Insurance Isn't Really Insurance

Estimates of Americans without health insurance hover between 15 and 20 percent - depending on the source (much of this is a difference in whether you ask about being uninsured presently or being uninsured at any time during the past year). According to the CBO, Obamacare will expand coverage to some 25 million people through exchanges and 12 million people through Medicaid expansion (a net of 27 million fewer uninsured because some people will lose employer coverage and others will lose existing non-group coverage). By CBO's estimates, this cuts the number of uninsured down to around 10 percent - about 30 million people.

This coverage expansion, however, masks some confusion about what health insurance really is. Beth Haynes, Executive Director of the Benjamin Rush institute points out the underlying problem:

Think about your auto, life and homeowner's insurance. Each of these is designed as a means to pay for unexpected, unpredictable, very expensive occurrences outside of the control of the policyholder... So what is it we have that we call health insurance but isn't? We have the prepayment of medical expenses. We expect our "insurance" to cover predictable, relatively inexpensive events like health maintenance checks, minor illnesses and injuries -- and to pay for them with minimal out of pocket spending.

Unfortunately, almost none of the discussion about America's health care woes attempts to clarify the point that insurance is designed to protect against catastrophic events - not cover every day, basic expenses. As Paul Howard and I have written previously, there isn't much logic in forcing "Cadillac" coverage (comprehensive coverage with little out-of-pocket spending) on a person that only needs coverage for the most catastrophic events (a young, healthy person, who can afford to cover a basic doctor's visit once a year but wants to hedge his bets against an unexpected cancer, for instance).

Because insurance companies are required - currently by states, and come 2014 by federal regulations - to cover basic expenses with minimal cost to the individual, the only place to shave costs remains in covering catastrophic episodes - the ones that tend to cause medical bankruptcies.

The problem is rooted in the idea that we can cut costs while offering more expansive coverage - you can't have your cake and eat it. More expansive coverage by definition means spending more money, regardless of who is paying. The fact that many people under Obamacare won't bare the full weight of their medical costs doesn't change the underlying price being paid for an inflated "insurance" product.

Think of it this way: you can get cheap auto insurance for under $100 a month; it will likely have a high deductible (say, $2,000) and no auto insurance covers maintenance like oil changes and tire rotations. But if your car gets totaled in an accident (which shouldn't happen often), you shell out the $2,000 deductible and the insurance company pays for the rest. That's how insurance works - except in the health care sector. Subsidies under Obamacare will mask the true cost of the law, but won't fundamentally change the fact that American health insurance isn't real health insurance at all.



You make some excellent points. You mention that insurance companies will be required to cover basic expenses and therefore may shave costs for catastrophic events. But with limitations on annual and lifetime out-of-pocket expenses, how will insurance companies do this? Will they limit the number of treatments? Will they require cheaper procedures and cheaper drugs? Will they require step therapies? Or will they simply increase their premiums? Any thoughts on this? Thanks.

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by Paul Howard, Yevgeniy Feyman, March 2013

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