That’s Not Insurance

I caught part of an “Alternative Radio” broadcast a few days ago as well.

In it, the speakers complained about insurance companies not wanting to provide coverage for people’s already-existing health problems and asserted that corporations wanted to create a world in which there were two people: healthy people with insurance and sick people unable to pay for their care.

Um, no. Look, people, ‘insurance’ means more than just “the thing that pays for my healthcare”. It’s a method of hedging against unforeseeable disasters.

Imagine a world in which people run the risk of their house burning down with all their stuff. That’s pretty devastating. The cost of replacing all that stuff, or even just the stuff that’s necessary for residence, can be prohibitive. Unless you’re very wealthy, the expense can be prohibitive.

So a group decides to offer people a deal: if the people pay the group a small amount, the group will pay them if their houses ever burn down by accident or someone else’s malice. (For obvious reasons, they don’t want to encourage people to burn down their own houses.)

That way, people who tragically lose their homes don’t experience complete catastrophe. Most people don’t get anything concrete out of the deal – what they get is a safety net. If you never fall, you never really use it, but it’s good to have one there and ready for the unexpected.

Assuming the group was completely efficient and had no overhead, the amount they’d charge would be equal to the total amount they paid out (or the amount they expected to pay) divided by the number of people participating.

If some people were at greater risk of fire accidents – they smoke, or they like lots of candles, or they’re circus performers who use a lot of flaming hoops, etc. – the group could reasonably expect them to pay more to cover the statistically-greater payoffs they’d get. Likewise, people at a lower risk could be offered a lower required payment.

In reality, there is overhead. Also, most of us want to do more than merely break even. We have things we want to pay for, and we need money to pay for it. Result: we desire profit. So the group would have to charge more than the absolute minimum, but only enough that people would be willing to accept.

What if someone’s house were already burning down? Why would the group take them on? To be fair, they’d have to charge the owners of the burning house the exact amount they’d have to pay out – plus overhead – and what use would that be?

We’ve gotten used to thinking of health insurance, not as a safety net, but as the means of paying for medical treatment. But insurance by its nature can’t pay for basic services everyone is expected to use! If everyone who purchases the insurance uses it to pay for regular scheduled checkups, the cost of having the insurance has to go up by precisely the amount of a checkup. If you know you’re going to have to have expensive procedures or treatments, you’d have to pay for them fully, because insurance only mitigates potential risk, not certain cost.

Part of the problem is that we’ve permitted ‘insurance’ to be a middleman that takes payments from employers and gives them to healthcare providers. But more than that, we’ve embraced the idea that healthcare is some kind of natural right or interest that society is obligated to provide.

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One Response to “That’s Not Insurance”

  1. This is the distinction Arnold Kling makes between insurance and “insulation”.

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