But It's Not Insurance

Insurance is a pretty simple concept, but health insurance seems to be in a class by itself. As currently implemented in the United States, Health Insurance is not insurance.

You purchase other sorts of insurance to protect yourself from an unlikely event, an event that would cause you a large loss, a loss that you would have difficulty overcoming.

You insure your house, for example, in case of fire or other damage. Your are responsible for a certain amount of the cost of repairs for damage (the deductible). You pay a small premium for the insurance compared to the price of the house because: 1) it is not likely that your house will burn down. 2) the insurance company knows you will have to pay the deductible. It is in your best interest to maintain the house so it doesn't burn down, because you will have to pay the deductible if it does.

Your deductible on insurance (any kind) should be as much as you could pay yourself from either savings or a short term loan (a loan that you would pay back quickly in just a few years or less). If your deductible is too low your insurance premium will be high, because it is more likely the insurer will have to pay out. In general, if you could easily replace something, there is not much sense in insuring it, save the money and just buy a new one (see post on service contracts).

With that as background, I contend that the Health Insurance system now in use in the United States is only partially insurance and mostly something else. That is why it has become so expensive and unmanageable. Our current Health Insurance is three things:

1. A Health Service Contract that pays the routine maintenance on you (doctors, medicine and so on)
2. Catastrophic Coverage, that pays for unusual medical care: accidents or serious illness that don't happen all the time or to everyone: accidents, cancer and other major problems.
3. Aging Health Coverage

The second item, Catastrophic Coverage, really is insurance, and is a good idea. It should also be relatively low cost.Young adults, for example, have little short term risk and a long time to pay for some health costs. We want them to be protected from the giant unlikely events: an accident or sudden disease. We don't want young people to become bankrupt or financially crippled because of illness.

Aging Health coverage is not coverage for an unlikely event like insurance. Instead it concerns something that is going to happen. Everyone gets older and then usually needs more health care. Not always, but usually. Older people don't expect to have a stream of future earnings (or perhaps any current earnings). Some, perhaps many, have limited means before illness. Since these expenses are likely to happen, we have to work out some way to pay for it, or save for it.

That leaves Health Services, the first item. We have somehow arranged that every medical expense will run through the insurance system. It is as if you submitted a claim to your car insurance company every time you changed the oil, or had a tune-up. Or you had to get pre-approval from your home insurer to paint the kitchen or install on new bookcase in the living room. That would start to make everything get more expensive.

Health Insurance policies are not in the main sold to individuals, they are sold to employers. An individual either has no choice or a choice between just a few insurers. And and individual can generally not change policies except at certain times.

This situation places health insurance companies in an interesting position. They have a steady stream of premiums, but no real prospect of increasing sales to existing clients. So, if they are going to increase profits they can either increase premiums (which is often restricted contractually) or reduce costs. In this case, reducing costs means paying providers lower rates or denying coverage. Denying coverage means having lots of examiners on staff, which increases costs.

In other types of business cost control is very important, but the big driver of increased profit in other businesses is selling more: getting more customers, and selling more to existing customers.

If the business model of Health Insurance is fundamentally changed, we will have better health care, lower costs and more profitable insurers.
---