By DAVID MOON, Moon Capital Management
May 25, 2003

Twenty years ago, I enrolled in an insurance class at the University of Tennessee. My instructor, future corporate matchmaker Dr. Al Auxier, defined insurance as 'the pooling of risks, where the likelihood of an individual loss was minimal, but the cost of any single loss would be catastrophic.' Or something like that.

The typical example is a home. The odds of losing your home to a fire in a given year are miniscule. For most people, however, the cost would be financially devastating. If enough people agree to cooperate and share the risk that a small number of them will suffer a fire in a given year, the cost is relatively minimal. I would rather have a one hundred percent chance of paying a $400 homeowners' insurance premium than take a one-half percent chance I lose my house.

Somewhere along the way, we abandoned this definition.

I suspect it started with Medicare, although it may have been earlier. But I am certain it started with medical insurance.

Using Dr. Auxier's definition, individuals could ban together to share the risk that any one of us might suffer a heart attack or need gall bladder surgery in a given year. What are the odds I suffer a heart attack in 2003? Something less than 100 percent ' hopefully significantly less. However, there is a 100 percent chance I will go to the dentist. I am guaranteed to have a routine physical this year. Why should other BlueCross BlueShield customers help pay for my routine medical services, particularly when I have complete control over whether or not I use these services? Despite what my agent says, I don't have medical insurance; I have a pre-paid medical plan that just happens to include a traditional major medical insurance program added to it.

The gambit has been pushed to a new extreme. Several large insurance companies are now offering 'insurance policies' with annual benefit limits barely exceeding the premiums. The Wall Street Journal describes one plan that costs $16 a week, but pays a maximum of $1,000 a year in benefits.

Would you pay $83,000 per year to insure your $100,000 house from being destroyed in a fire? Then why pay $832 for a policy that limits your medical benefits to only $1,000?

The companies sponsoring and selling these plans feed on the fears of the lowest paid workers in our society, suggesting that having some medical insurance is better than having none at all.

A solution, of course, isn't simple; the system is already warped. Except for a few mavericks who opt for traditional major medical plans, medical insurance (at least by Dr. Auxier's definition) is likely long gone. Very few people can afford the 'sticker price' of their doctor and hospital bills. Even fewer actually pay that price. The system is clearly broken. But low cap benefit insurance plans are not the solution.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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