How Insurance Should Work

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pmconusa
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How Insurance Should Work

We purchase insurance to alleviate the occurrence of catastrophic events that would cost an inordinate amount to overcome. For example, my Pancreatic cancer operation, including chemo-therapy and radiation cost roughly $120,000. At some future time, I will address why this should not cost this much. I could have paid for it from my savings but it would have reduced the amount I had put aside to supplement my retirement. Most people do not have this amount of cash available without selling or mortgaging their home and if you have no home or assets to mortgage or sell you may be forced to borrow. If you have no job, you will not be able to obtain a loan so insurance comes to the rescue, only if you still pay the premiums.

Not everyone will require Pancreatic cancer therapy or will undergo such costly methods of correction and mathematicians, particularly those skilled in statistics can make reasonable assumptions, based on statistical data to predict how many people will actually need Pancreatic therapy or most any other therapies where sufficient statistics exist. It is how insurance companies predict life expectancy when they sell life insurance. Everyone is going to die and statistical analysis tell the insurance companies expectancies for various classes of individuals. After all, they are in the business to make money and there have not been very many bankruptcies in the insurance industry and when there were, the government stepped in and bailed them out because they are a government protected monopoly, just like the banks.

Let’s say 30,000 policies are sold to cover catastrophic healthcare costs. All of these policies contain a deductible clause that negates the coverage of individual claims under a certain amount to avoid nuisance claims. Medicare has the same effect by covering nearly all claims but paying only 80%. If you are not covered by Medicare and fall into a specific dependency category you may qualify to receive a government subsidy through Medicaid another scheme that insures the medical profession and the insurance companies who pay them will not have to provide a service without being compensated.

Let’s estimate that the cost of these 30,000 policies, with a $6,000 deductible cost $12,000 per year and cover a family of four. That means the insurance company is collecting $360 million per year from its participants. This would pay for 3000 Pancreatic cancer operations, but of the 120,000-people covered it is highly unlikely there would be that many and statistics of just how many each year for this cohort is reasonably well known. Therefore, the insurance company knows, with a reasonable degree of accuracy just how much it will have to pay out of the $360 million it takes in. Some of the difference is taken up in administrative cost and what remains is profit. Let’s say it amounts to an actual cost to each participant of $1,000 per year. Instead of returning this amount back to the policy holders, the insurance company invests or loans this money at interest. After 12 years the company has a nest egg of the equivalent of 1 years’ worth of premiums and growing.

The medical cost example is just the tip of the iceberg, home insurance is ever worse in that, at least in my community, very few houses experience a total loss in any given year and in many years, there have been none. It is why insurance companies can offer you term life policies at such low rates, because the payout versus the premium income is in an area where statistics are the most accurate and voluminous. Insurance companies compete only on the amount of greed they are willing to forego.

The insurance industry exists only because of the economic system that has been adopted by every society in recorded history. It is totally unnecessary and why is described in my book The Real Economy because an alternate economic system, I also describe, would make it redundant. Not only would you be able to pay for whatever it was that you needed, you would be able to pledge future income if you had not saved enough to cover an unexpected cost.

Melvin Udall
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(No subject)

Melvin Udall
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" For example, my Pancreatic

" For example, my Pancreatic cancer operation, including chemo-therapy and radiation cost roughly $120,000."

I suggest that your experience did not COST $120,000, but instead that the documents you saw showed a total PRICE of $120,000, not-withstanding any and all adjustments that might be involved.

Not that there's anything wrong with that.

At this point in our health sector, one of the main problems is that identifiable costs for various courses of treatment are largely unknown, and instead, those involved set prices that the overall system will accept. Reimbursements bear no relationship to price or actual cost.

In other words, the underlying cost structure for the totality of health services in this country is a mystery, with the published figures being contrived and negotiated on a largely arbitrary basis.

We cannot make "health care for all" feasible and affordable if we don't know what it costs to begin with, and patients, who are almost always the third party in the mix, have become totally disinterested in the subject.

pmconusa
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In your knee jerk reaction to

In your knee jerk reaction to my post and in order to find some fault in my statements you failed to thing through to discover the errors in your response.

