Health Insurance: The Lower the Risk, The Greater The Return
In its purest form, insurance is pretty simple. You pay in “X” amount of dollars, and you might get back two times, three times and sometimes even 100 times in benefits on what you actually contribute. On the flip side, sometimes the insured might only receive a fraction or absolutely nothing in return for their contribution.
This ratio of benefits to contributions can be reviewed annually or even over several years. One might think, from a strictly return on premium standpoint, that a 10,000 percent return is much better than a 300 percent one, but there are also many instances with insurance (such as with term life insurance) that the insured would typically be hoping for a 0% return on their money.
That rationale makes sense if premiums are small in relation to income as well as to potential payout. The ratio of premiums to payout makes sense only if the entrance fee-aka the “premium”- into the insurance game is reasonable.
In the 1970s, I played blackjack in Las Vegas. Back then, the minimum table was $1. I was able to play for hours before eclipsing my quota of losses. Now, I would be lucky to find a table for a $10 entrance fee (unless maybe I went down to Freemont street or some other area of town). While the entrance fees for black jack on the Las Vegas Strip might have increased 10-fold since the 1970s, the payouts are still very similar.
For a $10 bet, if I hit blackjack, I would win $15, a payout of 1.5 to 1. The chances of winning a hand are the same, and the payout is still approximately the same ratio as back in the 1970s. The only major difference is that the entrance fee is much more expensive these days.
The entrance fee into the health insurance arena is the premium. Group premiums have risen dramatically since the 1970s in probably a similar ratio (if not more) to that of blackjack. While the average annual premium for a family might have been $1,700 back in the 1970s, group insurance premiums now average $17,000 per year per family. The drawback here is that 10 times $1,700 is much more cost prohibitive than 10 times $1.
The median household income in the United States is $53,000 meaning that annual household income is a bit more than three times the annual family group premium. While one certainly hopes his health claims are minimal, if a family had no claims in 3 years, they would have spent an entire year’s income with no return in benefits!
Imagine spending a little more than one week’s worth of median household income at the blackjack table, which is $1,000. At the $10 minimum table, with my lack of blackjack expertise, I would be lucky to accumulate 10 hours of enjoyment while squandering one week of my family’s income!
This begs the question how might our family health care costs rise either at a lower percentage, or even better yet, actually decrease over time? Can we actually lower contributions as we age, even though our chances of making claims increase?
The insurer knows the ratios of premiums to payouts. Within state and federal laws, it is the insurer who sets the terms and conditions for payouts much like a casino sets the terms and conditions for the various games of chance like blackjack.
Insurers and actuaries can predict with precise accuracy what contributions are needed to pay out claims. What is NOT established are the terms and conditions of the benefits allotted on these payouts. What if insurers could change the rules, and instead of only paying out 1.5 to 1 like the casinos do on blackjack, safely award 2 to 1 or even 3 to 1 instead while still remaining financially strong and conforming to state and federal laws at the same time?
In this way, both the insurance company and the policyholders can come out with a profit together. Although I hear the blackjack return ratio on the Las Vegas Strip is only getting worse these days, thanks to National Prosperity Life and Health, this win-win can now be accomplished over a relatively short period of time when it comes to health care payouts. The groundbreaking Health Matching Reimbursement Account serves to lower the risk for the self-funded employer, while increasing the returns for the participants in ways that the Las Vegas casinos would never offer at the blackjack tables.
Don Levit, CLU,ChFC