Insurance Does Not Equal Health Care

First, we need to separate the question of how much we pay for healthcare from the question of who pays for health care.

In its most basic form, insurance allows individuals to pay a little to protect themselves from something that will cost them alot but has a low probability of occuring.

For example:  In my hypothetical, greatly simplifed world, I pay about $1,000 per year to insure my car.  If something catastrophic happened to my car, I would expect that to cost $20,000 that would be covered by my insurance.  If I had to pay $20,000 out of pocket, that would be a hardship for me.  So, I am willing to pay the $1,000 each year to avoid that potential hardship.  Insurance 'saves' me money if I have to make a major claim.

Insurance companies can do this because they have lots of people paying them $1,000 a year.  They pool our risk.  If 20 people buy insurance each year and one person in that group has a $20,000 accident each year, then the insurance company breaks even.

Of course, basic auto insurance doesn't cover every automotive expense.  Oil changes, new tires, car washes, etc.  I pay those expenses myself.  But becuase an oil change is only about $30, that's not a hardship for most people the way a $20,000 accident would be.

What if insurance covered oil changes - one $30 oil change per person per year?  The insurance company would expect to have to pay out $600 per year ($30 x 20 people).  How much would they charge their customers for this oil change insurance? At least $30, of course.

And because the insurance company has pay an employee to handle the paperwork, and buy them a computer to track the paperwork, and heat/cool the office in which they work, the company would have to charge their customers more like $32.

Why would you pay an insurance company $32 to insure yourself against an expected $30 oil change?  That doesn't make any sense.

Putting this conversation back in the health care realm - Why would you pay an insurance company to cover your routine doctor visits?  If you have a annual physical exam that cost $200, and so does everyone else, then you can expect your insurance for that exam to cost you MORE THAN $200 for the reasons we discussed above.

Therefore, I conclude that health insurance should be used to cover high cost, low probability medical events not every single medical expenditure an individual may incur.

Obviously, this first post ignore many issues about how insurance companies work (profit motives, ability to bargain for prices) and the fact that costs of medical services are very difficult to determine in advance.  We will cover these topics further in future posts.