Didactic Wonk-Screed on Insurance

Before anyone debates health care reform with me they need to know the following: How Insurance Works Insurance is basically gambling which is a subject I know a lot about (seriously - please watch my rough video mock-up of a lesson on "Fundamental Gambling Theory" because it provides a crucial foundation to understand the tricky concept of insurance). As simply as I can explain it, an insurance company: 1) Assesses the likelihood of payout for a claim "1/X" 2) Multiplies that by the size of the claim(payout) "Y" to result in the "True Odds" cost 3) Calculates its operating costs "OC" & profit margin "PM" which together are divided by the number of insured "Z" to result in the "Business Costs" "Premiums" are checks insured customers ("policyholders") pay their insurance company. In equation form: Premiums = "True Odds" + "Business Costs" or, in detail, the premiums = ((1/X) * Y) + (OC + PM)/Z For example: Let's say I am an insurance company that only insures Americans against death by shark attack. The number of people who get killed by sharks in a given month is, let's say, 1 in 300 million (let's say about 12 American deaths per year). That likelihood is "1/X" according to my formula. And the payout for that claim (to the estate of the victim) is, let's say, three million dollars ($3,000,000.00) which would be "Y" in my formula. Further, let's assume initially I'm insuring every American against shark attack (so 300 million insured would be the "Z" according to my formula). So, in any given month I should expect to pay one claim for $3 million. But for my insurance company to survive I need to take in more in premiums than I pay out in claims. How much should my insurance company charge to each of my policyholders, per month, as a "True Odds" bet (initially assuming no overhead costs and no profit)? It's easy, simply multiply (1/300million) by ($3 million) and you get = 1 penny! So if all 300 million Americans signed up for my shark attack death insurance policy I would take in 300 million times one penny = $3 million and I'd have to pay out, on average, $3 million to the estate of, on average, one policyholder per month who dies by shark attack. But since I am running a business I have overhead costs and profit to make. And no company insures all Americans. So I can be simplistic and calculate all of my operating costs (employees, advertising, taxes, overhead as well as dealing with fraud etc. = which is "OC" in my formula) and add my profit margin ("PM") for my investors-shareholders and then divide that sum by the number of insured (which is "Z") to get the premium I must charge my policyholders. Consequently, I have to charge considerably more than one penny per month. How can I, the insurance company, extract greater profit as a business? a) I can charge higher insurance premiums. b) I can try to exclusively get people to sign-up who have a relatively low chance of death by shark attack (e.g. maybe the elderly in Colorado). That way I can take in money (in premiums) from people who are not likely have to have claims (no payout). c) I can try to reject as applicants for my policy those who are at greater risk for shark attack death (e.g. maybe scuba divers or people who vacation in shark infested waters). This way I can similarly limit the number of claims I have to pay out. d) I can somehow attempt to reduce the number of shark attack deaths for a lower cost relative to the number of claims it reduces (e.g. maybe by sponsoring "shark education" in resort hotels or maybe my hiring people to kill the sharks). e) I can wisely invest the insurance premiums that policyholders pay me to earn such a good ROI that I profit more between payouts. f)  I can create efficiencies in my business thus reducing "OC" and enabling greater profits ("PM"). g) or I can immorally & illegally attempt to getaway with not paying out the $3 million to each of the estates of legitimate policyholders who die by shark attack. My disgusting rationale might be that I can stall & hinder through the courts enough legitimate policyholders that I owe claims to such that some give up or some lose due to my great lawyers. If my stalling tactics & lawyers cost less than the payouts I legitimately owe then my disgusting scheme "works" in increasing profit. Now map that entire shark insurance analogy to the health care debate. For each possible sickness or emergency or other situation that requires medical care there is some likelihood of it happening (remember "1/X" from my formula?) and there is some estimated cost of a claim (payout = "Y") which results in the "True Odds" costs. In order to reduce premiums (i.e. contain "health care costs") we can do most everything that an insurance company can do to increase profits ("a" through "f" but hopefully not "g") and also we can reduce the profit margins (note that I consider "deca-millionaire" executive salaries to be de facto profit margins). SIDE NOTE: Please review arguments (and counter-arguments) that explain the true costs of action compared to inaction. Consider everything the non-partisan CBO (the necessary and recognized "referee" in all American policy debates related to economics) considered when it made its (conservatively-estimating) projections. Personally, I think the debate should first focus on those "True Odds". Someone please show me the website that calculates the "True Odds" premiums for every malady/injury/etc. and allows a user to create simulations of what things would/should cost if they only covered Disease "A" and "B" but not "C" . Alternatively this website should allow the user to "set a price" which will result in a limited collection of medical care services that would be covered for that price. I guess it could be a bit similar to those "Progressive Insurance" advertisements' offer to "Name Your Price" and they'll "build a policy to fit your budget". Then we can see what it costs to, for example, cover car accidents vs. chronic diseases (e.g. genetically-caused Crohn's or environmentally-caused Type 2 Diabetes) and thus people can identify & quantify what "rationing" they'd be comfortable with. Once we reach some sort of consensus on the "True Odds" we can then address (triage) the other factors that go into the price of premiums. Obama & the Democrats in congress just instituted a massive change in American Health Care (Insurance) based on fairly rosy forecasts in contrast to the unmitigated disaster the GOP predicted if it went through. We will see the future make one side more right than the other.