Health Care: Insulation vs. Insurance

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One concept of health insurance is a policy that pays for just about everything. That is insulation, not insurance.

Another concept of health insurance is catastrophic coverage--you pay for everything until you reach a high "deductible" of, say, $10,000. That is closer to real insurance.

Origins of health insurance

Suppose that we had "blue eats," where you pay for restaurant insurance, and then it's all you can eat

Real insurance, e.g., fire insurance

events occur rarely, are expensive, and are unpredictable

exchange small premium for occasional big payoff

an example of real health insurance

Yearhealth expenses5-year totalinsurance pays
2006$2,000--$0
2007$2,000--$0
2008$2,000--$0
2009$6,000--$0
2010$10,000$22,000$0
2011$10,000$32,000$2,000
2012$10,000$38,000$8,000
2013$5,000$41,000$11,000
2014$2,000$37,000$7,000
2015$2,000$29,000$0

What about elderly?

Medicare is like insulation

High cost predictable--on average $88,000 from age 65 until death

Require people to save, say $100,000

Remaining Lifetime Catastrophic Health Insurance

Pay $25,000, have limit of $75,000

If your remaining lifetime cost is more than $75,000 then insurance pays the rest

Advantages of real health insurance: can target assistance to the poor; reduce incentive for people to over-consume; insurance more affordable; less claims processing; people don't lose their health insurance just when they need it