Does Your Insurance Cover That?

Sometimes, bad things just happen. It’s a fact of life, plain and simple. Houses burn down. Stores get robbed. Cars get wrecked. People get cancer. In each of these scenarios (and any number of misfortunes) there is likely to be emotional, physical, or material damage. There is also a negative financial impact that can run into the hundreds or thousands of dollars. Such unexpected expenses can often spell disaster for average, middle class citizens, but thanks to a concept called insurance, the financial strain can be somewhat lessened. Insurance originally developed in ancient Babylonia to protect shipments of goods, whereby traders would front the funds for caravans and get paid back with interest upon safe delivery of the goods. Later, the Romans would add another wrinkle through their burial clubs; soldiers paid a fee and in return would have their funeral costs paid as well as a little something for their survivors. Today we have insurance for just about everything under the sun, from house, health, auto, and life to wage insurance, liability insurance, even product insurance and pet insurance. Insurance has become big business, earning $17.3 billion net income industry wide in the first quarter of 2005 alone.

Insurance is a semi-socialist endeavor that pools the money of a lot of people to pay for the misfortunes of a few and the peace of mind of the rest. But all too often, insurance is viewed as a type of public lottery system that can deliver an unexpected, and in many cases undeserved, windfall. What started out to be a safety net program for infrequent yet expensive life events has instead become wrought with fraud and greed, perpetrated by both the consumers and the insurance companies. Companies seek to maximize their profits by minimizing their claims. Consumers retaliate by inflating their claims to increase their recovery. And companies in the middle, those who ultimately get the cash for fixing the broken whatever, play on both sides of the fence. This mutual distrust has spawned a regulatory and legal labyrinth that ultimately costs more for the consumer while providing less. It’s an environment that has pitted the company against its customer, greed against good.

Insurance is a very good idea that has become altogether too complicated, so perhaps it’s time to simplify things, and in the process eliminate the opportunities for fraud so that we can keep costs lower for everyone, while providing the important coverage that everyone needs. Let’s look at the big four- health, home, auto, and life.

The first one, health insurance, is the most expensive and is filled with fraud. Rather than working to ensure that patients receive the care they need, health insurance companies are driven by the profit line in an industry where costs spiral out of control. Take a look at any hospital surgery bill and you’ll find single doses of aspirin being charged at several dollars a piece, in some cases over $10 a pill. And this example is among the smallest but most numerous type. (Consider the fact that many hospitals receive these medications at much lower prices, but charge these ridiculous sums to recoup costs associated with treating uninsured patients.) Notwithstanding the clear inappropriateness of accountants dictating medical care, a system that allows itself to be abused in such a way is hopelessly broken. The good news is that we could eliminate the need for any kind of health insurance by reforming our system of medical care in this country. (See Affordable Health Does Not Mean Free Health Care) Health Insurance companies will be loathe to adopt most health care reforms though simply because they will lose their lucrative business, but this is where the government, run by the people, must step in and make the change. Health care should be about health, not profit.

Next, combine home and auto insurance into one blanket property coverage policy, with a mandatory minimum policy available at affordable rates that provides up to a half million dollars of coverage for up to three events without a rate increase. A tree falls on your house, you’re covered and the rates stay the same. Rear-end another car on the freeway? You’re still covered and the rates stay the same. Accidentally set fire to the neighbor’s garage in a welding demonstration? You’re covered for that too, but this time you’re rates can increase. Because most of these kinds of events are rare, the probability of an insurance company paying out often to the same person is unlikely, and fraud would be easier to detect. Blanket policies would eliminate confusing policy restrictions, because once fault is determined, the insurer would be required to settle the claim quickly. Determining fault should be completed in no more than 90 days. In cases of no fault, the determination should be made as quickly as possibly. One caveat to the property insurance policy would be for homes built in repeated natural disaster locations. If you live in an active earthquake zone that is likely to result in damage or a hurricane lands in your neighborhood every other year, an insurance company should not be required to extend coverage (or should be aloud to charge a much higher premium) if your home has been destroyed once, and if you choose to rebuild in the same place. Furthermore, the federal government should remove itself from this kind of rebuilding effort. Its quasi-insurance endeavor, FEMA, should stick to offering aid and clean-up assistance and stop using tax dollars to keep rebuilding homes in these places. Finally, a cap on damages should be instituted that limits awards to actual property repair/replacement costs and eliminates most kinds of non-compensatory awards. It’s high time for people to quit pretending that their entire psyche has been irrevocably damaged from tripping on the curb and that only money can make it better. Establish an account to cover medical co-pays, but all other medical concerns would be handled under each persons medical care plan. Insurance companies would probably fight these reforms too, but they’d actually save a ton of money in legal fees, bogus awards, and medical claims to cover most property damage claims and still gain a profit.

