By Evan Falchuk

Ezra Klein is back with another post showing what happens when you form strong opinions without knowing very much about your subject matter.

Today, he’s here to tell us the “truth” about the insurance industry.   He succeeds – but only in making himself look very silly.

Ezra is horrified to learn that the financial results of health insurance companies are driven by how much money they pay for health care.  The insurance industry is driven

by “two key figures, earnings per share and the medical loss ratio. . . That is the ratio between what the company actually pays out in claims and what it has left over to cover sales, marketing, underwriting and other administrative expenses and, of course profits.”

Think about that for a moment.  The industry literally has a term for how much money it “loses” paying for health care.

Here’s the problem:  the word “loss” is an insurance industry term that dates back at least to the 17th century, when the first maritime insurance contracts started being underwritten at Lloyd’s Coffee House in London.  A “loss” in insurance is just the word that is used to describe the payment an insurer has to make when the insured event takes place.

So, if I insure a ship, and it sinks, my “loss” is the cost of the ship.  If I sell home insurance and a tree falls on the roof of the house, my “loss” is what it takes to fix the roof.  And if I insure someone’s health, my “loss” is how much money I pay for the insured’s medical care.  It doesn’t matter if the insurer is for-profit or not-for-profit.  It doesn’t matter if the insurer is in the United States or abroad.  “Loss” is just the word used to describe these kinds of costs.  A “loss ratio” is just the quotient you get when you divide these losses by the amount of premium you collect.

Ezra is willing to concede that while insurance companies are not “evil,” their focus on trying to make money causes big problems.  I guess he’s never heard of the many not-for-profit and mutual insurers that cover tens of millions of Americans without earning a profit– and who pay close attention to their loss ratios, too.

But you know who else tries to control how much money they spend on health care?  Medicare, Medicaid, and all of the other government sponsored health programs.  In fact, minimizing “losses” is just a fancy way to say what most people agree should be the top priority for health care reform: controlling costs.

But this is no time to focus on inconvenient facts.  Ezra would much rather talk about….heroin.

The reason we generally like markets is that the profit incentive spurs useful innovations.  But in some markets, that’s not the case.  We don’t allow a bustling market in heroin, for instance, because we don’t want a lot of innovation in heroin creation, packaging and advertising.

Wait until Ezra realizes that the publicly funded health plan he supports will also have to manage a loss ratio.

Health care is serious business, and reforming our health care system is an important national priority.  We need more serious, informed voices guiding this discussion.