I have chronic heartburn and I have to take medication for that heartburn. The best drug that works for me is Nexium. But, I don't take that because my insurance co-pay for it is too expensive. If I did take that, I would only have to take one per day.

Because Nexium isn't a preferred drug on the insurance policy, I have to take two per day of Prilosec (or its generic equivalent). So, instead of 30 pills per month, I take 60 pills per month. If I miss a pill, I have a horrible few hours until the next pill kicks in.

I thought I would do a little research on what the real cost is.

The total cost per month for my prescription is $153.99. Because I have a reasonable insurance plan, my co pay for that drug is $10.00 and the pharmacy is proud to say that I "saved" $143.99.

I decided to look at Amazon.com for comparisons.

Here is what I found. I can buy my drugs over the counter, with no prescription, the brand name version Prilosec OTC for $32 per month. But, the insurance company doesn't pay anything; I am responsible for the full price.

I can also buy a generic version of the drug for $26 per month. Again, the insurance company is not willing to pay anything, so I have to pick up the full tab.

For the longest time, I chose, like most people do, to have the insurance company pick up the cost. I figured the economic choice is simple. I can pay $10.00, $26 or $32 per month. I've always figured I paid $600 per month (now, $1,000 because of Obamacare) for my plan, I was going to use it to it's fullest.

Why should I pay 3 or 4 times the cost when I already am paying my insurance company so much to do that for me.

Which would you choose?

I find this fascinating because they are the exact same drug. Exact same dosage. Different package and different marketing route.

I think my head will explode if I hear one more politician say that we need health insurance for everyone. I am at the edge of dumping mine because of stupid pricing schemes like this one.

I do understand that one of the key reasons for this pricing scheme is that there is greater overhead buying through an insurance company. The pharmacy essentially has to finance your purchase until they are reimbursed. The insurance company has an administrative staff that makes sure the claim is within plan. The accounting department has to transfer the funds.

All the while, there is a greater burden put on the system.

I know that it will take responsible consumers to change the system and not abuse the system. As a result, I now pay more out of pocket for my prescription instead of going through the insurance to get it.

Hey, insurance company, I'll tell you what. I'll give you a $30 co-pay for a six month supply if you let me buy the generic over the counter stuff... I'll save $252 per year and you'll save $1,595.

Oh... they really didn't save me $143.99... they saved me $16.

One last thing. Did you know that most insurance plans don't actually pay for your prescriptions drugs? Most of them actually just roll the cost of all prescriptions paid last year into a premium increase this year. So, by being irresponsible in using the prescription drug insurance in this way means that everyone on the plan pays more down the road. Cool, huh?

Hold your horses. I am going to talk about health insurance.

However, I am going to avoid waxing too political... primarily because I am tired of the politics surrounding a financial decision. I am tired of the Democrats accusing the Republicans of being partisan and vice versa.

I think that if people understood that health insurance is a financial decision and not a decision based on "caring" or "compassion" then we would probably come to a solution to our problem. In fact, if people really thought about it, they would never want insurance but simply pay their own bills as they come up.

The premise of this post is that the problem with the health care debate is the assumption that health care insurance actually costs less than just paying for the service.

So, follow me on a couple of key concepts.

What really is insurance?

Let’s take just a moment to understand what insurance is… I mean what it is at the core.

The primary purpose of insurance is to even out risk among the participants in the program.

It is not a savings plan.

It is not a cost reduction plan.

It is not a discount services plan.

It is a plan that everyone in the group pays in to in order to spread risk out among its members.

Think of it this way. If my cost is low and yours is high, we average it out and pay the same amount. That means I pay more than I should and you pay less than you should.

Sounds very socialistic, doesn't it? That's because that's exactly what socialism is.

Insurance companies are not charities.

I don’t know what it is about politicians that think that if an insurance company makes a profit they are root of all evil. They have shareholders. They have employees that need to make money.

They have expectation of profit.

In order for them to stay in business and even provide the insurance at all, they need to turn a profit. If they don’t turn a profit, then they aren't in business. If they aren’t in business, then they can’t provide insurance. If they can’t provide insurance, then you can’t buy it.

Insurance companies don’t make as much profit as you think.

There is all the talk about insurance premiums raising and being absolutely ridiculous but the reality is they don’t make a lot of money for what they do.

The challenge is that when the politicians talk about their profit, they use the total dollars of profit instead of the percentage of profit.

Let me give you one simple example.

If I told you that Blue Cross and Blue Shield of Mass. in 2008 had a profit of $105.4 million you might be upset that they made so much money. If you live in Mass, and were a client of theirs, you might even be very upset that your rates are increasing.

The reality is that in 2008, their revenue was $6,670.8 million, which means that their profit margin was only 1.6%.

I’ll tell you right now that if my company only performed at 1.6% profit I would probably not continue to run the company. It just wouldn’t be worth it for me.

Insurance company profit isn’t why your premiums are raising

When rates go up 10%, 20% or even 50% (mine went up 23% last year), it is easy to get mad at them because of the cost of health care.

Their profits aren’t the key reason their rates are increasing. In our example above, their profits decreased nearly 50% from 2007… so that can’t be the reason for increases in cost.

Remember, they are a company. They make decisions as a company. They want their employees to have a nice place to work. They want to have an impressive location for their clients and vendors to see them. They have executives to pay. They have costs associated with running a business. They don’t always make smart business decisions, but many companies don’t. (You can’t tell me the government will do any better because they have proven time and again they do worse).

So, why are insurance rates so high?

There are two keys costs that you pay for as an insured.

First, you pay for the administration of all the bills the doctors send. You pay for them to vet the bill to make sure they are in plan. You pay them to make sure that the money is being spent properly. You pay them to provide a service. You pay for government regulations and for them to lobby to keep those government regulations at bay. I promise, those costs are way higher than the profit of the company… way higher.

Second, you pay for fraud. You pay for the people who try to game the system. Those that get one service but the doctor codes it as something else (I know, I used to have a dentist that did it all the time).

Competition is virtually non-existent.

Because of government regulation, the barriers to entry for new insurance companies are very high. There is no way that consumers can purchase across state lines and consumers have very limited choices. Those regulations increase the administration costs. Obamacare claims it will fix that but it seems more and more likely it will squash it.

Think simply about this.

So, let’s try to sum this up a bit. If the insurance was simply a spread of the risk across all it’s members, minimally, 50% of it’s members would being paying too much for insurance because at least 50% of its members would pay less than they should be paying.

Now, let’s add to that the small insurance company profits.

Now, let’s add to that the regulatory requirements and fees.

Now, let’s add to that all the administration fees.

Now, let's add the cost of all the employees that have to process your payments including their support staff.

Now, let's add the cost of their facilities.

Now, let's add all the legal and political costs.

Now, let’s add to that all the mistakes that business leaders always make.

We haven’t even discussed when they pay far more for services than they should… I think I'll write on that next week. Nor have we even addressed the cost to the doctors for having to submit for payment, hope it gets approved, waiting for payment with no interest and getting their costs fixed.

This means that at a minimum of greater than 50% (I would bet nearly 75% of insured) pay too much for the health care they are getting.

Bottom line… you pay too much for health care because of insurance.

If you would simply save your money and pay directly for health care instead of insurance premiums, then everyone would pay their fair share. Those that need the care would pay only for theirs and those that don’t need it won’t pay for everyone else.

Sure, some people would pay more, but more than 50% would pay less than they currently are. But, if you add everyone’s healthcare costs up then they would total less because of not having to pay all those other costs.