Insurance, What It Really Means
America has become known worldwide for a high-quality failing health care system. As a foreigner moving to the United States, the enormous cost (to consumers) of health care and dental care are mind-boggling. Even with very expensive health care insurance offered through employers (and, lately, by government decree), one ends up paying quite a bit out of pocket. And pretty much all insurance policies include a maximum lifetime benefit amount as well as a cap for treatments. This raises a very interesting – but seldom raised – question: what is insurance?
To make sure we are all on the same page here, let’s compare private health care insurance between two countries I have recent extensive experience living in: the United States and Sweden. In the US, my health care insurance costs some $200/month and covers, after a $20 deductible, about 80% of treatments with a lifetime benefits cap of $250,000. In Sweden, I would pay about $1,600 per year for worldwide coverage of any “reasonable” (meaning approximate market prices, that is non-usury level) expenses with no lifetime benefit cap but limited to $300,000 per treatment (only if outside of Sweden) and with a higher deductible ($90).
So here we have it, the difference should be obvious: the Swedish private health care insurance costs less and covers more, but comes with a higher deductible. What is interesting here is not the difference between insurance policies, but what insurance actually is.
Let’s look at another example: dental. For the three policies I can choose from via my employer, they all cover the first outlay and have a cap for each procedure and calendar year. The point I wish to make in this essay is even more obvious in the dental insurance case, since coverage is without (or with only minimal) deductible and any treatment quickly reaches the benefit cap. One of these, for instance, covers 100% up to $150 and then 50% up to $1,500 – and then nothing. This is not insurance.
Insurance means risk-sharing between those carrying insurance so that costs are covered should something happen. Insurance is a collective pre-payment to pool resources to cover for whoever is the victim of an unlikely event. Even though it is impossible to calculate for instance whose house will burn down, we can be statistically semi-certain that X houses in a certain area will burn in any given year. This means that we, collectively, can put a small amount in a resource pool to pay for whoever’s house burns down. It is more effective than everybody saving on their own.
If health care insurance worked this way, it would mean that we pool our resources (our premiums) to cover the costs of unlikely events – such as accidents, illnesses, and so on. In order to lessen incentives to act carelessly when one has insurance, the insurance company may enforce a deductible, differentiate premiums, and so on. This is how an insurance company can make sure that it as well as its customers aren’t ripped off by someone intentionally leading a very risky life and so taking advantage of the insurance coverage.
Coverage should then be very limited for routine screenings, health checkups, flu shots etc – to the degree the insurance company doesn’t think this is actually beneficial (by lowering the number of claims). But it should cover a lot (if not all) of the expenses should something happen – like a car accident, heart disease, or cancer.
There is obvious outlay and cost for annual health checkups, teeth cleaning every six months, and things like that. So there is no money in it and no benefit for insurance holders, since the cost is covered through the collective payment of premiums. If your insurance covers such standard, routine things it means your premium is higher by the amount it would cost you to do those things without insurance. There is no point with such an “insurance” – it is really just a savings account.
The only benefit is through policy – tax breaks for employers who pay insurance for their employees. The effect of such a scheme is really income redistribution from whoever pays taxes without insurance to those employed with insurance.
So what about the rare and perhaps unforeseen events? This is the real insurance, but this is where most insurance companies have a rather strict cap or upper limit. They even enforce a limit percentage to each treatment, such as 80% of cost. What this means is that you are really only partially insured and only if nothing really bad happens – because then you will reach your lifetime benefits cap. It is, in other words, a partial insurance (80%) that doesn’t provide coverage if something really, really bad happens.
The effect is that only those with high income or lots of money in the bank can afford to get sick. A poor person with such insurance cannot afford to pay the 20%. He or she will of course be utterly unable to pay the full amount above the lifetime benefits cap. Interestingly, “the rich” can afford it – and even afford insurance with higher coverage (higher premium) and therefore (through tax breaks) benefit more. So this type of insurance, due to being subsidized through tax breaks, is effectively a redistribution from the poor to the rich.
But there’s more. The prices you see when you get the statement from your insurance company are the list prices, but not the prices the insurance company pays. If you have ever been to a hospital without insurance (or, which happened to me, they failed to enter the insurance information properly), you get a statement from the hospital with rather extensive standard “rebates” because you don’t have insurance. This is likely what your insurance company pays too, but they report the higher amount to you – so you are likely to reach the lifetime benefits cap much sooner than is actually the case.
This is an indirect incentive for insurance companies to have their insurance holders seek care as often as possible. This is especially the case for those in poor health – if they seek care early and use their insurance for all kinds of standard or routine tests, they will reach the lifetime cap sooner. And then they’re out of the picture and won’t incur more costs for the insurance company. This is a bonus if they (their employers) keep paying the premium while those who are generally healthy do not seek care on a regular basis. If this type of tendency can be increased, then insurance companies effectively redistribute from the sick to the healthy (who have the benefit of remaining coverage should they get sick).
Most of these problems aren’t inherent to the insurance business, however. They are almost exclusively the result of policy, and politicians wishing to “help” the poor by legally (or by threats) requiring insurance companies to have low deductibles, cover routine checkups, and so on. And, at the same time, creating a system where health care providers must carry massive insurance coverage in the case they might (will) get sued because their treatments didn’t work out. So prices are inflated, list prices are further inflated (since government systems will only pay standard amounts based on list prices), and – naturally – less care is produced.
A real insurance would likely look more like the one referred to above that is offered in Sweden: no (or rarely effectively) upper limit and higher deductible. Insurance companies – were there a real market for such products – would compete by offering individualized packages (high deductible-low premium or low deductible-high premium, or anything in-between) and streamlined, efficient bureaucracy.
They might negotiate deals with providers, as the “network” providers many insurance companies offer today, but doing so is very costly unless the insurance company’s market is geographically restricted. The negotiations of today, which result in different coverage for in-network and out-of-network treatments, are the result of market intervention that creates artificial economies of scale and thereby force actors to become bigger. With only few big hospitals and few big insurance companies, they are more likely to negotiate special deals to avoid costs of real competition – and government is happy to support this, since corporatism is easier with only a few big corporations than a free market’s myriad decentralized businesses with innovative, and individualized offerings.
Insurance used to exist locally and without corporations. For instance, workers collaborated in instituting sickness funds to care for whoever was struck by illness and unable to work. So they put part of their salaries in a pool for the benefit of knowing they (and their families)supplied insurance coverage.
Try paying your insurance privately with your already taxed money instead of having your employer pay for it. It is simply not feasible, and this is because the system is messed up. And we get a messed up, ill-functioning market as a result.
Structured, rational thinking about community, cooperation, and the market