If you have ever had a hospital experience you would have noticed that the personnel are all equipped with little counters or required to account for the time they spend with any patient. Just like a lawyer who is required by his firm to bill payable hours, hospital personnel, in the doctors must account for their time in order to prepare the billing to the patient, or whoever is paying the bill. Therefore the cost of $120,000 for my Pancreatic Cancer operation is what the hospital billed and what Medicare and my private insurance paid for the services they provided. The operation took 4 hours and if it had taken 5 or even three, the bill would have been adjusted accordingly. Whether this is the right amount per hour for each of the participants we can debate but because the medical profession has a government protected monopoly and can get away with monopoly pricing that the government now regulates.

It is interesting how this monopoly operates but a monopoly it is because the AMA regulates the number who can get in the game and the rule of the game is we don't compete on price.

I grant that if you asked for a fixed price before entering the hospital you would probably being paying more because they would estimate the hours as the highest number experienced for the type of service being provided.

Melvin Udall
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Knee-jerk?

Knee-jerk?

The fact that they carry little equivalents of time card clocks with them does not change my premise.

At best, it says they keep track of how many hours are attributable to you, as opposed to other patients. It says nothing about allocables, overhead rates, G&A, etc. And generally speaking, I'm guessing the vast majority are salaried, though in this day and age many are per-Diem employees.

Either way, I'm betting they get paid their salaries, with possible scheduled overtime depending on their contracts.

Did the little machines count how many aspirin you were given? And whether you had an extra cup of coffee, or no coffee?

How much do they get for an aspirin these days?

I haven't had a major procedure since my cancer surgery 31 years ago, so as in most things, you are the dominant source of truth.

Frankly, I'm amazed that you take the side of the staff and hospital that provided your care, since your typical default position is that everyone we deal with is screwing us blind and taking us down in the process. Including insurers and all forms of government, both of which were heavily involved in your care and expenses.

So; the meaning of life is ????

Melvin Udall
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Oh, something else, oh

Oh, something else, oh teacher.

I have an annual "procedure" as a result of my cancer surgery all those years ago.

When I get the paperwork, labeled an EOB, it typically shows an amount billed, an amount paid by my insurer, and my payment amount.

Let's say the amount billed is $850, and the payment by my insurer is $283.17, and my share is $35.

How much did my procedure "COST?" I also had a blood test a few weeks ago for lipids.

I believe the billed amount was $300 plus; the insurance paid around $50, and I have to pay $10.

Same question.

Melvin Udall
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I guess your knees must be

I guess your knees must be locked up.

Bruce Libby
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Smegma your friend need some

Smegma your friend need some spelling help .

pmconusa
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Mel: What is the difference

Mel: What is the difference between price and cost? According to Webster they are synonymous. It matters little who pays, you or the insurance company the end result is not changed. Now if you ask what it should have cost, you enter a totally different arena. Because of the economic system we employ, that same operation, performed in 1935 by the doctor who first performed it probably would have cost less than $1,000. The difference being first, the natural deflation in the value of a means of exchange that accumulates as opposed to being consumed and the fact that the medical profession has monopoly power and can charge whatever they can get away with.

Its all in the book and if you had read it you would not be so confused.

Melvin Udall
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To use your words, instead of

To use your words, instead of taking cheap shots at me, why don't you correct what I wrote.

Maybe if you had not written your book, and exist only within it, you wouldn't be so confused.

If you think cost and price are the same thing, it's clear that doing business in Saudi Arabia didn't teach you much about business finance.

Or fixed price contracts, or cost plus contracts, etc...

I'm also concluding your decades there robbed you of learning normal social cues and how to read them, and casual conversational styles.

If you're telling me I could become you if I read your book.....a challenger to your own received wisdom...I would think you'd burn every copy. You don't want anyone to compete with your genius. You wouldn't know how to handle it.

Bruce Libby
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As a biased observer and

As a biased observer and designated mini me Mel seems to be not confused.

pmconusa
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During my time in Saudi

During my time in Saudi Arabia I was responsible for writing and executing cost reimbursable and fixed price contracts with mostly American companies or their Saudi joint ventures to the tune of billions of dollars and had over $9 billion of future capital projects on my plate when I retired. I doubt Mel, even you, came anywhere close. As I recall you spent most of your career with a government protected monopoly where cost overruns are commonplace.