Life insurance is really a misnomer because we’re actually talking about a policy that pays your survivors when you die. Nevertheless, life insurance policies are the most capricious of all. You are basically betting on when you will die. You buy the policy thinking that you may die during the term and your family will be taken care of. The insurance company is betting you’ll live through the term of the policy and pay premiums without getting anything in return beyond your piece of mind. But if the main reason for life insurance is to provide financial support from beyond the grave, a national pension plan (A National Whole Life Pension Plan) provides many of those same benefits for families with children and makes unnecessary these policies for older couples. Offering a policy to cover the funereal costs seems like a pretty good idea though, at least saving your loved ones from having to handle the details. This would actually become more of a prepaid account than an insurance policy, assuming you lived long enough to cover the costs. Insurance companies could still offer additional life policies, but their appeal would likely diminish with the acceptance of the National Pension Plan in place.

All other insurance coverage could still exist in a carte blanche marketplace with rates and reliability not regulated beyond the normal rules of fraud and theft. Reforming the insurance industry won’t be an easy task, but it will result in better, more focused coverage, lower costs for individuals, and a renewed sense of what insurance is really supposed to be about. Like medical care, insurance as it exists today, preys on the misery and misfortune of others, or the inevitability of it. To make a profit for services rendered is one thing. To make an obscene profit while denying use of the very product you are selling is heartless. It is even more so when your product is mandated by law.

Meaningful Bankruptcy Reform

Financially speaking, bankruptcy occurs when you don’t have enough money coming in to cover your bills. As a legal maneuver, bankruptcy offers an individual, business, or government entity an opportunity to crawl out from under their accumulated debt and either restructure a repayment plan, reduce amounts to be repaid to creditors, or liquidate real assets and distribute the proceeds among those owed money. Once completed, a bankruptcy filing clears the way for a fresh financial start, or at least one with more breathing room. In the fiscal year ending in March 2005, approximately 1.6 million individuals (or married couples) filed for some form of bankruptcy protection. In that same period, nearly 32,000 businesses filed for bankruptcy. And, if historical averages run true, an average of 7 municipalities filed during that fiscal year. While this might not seem like an overwhelming percentage of the population, the effects of bankruptcies affect each of us in one way or another. When businesses go under, people lose jobs, cities lose tax revenue, and economies take a hit. When people go under, businesses lose money and recoup it through higher prices for the rest of us. Because bankruptcies are far reaching, the Constitution of the United States granted to Congress the power to regulate bankruptcy law. And recently, it has exercised that option to reform bankruptcy laws in this country.

But if you look at the changes made to the laws, the recent reforms seem to be aimed at helping businesses recoup their money rather than offer a fresh start to indebted consumers. Meanwhile, business and municipality bankruptcies are skewed against the average person, with accountability and repayment often swept under the rug for years on end. Bankruptcy, almost by definition, should be about helping the individual, not burying them under an even more complex financial disaster. And though consumers do need to take responsibility for their spending habits, the truth is that most personal (non-business) bankruptcies are precipitated by unexpected medical bills combined with a loss of income, losing a job, or by way of death or divorce. And while one could counsel that saving for these types of unexpected situations is something that just makes Common Sense, the truth is that a lack of financial education coupled with a national mantra of “Just Get It” means that most people have a hard time saving for a new refrigerator, let alone having a “rainy day fund.” We buy now and pay later, and with the exception of some big ticket items like a house or vehicle, which can usually be bought no other way for the average person, we rack up more in monthly balances than we bring in the door. The payment plan makes this affordable on a month-by-month basis, but lose some income or have a disaster and it doesn’t take long to fall into trouble.

But if the goal of bankruptcy reform is to reduce bankruptcy filings, which seems to be the feeling behind the recent law changes, than it would perhaps be wiser to address the root causes of most individual bankruptcies and try to reduce or eliminate those first. It’s almost always better to get to the root of a problem and treat it there than to continually treat the symptoms and not make any progress. So in creating real bankruptcy reform, let’s look to solve the reasons for each of the bankruptcy classes, starting with individual (or personal) bankruptcy.

According to recent studies, almost 80% of personal bankruptcies are filed due to one of three reasons: medical bills, job loss, and family break-up. Of these, the first is the easiest to eliminate. In my essay “Affordable Health Care Does Not Mean Free Health Care,” I proposed some changes to funding expensive medical procedures that would eliminate this as a reason for bankruptcy.

“In addition to the co-pay, the patient would be responsible to pay up to 50% of the actual costs of the medical procedure, up to a maximum out-of-pocket expense, but would be allowed to negotiate a no-interest, long-term, no penalty, flex pay installment agreement. Such an agreement could not be used to foreclose on any citizen’s property or garnish of their wages too severely, provided the citizen maintained communications with the fund administrator. At the same time, citizens trying to evade their medical bills with malicious intent should be brought to justice and forced to repay, this time at the terms of the courts.”

