Last week we discussed basic principles of insurance. Today, let’s look specifically at health insurance.

Before getting into any details, let’s ask ourselves why we buy health insurance—or any other insurance—in the first place. We know that insurance companies have employees to pay, buildings to operate and depreciate, profits to make.

A portion of what we pay in premiums must go to those things, meaning that an average Joe will receive back LESS in claims than he pays in premiums. That sounds like a losing proposition, so why do we do it?

The basic concept behind insurance is to protect ourselves against losses we can’t afford to suffer out of our own pockets. To protect ourselves against BIG losses.

When companies first began offering health insurance, it was designed to do just that—to pay big hospital bills and surgeons’ fees we couldn’t afford to write a check for. Losses too big for us to handle on our own.

Back then, health insurance made sense. We rarely ever needed it, but when we did, it met our needs by staying in the background and picking up the bills after we had our surgery or got out of the hospital.

Insurance companies didn’t insert themselves into the doctor-patient relationship. They didn’t need to, because we were paying our own doctors’ bills. We were free to choose our doctors as we saw fit, and they were free to practice medicine as they’d been taught—with no third party interference. If the doctor said a hospital stay or surgery was medically necessary, the insurance company paid for it. Simple. The doctor ordering the treatment had little incentive to do so if it were not truly necessary, so the insurer didn’t question his decision.

Then someone came up with the idea of broadening the scope of health insurance to include covering the doctor’s charge for an office visit. At that point, we strayed away from the legitimate purpose of insurance for the first time. Rather than buying protection we NEEDED for BIG bills we couldn’t afford to pay, we began buying protection for smaller bills we COULD afford and SHOULD PAY on our own—money just flying out of our pockets.

Remember, only a portion of our premiums goes to cover benefits. The rest goes to the insurance company’s expenses and profits. An office visit we could have paid for (back then) with a $10 bill now required maybe $15 in premiums to pay. At today’s prices, a $100 to $125 office visit costs us a copay plus maybe $150 to $175 in premiums.

The cost in your area may be higher or lower than this example, but the principle still applies. The cost to the insurance company of processing that office visit claim is a much higher percentage of the bill than that of a hospital bill or even an MRI or CATScan.

Having these bills covered by insurance makes about as much sense as paying for no-deductible comprehensive or collision insurance on our car insurance. If we can’t afford to pay for a doctor’s visit, we sure can’t afford to pay the premiums for insurance to pay for it.

Another problem with having insurance to cover office visits is that a doctor who would never think of harming us with inflated bills might have much less compunction about overbilling an insurance company. This began to happen almost as soon as they started covering these bills.

Insurace companies, not being stupid, caught onto this pretty quickly and began keeping statistics on reasonable charges for various procedures and limiting their payment to the doctors to whatever their statistics said was reasonable. At that point the doctor we depend on for our care and the insurance company we depend on for our coverage became adversaries, leaving us in the middle of their fight.

None of this was necessary back when health insurance was used for the purposes it was designed to serve. They might have hassled at times with a surgeon who tried to overcharge for his services, but he wasn’t our main doctor anyhow. If he and our insurance company were at odds, it didn’t affect our relationship with our internist or GP or whoever served as primary for us.

The next step in the progression toward the morass of today’s healthcare was managed care. Doctors now had incentive to see patients more often and/or perform more billable services since and insurance company was paying for it. Not to imply that all doctors are crooks—my dad was a doctor and certainly not a crook—but there were always a few who were willing to try to bilk insurance companies.

The insurance companies decided they needed to protect themselves against illegitimate claims, so they instituted managed care. They would decide whether a doctor should be allowed to do this or be forbidden to do that.

Does anyone believe insurance company claims’ departments are filled with medical experts qualified to decide what our doctors should and should not do? If so, I’ve got some beachfront property in Elko, Nevada, I want to sell you.

Even if they did have qualified medical experts, they wouldn’t be the ones seeing the patient, observing symptoms first-hand, knowing the patient over a period of years. Nor would they care about us as individuals like our own doctors do.

In reality, these decisions about what a doctor is allowed to do are made by some clerk in the insurance company’s home office. Maybe a claims expert with a college education, but more likely a high-school graduate with some level of experience pushing papers around.

Ø How do you feel knowing that it costs you up to $200 in copays and premiums to pay a $100 doctor’s bill?

Ø How do you like having some insurance company treat your doctor like a crook over your bill?

Ø How do you like having a remote, non-medically trained person telling your doctor what he can and can’t do in treating you?

Next week we’ll examine HMOs, PPOs and government involvement in healthcare.