In all of your posts you have yet to fault the facts I have stated. If you have alternative facts I would like to know them. I came upon them not by accident, but by continually asking myself the question ("Why?), until I found the answer. You could have done this as well but you stopped thinking when you found an answer that suited you.

Bruce Libby
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If provided you would still

If provided you would still find fault and discount them ,alternative facts, that is what you do.

Melvin Udall
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Listen; if you make something

Listen; if you make something and calculate what it cost in labor, materials, and overhead to produce it, and then price it at the same amount for public sale, you have a far different understanding of business finance than I do.

You're right; the most the program I was involved with never went above $1.5 billion or so in concurrent contracts. And frankly, we didn't overrun them. But you are entitled to your presumptive certainties.

Jasper
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Smegma your friend need some

Smegma your friend need some spelling help .

Anyone can make a spelling mistake now and again, but it is only the "special" ones who should repeat grammar school. Good god, man, your prose is an absolute abomination. Have you no shame?

Matt
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Bruce calling out someone for

Bruce calling out someone for writing instruction is like Chris Christie suggesting someone should lay off the potato chips.

Bruce Libby
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No ,I am inspired by your

No ,I am inspired by your filth ,crassness and the benevolence shown to you, by the all knowing holder of the truth ,who can make a spelling mistake.
Thank you Smegma.

Jasper
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What on earth is that word

What on earth is that word salad all about?

pmconusa
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Bruce: If you come up with

Bruce: If you come up with an alternate fact we cannot both be right so debate would ultimately lead us to the truth. If however I am right, there is no alternate truth, only Progressive thought that stops when it discovers the truth that suits it.

I don't fault your mistakes in spelling, I make them also and need Microsoft's spell checker to help me out. Unfortunately, AMG's spell checker is not as good but it makes little difference when the context of your remarks usually makes clear your message.

Mel, on the other hand, has to find fault, even if he has to make it. His comment above is a clear example. In pricing your product you must include profit, which is the return on the owner's investment, a cost that must be recouped. Cost therefore includes profit as a given, the level of which will determine whether people will buy or not buy in a competitive environment. Government contracts for material may be competitively bid but who gets the work depends on whose state puts the most pressure and has the most clout in the Congress, because it is jobs that are at stake, not the defense of the nation. For example, we have only two main shipbuilding companies for destroyers and vessels of that class. Bath Iron works here in Maine and the other in Louisiana. They both need to be kept in business and despite the supposed competitive bidding, the Navy always manages to keep both in operation. No other bidders are possible because of the capital investment needed in facilities prevents another domestic competitor. We lose sight of the fact that these ships could be produced more cheaply in places like Korea, but the government holds to a buy America policy, dictated by the Congress. So the American taxpayer is obliged to pay for a more costly product. They tried to protect the manufacture of electronics and appliances and clothing with tariffs but those who want their cake and eat it too would have none of it. They got their wish but in the process, the jobs provided by these industries disappeared, never to return.

We keep this entire charade going by the printing of more money which loses its value the more we print. It is so bad that one can actually calculate when this party will end and it is now before the end of this century until we have the good sense to change it. The problem is that those who benefit from it control it and are not about to burst their own bubble. Fairly soon it will be too late. If that is too doom saying for you Mel, I'd like to sit down and explain it to you and your friend Bruce. Its all in the books I have written but since you haven't read them I doubt very much you would like to engage in debate on the subject as evidenced by your continued unfounded criticism of my writings on this very blog.

DisPas
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Gotta side with Mel on this

Gotta side with Mel on this one, pmconusa.

Bruce Libby
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Itis little early for

It is little early for popcorn ,let's plug it in anyway .

Melvin Udall
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Profit is not a "cost." It

Profit is not a "cost." It is an arbitrarily set number based on any number of factors.

You can mangle semantics all you want, but it doesn't change the common understanding of terms.

Furthermore, your history of shipbuilding ignores the history of same...yes, in your lifetime and mine.

Presumably, you'd like to see the shutting down of auto manufacturing and other heavy industries here in the states. As if that isn't already happening.

So, what is the meaning of life?

And you never pointed out the errors in my insurance posts so we could "debate them."

You are too willing to believe the answer you want when you find it, and then you stop looking.

To borrow a thought....