Such a solution would not only enable people to repay large medical bills according to their ability, but these bills would also not be an anchor around their financial necks. Indeed, medical emergencies are often beyond the control and planning of most people, and being forced into bankruptcy because you got cancer or had a heart attack or other serious medical condition seems to fly in the face of the concept of “life, liberty, and the pursuit of happiness.”

Outside of medical bills, job loss and marital break-up are the next biggest causes of bankruptcy. Of course, if people were living within their means prior to these kinds of events, bankruptcy would be much less necessary, but even assuming that a family was doing their best to not spend more than they were earning, loss of income can quickly create a hole that is hard to climb out of. For those who lose their job through no fault of their own (downsizing, restructuring, or business failure) a moratorium could be instituted that would give them a reasonable time in which to find a new job. If that job paid significantly less than the original one, a readjustment of debt should be worked out that would not damage a person’s credit worthiness so long as they were repaying their debts according to the new schedule. Marital dissolutions could follow a similar path too, with debt being divided equally between the couple and repaid over a longer term.

At the heart of the matter of personal bankruptcies though is the need to better educate people about personal finances and financial responsibility, to better educate people in general, so they can not only avoid the pitfalls associated with our materialistic mindset, but be in a position to earn a better living for themselves which would negate some of the reasons for bankruptcy in the first place. Bankruptcy should always be an option of last resort, and there should be a limit to the number of times a personal bankruptcy could be filed. At some point, we all have to live up to our mistakes, but in an age where personal responsibility is neither taught nor expected, especially in the financial arena, we must teach people how to control their spending as we work towards real bankruptcy reform. This, along with some of the reforms mentioned in “A Nation of Debtor’s” could result in better financial health for all people.

So what about business bankruptcy filings? What is the solution there? To begin with, financial pitfalls for businesses could be more readily avoided if there were an accounting standard that did not encourage creative bookkeeping. Certainly, reformation of the tax code will help in this situation, but also reforming medical costs and pension benefits (both topics covered in previous essays) would make it easier for businesses to uphold their bottom line in times of trouble. Requiring both private and public businesses to be audited annually would also help find problem areas before they became too large and resulted in bankruptcy filings. And severe legal penalties should be instituted for corporate financial malfeasance for companies that employ hundreds of people, since their overall financial health impacts the lives of their employees and the community at large. Businesses should be expected to be responsible, especially financially, since their success is in large part responsible for the success of our entire economic system. Business bankruptcy should reflect this attitude by first making sure that failing businesses are held to higher standards than individuals and limit liquidation in favor of restructured debt. Businesses that fall into bankruptcy (or restructuring) should have their financing staff retrained or removed in favor of people who can keep a solid financial base intact. The CEO’s of these corporations, and their largest shareholders, should also be held personally accountable for guaranteeing the debts incurred by their companies if they are receiving compensation that runs into the millions of dollars each year or sit on a governing board that makes financial decisions. It’s time to make sure that these people are actually earning their money (if that’s even possible) by insisting that they take responsibility for bad business decisions that negatively affect the company’s bottom line and solvency. It’s time to put an end to the personal greed that permeates our largest businesses.

Finally, we get to the matter of municipality, or governmental bankruptcy. Of all the kinds of bankruptcies out there, this is the one that is perhaps most troubling. We can understand how people can get into a financial mess, either through personal misfortune or poor financial education. We can even understand the problems facing businesses that find themselves in financial dire straits, whether that reason is a poor overall economy or bad management. But when a governmental body moves into bankruptcy there is only one reason: corruption and ineptitude. Publicly elected officials must understand that the money they have to run government affairs is not their money, but that of the public at large, and a higher standard of accountability must be expected and insisted upon. Professional accountants, using honest accounting principals must be a part of any public funding process, with financial expenditures being made in the open and publicized so that people know where there tax dollars are really going. People must remember that politicians are not necessarily smarter than the average person when it comes to dealing with millions and billions of dollars and remain involved in the tax and spend process. A mandatory citizen’s board should be instituted to ensure that public monies are used for public projects and not wasted away in studies or kick-backs or other nefarious schemes. At the same time, the general public must learn not to expect government dollars to take care of their every whim. Tax revenue is designed to maintain infrastructure and run those public services that benefit the greatest number of taxpayers, in addition to funding some social programs. But to spend or allocate more than is collected is just bad business and bad politics.

The bottom line lies in education for everyone, a changed social attitude towards living far beyond ones means, and an expectation that bankruptcies can be avoided by adhering to Common Sense and integrity. But we must also remember that sometimes bad things just happen, even in the world of personal and business financing, and our bankruptcy laws should recognize this and look for ways to help people climb out of the morass instead of finding ways to keep them indebted forever.