By DAVID MOON, Moon Capital Management
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
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).