A Different Perspective on Health Insurance

By Peter DeHaan

It happened again.  It shouldn’t surprise me but it does.  In fact, it has been said so often that most people believe it to be true and accept it as fact.  What am I talking about?  Once again, a politician has stood up and impassionedly, emphatically, and convincingly asserted that we, as citizens of the United States of America, have a right to health care.

Wait a minute, we have a right to health care?  Is it in the Constitution?  Is it listed in the Bill of Rights?  No, health care is not a right, but asserting that it is serves as an effective rallying cry for those who feel under-insured.  People who do not enjoy this “right” imagine themselves as victims and in need of a champion to rescue them from their implied substandard existence.  Who will rescue them?  The very same politician who pointed out this grave injustice in the first place!  Political rhetoric aside, there are several other misunderstandings about health insurance, as well.

According to Webster’s, insurance is the “coverage by contract whereby one party undertakes to indemnify or guarantee against loss by a specified contingency or peril.”  The key words here are “contingency or peril.”  Let’s look at some examples.

I have insurance on my house that will replace it if it is destroyed or suffers major damage.  Without insurance, losing a home would be a financially devastating hardship.  My homeowner’s policy doesn’t cover repairs or maintenance; those are things I can afford to pay myself.

My cars are insured as well.  When they are new, I have full coverage in the event of a major accident.  The thought of needing to unexpectedly shell out tens of thousands of dollars to replace a car is sufficient justification to pay for premiums with full coverage.

If people had the same expectations of their car insurance as they do for their medical insurance, here is how it might work.  First, there would be a five dollar co-pay for gasoline.  It wouldn’t matter if the tank were half-full or empty; the cost of a fill up would be two dollars.  This would provide little incentive to buy fuel-efficient vehicles – we would merely want cars with bigger gas tanks!  Oil changes would probably not be covered, but that’s okay.  Just skip the oil changes and when the engine seizes up, there’s nothing to worry about, because engine replacement is covered!  If you hadn’t reached your deductible, you might need to pay twenty percent of the “reasonable and expected” charges for an engine rebuild, but that’s all.  Then there are tires.  Your policy would pay to have tires replaced every two years.  It wouldn’t matter if you needed tires or not.  So even though there is still usable tread on them, you have them replaced – insurance will pay for them.  Of course, if one of these new tires has a blow out before the two years are up, then you’re out of luck – and you get mad at your insurance company.  What about the cost to keep that old beloved car running?  Not a problem, insurance covers it.  Never mind that the parts are no longer being manufactured, hard to find, and expensive.  Insurance will pick up the tab.  The downsides to this incredulous scenario are that there will be lots of paperwork and you can only go to mechanics that are “part of the system.”

“Wait,” you say, “Cars are not people!”  You’re right. They’re not.  So, let’s talk life insurance.  I want my family taken care of in the event I die unexpectedly.  This sounds simple, but there is a decision to be made as to just how well I want them to be provided for.  The first reaction is that my family should be totally and completely taken care of – forever.  Let’s see, that will be a policy for a gazillion dollars and the monthly payment will be…slightly more than my take-home pay.  Okay then, how about if they are partially taken care of but still need to work.  Now the monthly insurance payment drops but is still too high.  Okay, how much insurance can I get for fifty bucks a month?  I’ll take it!

So insuring our lives is reduced to an economic decision, a cost-benefit calculation.  If the tendency is to focus on the expense of life insurance, rather then the benefit, why not do the same for medical insurance?

Back when companies paid all their employees’ health insurance premiums, we, the insured, didn’t care about – or even consider – the cost of that benefit.  But as premiums skyrocketed, companies began shifting some of that cost to employees.  This should have driven home the financial cost of company-provided health insurance, but for far too many employees it didn’t.  Over the years, I’ve had employees come to me with this common lament about their health insurance: “I didn’t even get back as much as I put in!”

Health insurance isn’t like the lottery.  The expectation of receiving more than you paid is simply ludicrous.  Yet, for some reason, many people view their health insurance with such a mindset.  I submit they don’t think that way about their auto or home insurance, and certainly not their life insurance.  Personally, each time that I write a check from the premium for my car, house, or life insurance, I am thankful that I didn’t need to use it!

What many workers don’t realize is that insurance companies are in the business to make money.  Even non-profit insurance companies have to have this attitude.  How do they make money?  Quite simply, their income (that is, insurance premiums) needs to exceed their expenses (that is, claim payouts and overhead).  That means, on average, no one is going to “get back as much as they put in.”  If they do, the insurance company has lost money on them.  If the insurance company losses money on too many people, or for too long, they either go out of business or need to dramatically raise rates.

Once we recognize the economic aspects of insurance (the cost-benefit perspective), are cognizant of the business model (to make money), and jettison wrong expectations (getting more than we put in), we can move forward with an attitude that health insurance should cover the “big” things and we should take care of the rest.  Therefore, I want a policy that will cover a major surgery, a catastrophic illness, and prolonged treatments.  I want to, and should be able to, cover the rest.  But how can I do that?

Incredibly, the government has a solution!  It starts with a high-deductible health plan.  High-deductible means much lower premiums.  This addresses concerns of catastrophic illnesses and bills that would result in financial ruin.  In fact, my own health plan has a deductible of $5,250.  That means I am on my own to cover most, if not all, of my family’s medical expenses.  This brings up the second aspect, a health savings account (HSA).  An HSA lets me set aside money, tax-free, for medical expenses.  This money can generate a return, which is also tax-free, and when I use the money for medical expenses, it is again tax-free.

With the high-deductible medical insurance combined with a health savings account, I have taken control of my medical costs and saved money.  I make decisions for how and when money will be spent on medical procedures, just like every other expense I consider – on the cost-benefit of the transaction.  Lest you become aghast at me turning health considerations into a dollar sign, let me remind you that every other purchase is treated that way.  So why not medical costs, too?  After all, what we eat has a great bearing on our health, but it is common to bypass healthy and advisable foods based solely on their cost.  We buy life insurance not by how much we need, but by what we can afford.  The place we live and the car we drive, both of which can have health ramifications, are again based on cost.

Originally, high-deductible health insurance plans and HSAs were intended for the self-employed.  Now they have been expanded to include small businesses.  Plus, it is likely that our government will expand the scope of who can be covered by these programs.  We have an opportunity to adapt a new attitude and take control of rising medical costs; let’s do so.

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