Do you remember when then-candidate and later President Obama told that tear-jerking about his mother, who spent her last months of life battling evil Big Insurance over whether her cancer was a pre-existing condition? Yeah, I didn’t either, because I try not to listen to stump speeches full of lies, but apparently he said it…a lot. Only it wasn’t true (Hat-tip: Megan McArdle):

During his presidential campaign and subsequent battle over a health care law, Mr. Obama quieted crowds with the story of his mother’s fight with her insurer over whether her cancer was a pre-existing condition that disqualified her from coverage.

In offering the story as an argument for ending pre-existing condition exclusions by health insurers, the president left the clear impression that his mother’s fight was over health benefits for medical expenses.

But in “A Singular Woman: The Untold Story of Barack Obama’s Mother,” author Janny Scott quotes from correspondence from the president’s mother to assert that the 1995 dispute concerned a Cigna disability insurance policy and that her actual health insurer had apparently reimbursed most of her medical expenses without argument.

But really, this isn’t the big lie. The big lie is that banning disqualification over pre-existing conditions is a good thing. Even Republicans have for the most part bought into this lie, because it’s such an easy, emotional issue to demagogue. The problem is that such a ban completely destroys the entire insurance model.

What is insurance? It is a pool of people who share a common trait: they have a very low chance of incurring extremely high costs. Rather than risk being stuck in a position where they incur medical costs they cannot afford on the off chance that they suffer a tragic accident or equally expensive medial disaster, they hedge their bets and pool their resources so that they can replace their low-odds, high cost risk with a high-odds (100%, in fact!), low cost alternative. In other words, by sharing the risk they are guaranteed to pay some cost, but avoid the potential of paying the astronomical cost if they should be unlucky.

Here’s where the issue of pre-existing conditions comes in. This system only works if the initial odds of incurring a high cost are low. If the risk is high, meaning the higher costs are incurred more frequently, then there simply are not enough resources to pay the high costs. The entire model thus breaks down, putting everyone’s financial future at risk. It would be like getting homeowner’s insurance after you’ve already been robbed, and then expecting everyone else with the same policy to pay your replacement costs. I’m sure you can guess why this wouldn’t work. Though in fairness, this is the problem which Obama and the Democrats attempted to address with the individual mandate. The problem there is that it’s not only unconstitutional, but also fails to address the real issue.

Rather than destroy the entire idea of insurance by replacing it with a dysfunctional medical pre-payment system (an objective which the government has actually been working on for decades now through price-controls, mandatory coverage and community rating systems), we should look at why so much medical care is such a financial burden, and thus making insurance necessary in the first place: out-of-control-costs. The excessive medical costs stem from the fact that government has unshackled the industry from the free market, leaving now downward price pressure mechanisms. The third-party-payer system, perpetuated by government programs such as Medicare and distortionary tax policy which encourages employer provided insurance, should be solved and the market made free. The result would be lower costs and greater access. For those few who remain either too poor, or were born with an expensive ailment (which doesn’t fit into the insurance model), help could be provided within the framework of the market (through vouchers or other redistribution that doesn’t involve restructuring the industry), rather than through it’s destruction.

Unfortunately, so long as sad stories about evil insurance companies that deny Grandma coverage can win votes, politicians will have incentive to keep using them, even making them up when necessary, instead of actually solving the problems at hand.