The Misnomer of ‘Insurance’ in Health Insurance, Why Health Insurance Is Not Really Insurance

By | February 22, 2021

Insurance is a financial product designed to protect consumers’ and businesses’ balance sheets. If your house burns down and you have insurance, the insurance company pays to rebuild the asset known as your house. For insurance to be real, the insurance must cover the party(ies) with insurable interest, be paid for by at least one party with insurable interest and must be designed to protect the balance sheet.

Standard health insurance fails these tests. The parties protected are not the ones paying the premiums. The policy is not written for the people whose insurable interest, their health, is at risk. This bastardization of insurance came about in the U.S. when the U.S. government froze wages in WWII. Employers needed to provide additional consideration to employees without violating labor laws.

Fully funded health insurance through an employer is really subsidized health coverage. It is not insurance. Naming it “insurance” is what has opened the door to escalating prices and continuous political debate. About the only parties who have true health insurance are those who buy it for themselves or would like to buy it if they could afford it.

Self-funded health plans are a hybrid between true health insurance and employer provided health subsidies. Self-funded health plans do create an insurable interest at the employer level because their balance sheet is put at risk through inadequate funding and regulatory compliance requirements. The party with the insurable interest is paying, usually, the majority of the insurance premium. However, the parties receiving the key benefit remain somewhat removed, resulting in this hybrid model.

One of the reasons agencies and brokers have struggled so much with making cross-sales between benefits and property/casualty (P/C) is because P/C sells true insurance (other than workers’ compensation, which is more of an employee benefit like employer provided health “insurance”) and the benefits department sells subsidized healthcare. The divisions do not come close enough to sell related products and this is because health “insurance” is not insurance in this space. The mindsets of the people selling and the people buying health subsidies are different from those of people buying and selling true insurance.

When selling health subsidies, one is not selling financial protection of the balance sheet. A seller is simply selling price relative to the varying qualities of subsidy options. The marketplace demands that employers provide employees with certain benefits. Those benefits are health subsidies. The trade-off is between the amount of subsidy provided versus the expense to the employer.

The employer may incur two kinds of expenses. The first is the cost of the premiums. The second is that if they do not provide adequate subsidies, they may not attract or keep the most talented employees. However, if they fail to buy enough coverage, they do not have to pay to rebuild anything overnight as they would if their building burned down. Lots and lots of employers get by providing few benefits and in some models their balance sheet is enhanced. Employer provided health insurance is simply apples to kiwis relative to true insurance.

Self-Funding Health Benefits

One of the problems when agencies migrate into selling self-funding health benefits is that producers do not make the mindful transition to understanding their job now is to protect their clients’ balance sheets and to sell a product that provides a subsidy. Thinking that self-funding is just a sexier version of the health subsidy is a good way to eventually violate ERISA laws and ruin a reputation. The loss may not occur for 10 or 20 years, but without tremendous luck, it will happen.

When protecting clients’ balance sheets, one must understand balance sheets. No other real possibility exists. Protecting anything successfully without understanding what one is protecting is simply impossible. Insurance agents often do not have any idea what they are protecting and nothing bad happens simply because, most of the time, nothing bad happens to the clients. No one needs insurance until something bad happens.

‘Employer provided health insurance is simply apples

to kiwis relative to true insurance.’

This is a distinguishing factor with health insurance, too. P/C claims are quite rare relative to any individual. The number is about 0.22 claims per dollar of GDP. However, medical claims are common. Almost everyone has at least one medical event per year even if it is only a checkup, and almost everyone will incur their largest medical spends in the last two to three years of their lives. Therefore, medical claims are far more predictable, and predictability leads to a maintenance plan rather than an insurance plan.

Insurance is for the unpredictable while maintenance is for the predictable.

If selling self-funding, one is protecting the client’s balance sheet from both a predictable basis and an unpredictable basis (a series of NICU babies for example all occurring in the same year). This requires more expertise, care and understanding of the client’s balance sheet. The stronger a client’s balance sheet, the more risk they can take with a resulting decrease in insurance expenses.

The trade-off is between the income statement and the balance sheet.

If a client’s balance sheet is weak, they likely need to spend more money on their self-funding program because if they find themselves having to cover too many health subsidies, they may not have the cash to do so if their plan is not designed well.

Understanding self-funding well requires being a true professional agent. Amateurs have no place selling self-funding plans.

A true professional gains two points of advantage that P/C producers sometimes enjoy but regular benefits producers never possess. They can show clients how they are improving the income statement and the balance sheet by showing how the tradeoffs work between the two within the plan design options. This is a great advantage, but one must be very educated, knowledgeable, and possess the communication skills to succeed. Again, only professionals should play in the self-funding world.

If you ever wonder why benefits producers and P/C producers do not talk the same language and why cross-sales do not work well, it is because one is selling insurance and the other is selling subsidies.

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Insurance Journal West February 22, 2021
February 22, 2021
Insurance Journal West Magazine

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