Economics of Health Insurance
By Arnold Kling
In this essay, I contend that what most people think of as health insurance is not technically insurance, but something else.
An equivalent plan for restaurant meals would be that instead of paying for your meal, you would pay an annual premium to “Blue Eats,” which would in turn reimburse restaurants for their costs, plus a profit margin. Every individual member of “Blue Eats” would have an incentive to eat out a lot and order the most expensive items on the menu, because the cost is shared among all of the members of “Blue Eats.”
For insurance to work, your expenses have to be unpredictable, so that you contribute to the insurance fund most of the time. With predictable expenses, you would always be drawing from the insurance fund and never contributing to it, so that insurance is not possible. The only way to pay for predictable medical expenses is out of savings.
Insurance is possible when there are unpredictable expenses, not when there are predictable expenses. Again, there are plenty of ways that our society can arrange for other people to pay for your predictable expenses, but those arrangements are “split the check” or “pass the buck.” They are not insurance.
Read the whole thing. The essay attempts to clear up some very common misconceptions about health insurance.
For Discussion. How else one might explain the idea that for costs to be insurable, they must be unpredictable?