Health insurance has become an increasingly important part of people’s everyday financial lives as well as an increasing focus of governments’ public policies around the world. In many conversations about health insurance, the concept is misunderstood. All too commonly, many confuse health care with health insurance, yet the two are fundamentally different economic and political concepts. A closer look at what health insurance is, what it does, and how it has evolved can help us differentiate between insurance and care.
Insurance and Risk Mitigation
In its broadest form, insurance exists to give people a safety net to fall back on in case of a large, unexpected calamity. For instance, people who take out life insurance policies will often ensure themselves against an unexpected and untimely death, usually for a large amount of money. The insured party (the person covered by the policy, which may or may not be the person who bought it) receives protection by the policy and hope that it will go unused.
In the case of life insurance, the insured party and the beneficiary are different people. If the insured party dies, the beneficiary will receive the award set by the insurance policy. For instance, if an insured person has a $500,000 life insurance policy and dies suddenly from a cause covered by the policy, the beneficiary will receive that $500,000 payment.
The idea behind this kind of insurance is to limit risk. By having many people take out life insurance policies at the same time, those who never use the policy will pay for it, having the peace of mind knowing it’s there if they need it. Those who do use the policy will be entitled to an award funded by other people who take out insurance policies. In this way, insurance is kind of like gambling: you are placing small, periodic bets on something disastrous happening, all the while hoping you will lose your bet.
Health Insurance is Different
Health insurance is different for a few reasons. For one, the insured party is also the beneficiary—although insured parties can also add other people to their policies (family members, most commonly), but they are also considered insured and beneficiaries. On top of that, health insurance is different than all other insurance types, which makes it a more complicated and expensive product.
In health insurance, the idea is very similar, but it is more common than other forms of insurance. Unlike car or life insurance, which most people hope they will never use, health insurance sees frequent use for routine health examinations, tests, and so on. This is how countries with private health insurance programs, like the United States or China, operate; individuals purchase health insurance that will in turn pay for their routine health care, in addition to providing coverage for a major and expensive health disaster, like heart disease or cancer.
Because the use of health insurance is far more than other kinds of health insurance, it is usually much more expensive. For instance, life insurance policies might cost $50 per month for $500,000 of coverage in the United States, while basic health insurance plans can cost five times as much. While most recipients of the health insurance plan will never use as much as those who benefit from that big life insurance policy, most will use some of it. This makes the cost of covering everyone with health insurance more expensive, in turn causing prices to rise.
Limiting Upfront Costs
Because of the higher price of health insurance, companies have begun to offer different levels of coverage to make the monthly payments for coverage more affordable. This has resulted in insurance policies of varying levels of coverage, including policies that limit their coverage to certain conditions, for example, many health insurance plans in South Korea do not cover for many types of cancers. This results in the development of supplemental insurance for specific things; insurance that covers only for cancer has grown to see hundreds of over a billion dollars in revenue in South Korea per year.
Another way to limit upfront costs is to set a deductible. This is a limit, expressed in an amount of money, which the insurance will not cover. For instance, an insurance policy with a $1,000 deductible means the insured party will get treatments paid for by the insurer after the insured party has paid $1,000 out of pocket for the medical expenses. In some cases, these deductibles are only for special treatments, and in others, they apply for all treatments, including prescriptions, routine doctor visits, and so on. In some cases, policies will have different deductibles for different types of coverage, making the health insurance program very complicated and difficult to understand.
Single-Payer and Government Mandated Insurance
The attempt to limit upfront costs is both good and bad for consumers. On the one hand, they pay less at the beginning; on the other, limited coverage and high deductibles mean that in many cases people find themselves with too little coverage, and a surprise medical problem can result in financial ruin.
This is one problem, which has grown in recent decades in the developed world. An additional problem has been the growth in the cost of healthcare, which has several causes. This has made health insurance more expensive and driven more people into lower and lower levels of coverage. It has also encouraged some insurers to try to limit coverage more aggressively, to limit payouts and boost profits.
Several governments have gotten involved in health insurance markets to fix this problem, with mixed results. These interventions are usually politically controversial. The most high profile government intervention of recent memory was the Affordable Care Act in the United States, also known as “Obamacare.” This law limited what health insurance companies can and cannot do with coverage. It also required all Americans have health insurance; those that cannot afford the coverage would get subsidies, or even have all costs paid by the government. According to the Congressional Budget Office, this law was revenue neutral, meaning it effectively paid for itself.
This was possible because of the government mandate. One of Obamacare’s most controversial features was stating that every American would have to get health insurance. This was important because in the past, healthy people not offered insurance through their employers chose not to get insurance. Unhealthy people also found they could not qualify for insurance, could not afford it, or simply chose no insurance. At the same time, American hospitals by law are required to provide care in emergencies, even if the patient cannot and does not pay for the care. As a result, many uninsured people would end up getting care in hospitals, and this would raise the cost of health care, which would in turn raise the costs to health insurance companies.
In other countries, governments solve the problem of getting uninsured healthy people in the system by making a “single-payer” insurance program that covers all citizens. In this system, the government uses money from tax revenue to pay for health care in the country, and uses things like wait lists for non-life threatening procedures and encourages wealthier citizens to get private insurance as a way of rationing care. In recent years, these insurance programs have become more costly and been challenged by politicians who wish to move towards other systems with more private insurance.