I recently went shopping for health insurance, and it reminded me of the reason for health insurance. Health insurance is intended to smooth expenses.
Health insurance is identical in concept to a home mortgage, which smooths the expense of a house over 30 years. Health insurance is identical in concept to a student loan, which spreads the costs of higher education across 10 years of (hopefully) higher income production. Health insurance is identical in concept to savings, which can be paid into across multiple years and then used in times of need.
This is true in every country, from Bangladesh to the United States. Expense smoothing is the purpose of insurance.
Thus, it is not realistic to expect that the cost of health insurance should be less than the cost of predicted health care. There is no free lunch in this system. If the last 6 months of life, on average, will cost $100,000 in hospitals, doctors, procedures, and drugs, that $100,000 needs to be paid into a health insurance system for the 30 years before that (or about $333 per month for 30 years in this example, just to pay for those end of life health care expenses).
Health insurance is NOT health care. Speaker of the House John Boehner’s quote below is indicative of the confusion. I suspect he is doing this on purpose:
“I hope the House will act next week to repeal the job-killing health care law so we can get started on replacing it with common-sense reforms that will reduce the cost of health insurance in America,” said Boehner.
Health insurance is driven by the costs of health care. 75% minimum of insurance premiums go to pay insurance claims, while 25% is divided between administration and profit. Perhaps you think we could reduce those administrative costs and profit. However, even if we removed the entire administrative costs and profit, health care inflation would get us back to current costs in just 3 years.
You wouldn’t want to eliminate all those administrative costs anyway. Let’s pretend that you and 100 of your friends decided to form your own insurance pool. Each of you pays $500 per month into a common account, and then you just withdraw it when you have medical needs. That’s $50,000 per month. Plenty of money.
But now, out of those 100 people, there will pretty much be someone sick every month. Based on national averages, your small fund will spend about $38,000 per month on health care, leaving $12,000 per month. I don’t know how you feel about 100 of your friends, but I would rather hire someone to keep track of 100 people’s doctor’s bills and monthly payments than rely on 100 people busy doing other things. So that will consume some money, especially if some of your friends occasionally call up to complain.
Add one more small expense. There is always the chance that one month a lot of your friends will get sick. Let’s say the shrimp was off at the local Kiwanis club gathering, and a bunch of people showed up in the ER at 3am on a Sunday morning. Our fund might have enough to pay for such an event. Thus, we need to purchase “reinsurance” which is exactly what it sounds like. Our little insurance fund needs insurance to cover it’s variability, or else we might not be able to make our payments at any given moment.
Insurance companies need some administration, and even some profit, to make sure they can give us the service they want. We can’t eliminate it.
Insurance costs aren’t the problem. Even health care isn’t the problem. The problem is us. It’s complex, but let’s start with the average American male is 25 pounds heavier in 2002 than in 1960. We are the heaviest nation in the world. That brings all sorts of health issues.