My comments today are a follow up to Michael Kitces’ thoughtful analysis of the challenges and potential benefits that employers, advisors and their clients will face as Obamacare begins to take effect, including the implications of dissociating healthcare from employment. As a former claims adjuster for two major property and casualty insurance companies a lifetime or two ago, I got a sort of “bottom-up” view of how the insurance industry works in the real world, which has proven valuable in helping advisors sort out insurers and their products over the years—including our current health care situation. 

As a claims adjuster, I experienced how insurance companies go about “managing” their “claims exposure,” or in plain English, how to keep down the costs of paying their insureds. In principle, it seems a conflict of interest to have people prepay to be reimbursed for some future catastrophe or loss by a for-profit company—at its discretion. Yet back in the day, despite occasional speeches by visiting home office executives about reducing “frivolous” claims (which sounded ominously more ambiguous than “fraudulent” claims), I found the insurance industry and its employees surprisingly concerned about paying their insureds everything they were owed. (Of course, some insurers are better about this than others, and the adjusters all know which are which.)

On a macro scale, of course, the insurance business makes a lot more sense: there are some catastrophes, such as when your house burns down, that while infrequent are financially ruinous when they do occur. So by many of us paying a fraction of the cost of a new house, we can create a fund to reimburse the unfortunate few who suffer such losses. We’re happy for insurance companies to make a profit for offering us this service. Thus, insurance works well for homes, and cars and boats and airplanes and anything else that only occasionally suffer damage.

Which brings us to health care. Unlike property insurance, which dates back at least to Renaissance-era shipping companies, health insurance is a relatively new business, originating in the mid-20th century. Until then, doctors could do relatively little for their patients, and the costs of most treatments were limited as well. What’s more, people didn’t live very long: when Social Security was created in 1935, the average life expectancy at birth for those born in 1930 was 58 years for men and 62 years for women (see this interesting archived article from the Social Security Administration on life expectancy back then.) 

But medical science and the potential treatments, drugs and operations it offers have exploded over the past century, driving up both medical costs and life expectancies to 78 years (according to the Census Bureau) for babies born in the U.S. in 2012. These two factors—medical technology and demographics—make health insurance unlike any other form of insurance. Rather than insuring for infrequent, catastrophic incidents, the vast majority of us are likely to incur health care costs over our lifetimes that are far in excess of what we will earn at our jobs. 

Consequently, health insurance isn’t an economically viable solution to this growing problem. Obamacare, by limiting its focus to simply expanding health insurance coverage, both sidestepped the real issue we’re facing and potentially made it worse. 

A better solution might have been to actually expand health care (rather than just insurance) by creating a system of free clinics and hospitals that would be available to all Americans. While that might reduce the burden on insurance companies, it wouldn’t actually solve the problem of exploding medical costs that we as a society will be forced, sooner or later, to address.

Consequently, the challenge for advisors in the coming years will be to help their clients navigate increasingly restrictive medical benefits, as insurers and/or hospitals themselves attempt to “manage” health care costs. In fact, as tax shelters did in the late ‘70s and early ‘80s, I suspect that financing health care will replace investments as the service demanded by advisory clients in the all-too-near future.