Melvin Udall
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Looks like this is from

Looks like this is from someone else's books, rather than pmcon's book, so he will no doubt dismiss it out of hand.

cost and price and profit

Profit Function

The profit is the net proceeds, or what remains of the revenue when costs are subtracted. If the profit depends linearly on the number of items, the slope m is called the marginal profit. Profit, revenue, and cost are related by the following formula.

Profit = Revenue − Cost
P = R − C

If the profit is negative, say −$500, we refer to a loss (of $500 in this case). To break even means to make neither a profit nor a loss. Thus, break even occurs when P = 0, or

R = C Break Even

The break even point is the number of items x at which break even occurs.

Melvin Udall
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Look! They even have an

Look! They even have an example for selling books, and my guess is it applies to pmcon, at least in part.

At this point, it's pretty safe to say x, if not 0, is a very small number, within epsilon of 0.

Example

Going back to the sci-fi novels, we already have the cost and revenue functions:

C(x) = 3.50x + 1200 dollars. Daily cost to make x books
R(x) = 6.50x dollars. Revenue from the sale of x books

The profit function is P(x) = dollars

For break-even, x = books

The marginal profit is dollars/item
Thus, you should sell ??? books per day to break even, and more than that to make a profit of $??? per additional book. ($??? is the marginal profit.)

pmconusa
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If you will refer back to

If you will refer back to what this post was all about it was the cost to the consumer, not the cost to the provider. Your analysis is perfectly correct but the cost you mention is not the cost to the consumer but to the provider. The difference is naturally the profit margin added to the producer cost to obtain the cost to the consumer. The hospital's cost is the amount they pay to the physician, the nurses, the orderlies, interns, etc. etc. To that is added overhead.

Most hospitals are organized as non-profits which means they can distribute what for-profit hospitals make as profit to their employees which is why they are able to attract employees from for-profit hospitals. They benefit from the taxpayer because these hospitals pay no taxes, but their employees do, but at lower rates. Show me a physician or surgeon who makes $100,000 of more a year who actually pays more than the corporate rate in taxes and I have a bridge in Brooklyn I will sell you. You will also find that much of the hospital staff's income is deferred until they retire and like Brunswick teachers, make almost as much from their pensions as they get from the years they actually worked resulting in a lower tax burden.

It is nothing more than government redistribution of wealth through the tax system which benefits those who support the politicians who then have the power to perpetuate this system.

Did-Pas: Do you still want to stick with Mel on this one?

Bruce Libby
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Butter on the corn ?

Butter on the corn ?

Melvin Udall
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See....resistance is futile.

See....resistance is futile. You are either for him, or against him. You either accept without question what he says, or be labeled a non-believer.

Wow, now we get a brilliant insight from an MIT PhD who said Webster's told him cost and price are synonymous, and that was good enough for him, and it should be good enough for us. After a few days of reflection, he finally realized that it depends on where you sit in the exchange. And now adds a few more twists to his pretzel to demonstrate that what he said in his original was absolutely correct, with no questions permitted or accepted.

So who do you want to side with, someone who doesn't know the meaning of life, but is the sole source of truth on everything else, or widely accepted and taught basic understandings and conventions?

By the way, how does a "sale price" or a "clearance price" fit within his framework of unquestioned certainty?

Melvin Udall
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"In pricing your product you

"In pricing your product you must include profit, which is the return on the owner's investment, a cost that must be recouped. Cost therefore includes profit as a given, the level of which will determine whether people will buy or not buy in a competitive environment."

ROOI is not a COST that MUST be recouped. You can argue that without a return on investment, the owner will eventually cast the business aside, perhaps at a loss, or perhaps at a gain. But growing his investment is not a COST; it is his fundamental incentive for financing the business.

anonymous_coward
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Melvin, as many that came

Melvin, as many that came before me so gently warned to me, you'll realize that trying to teach a pig to sing just wastes your time and annoys the pig.

I feel that it is now my turn to bestow the great wisdom that is found in letting the pig oink instead of trying to force it to sing.

Bruce Libby
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Damn I was hoping for more

Damn I was hoping for more popcorn sales right now your welcome to stick around !

Melvin Udall
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a-c: I think you busted me.

a-c: I think you busted me.

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