HEALTH INSURANCE IS NOT INSURANCE 

By Bill Dunn 

During the recent discussions about health care reform and health insurance, one thing seems to have been overlooked: the actual definition of insurance. In its most basic form, insurance is defined as the transfer of risk from a small entity for a fee, to a large entity that can absorb the financial impact of the risk.

A perfect example is homeowners’ fire insurance. There is a risk that my house might burn down. If that happens, I cannot afford to rebuild the house from my savings account. (Most of my savings these days is in the form of spare change behind the couch cushions, which presumably would perish in the fire.) But I can afford a few hundred bucks each year, which I pay to an insurance company. This company collects similar premium payments from thousands of homeowners, and if any of us has a fire, the insurance company agrees to pay the repair costs. The risk (fire) has been successfully transferred from a small entity (me) for a fee, to a large entity that can absorb the financial impact of the risk (the insurance company).

The key is the statistical certainty that not every insured house will have a fire. If this were to happen the insurance company obviously would go bankrupt.

Health insurance used to work this way, providing coverage for risks that the average citizen could not afford to pay out of his savings account, such as major surgery or cancer treatment. But then somewhere along the way the term “health insurance” became interchangeable with the term “health care.” Americans began to demand that health insurance must pay for every medical product and service, even routine exams and prescriptions.

The whole concept of true insurance—risk transfer and statistical analysis—has been thrown out the window. Everyone should get periodic medical exams. Everyone will need prescription drugs at some point. In other words, everyone will file a claim. This is no longer real insurance; it is simply a situation where we demand someone else pay our bills.

What if we treated homeowners insurance the same way we now treat health insurance? Imagine demanding the fire insurance company must pay the bills when we remodel the kitchen or put new wallpaper in the bathroom. Ludicrous, right? But this is exactly what we do with health insurance. We now live in a society where people think nothing of spending $300 for a tattoo, but are livid if they have a $10 out-of-pocket co-pay on a bottle of antibiotics (often needed to fight the infection of the botched tattoo).

The true reason health care costs have skyrocketed over the years is because the consumers of the products and services—us—have no idea what it costs. And we don’t care what it costs since someone else pays the bills.

Americans should pay for routine health care services the same way we pay for tattoos and new wallpaper: out of our own pockets. We can purchase insurance policies to cover the really catastrophic stuff, like major surgery and cancer treatment, or after we’ve paid a particular amount out-of-pocket during the year, say, five or 10 grand. This would introduce market forces to the health care industry for the first time in ages, which will drive prices down.

For those who are truly destitute, the government can issue “health stamps,” which can be used to pay medical bills in the same way food stamps pay for groceries.

No matter what shape “health care reform” ultimately takes, if we do not incorporate these basic economic concepts, costs will continue to spiral out of control. This is because right now we do not have true insurance; we have whiny entitlement.