whole point of running a business. Decent profits allow them to grow and expand coverage and make more policies. Exorbitant profits should show consumers they don’t play fair (or possibly are just winning a lot of bets at the moment).

Once again however, the government has stepped in saying “it’s not fair.” This time, it’s not fair that people can’t afford insurance or are being excluded for preexisting conditions, etc. Instead of changing the rules so valid preexisting conditions are covered while others may still not be, the government has simply said, “Insurance companies can’t deny coverage based on preexisting conditions.” Or essentially, “Insurance companies have to cover everyone, or else.”

Insurance companies will essentially be forced to take on excessive risk, resulting in much more money going out in claims, so more money must come in.

“That’s okay,” the government says. “Everybody must buy insurance, or else.” This the government says so insurance companies have a chance at balancing risk. If healthy young people have to buy insurance, it’ll help pay for the older or sicker people to get health care, instead of simply waiting until they’re old and sick to get insurance.

Sounds like a win for everyone, right? Possibly. If all the rules are written just right, it might balance risk well enough to allow insurance companies to continue operating in the long term. But if there’s anything wrong with the rules, risk will be unbalanced and we’ll be headed for a health insurance crisis on the scale of the sub-prime mortgage fiasco.

Further, mandating that everyone buy insurance is outright unconstitutional. I buy insurance. I like having insurance. But I don’t think the government has the right to mandate that I do so. I’ve heard all the arguments and they fall flat. Car insurance is not required, unless you want to drive on public roads. Regulating commerce is not the same as mandating that commerce take place. Promoting the general welfare is not the same as mandating the purchase of a commodity.

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