Health Insurance Confusion

Insurance. Spray paint and oil on canvas. John...

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The point of insurance is to insure against the unexpected. You are willing to pay a premium, literally, to avoid a large unpredictable expense. But no one wants to pay a premium for an expected, predictable expense. And when you’re old, getting sick is predictable and expected. So when you’re old, you’d be unlikely to buy private insurance.

But it isn’t health insurance that keeps you healthy. It’s health care. Would old people be able to buy health care? Sure. It just wouldn’t be free.

via Health insurance for the elderly?.

The debate over national healthcare is far from over. It’s likely that the next Congress will try to fix or scrap the huge collection of initiatives that’s called Obamacare. The whole discussion will be clouded by the use of the term health insurance. What we call health insurance isn’t actually insurance in the ordinary sense of the word (except for the catastrophic insurance approach, which actually is insurance). What we have is pre-paid healthcare where the input (what we pay) is less that the output (what we spend). This is clearly unsustainable. It’s unclear to me whether Obamacare fixes the problem or makes it worse, but given it’s open-ended nature, I fear the worst.

Our confusion with insurance comes from the fact that we want to socialize healthcare costs, i.e. everyone contributes to a common pool and is paid from a common pool. That sounds like insurance. The critical difference is that insurance pools risk. With “health insurance” we are pooling certain spending.

Experience shows that pooling risk can be made to work. Economics shows that pooling certain spending, where each participant can spend as much as they want, can’t work. Our problems with the cost of health care aren’t primarily due to the mechanics of our coverage systems. Our problems come from a fundamental misunderstanding of insurance concepts.


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