“Health” “insurance” under the American model is indeed perverse. There is a lot to unpack here. Buckle up.
Bona fide insurance is a paid transfer of risk. With your auto insurance, you pay set premiums to Progressive, say, in return for them to replace your car if it is destroyed. With homeowner insurance, you pay monthly or annual premiums in return for Allstate to accept the risk of replacing your house should it burn down, be flooded, and so on. You pay premiums to MetLife, and in return, they pay out a cash lump sum or stream of payments should you die before a certain date.
All of these pay hard-core green-visor number crunchers called actuaries whose job it is to accurately price risk. Given a certain profile, how likely are you to be involved in an auto accident, suffer a house fire, or pass away? The profit motive is strong incentive for insurers to price risks accurately: too expensive and competitors can undercut them profitably, and too cheap will mean they lose money paying out more in claims than they collect in premiums.
It turns out that risk is not uniformly distributed. From their experience with USAA, the Goodwins determined that government employees are more risk-averse than the average American, and thus was born the Government Employees Insurance Company or GEICO. Before 1974, you had to be a civil servant to get a GEICO policy. In 1974, Geico began insuring the general public but still in some cases gives discounts to government employees. This is not done out of the goodness of their hearts.
Imagine you were CEO of InsureCo responsible for keeping the lights on and paychecks flowing to your employees. You cannot (for long anyway) pay out more than you are taking in. Your premiums have to remain competitive. Clever insurers also invest their “float” (money collected in premium not yet paid out in claims) to increase profit. However, if a potential customer comes to you requesting a policy quote but who represents greater risk in terms of expected claim payouts, a straightforward mathematics exercise means you must charge that customer more in premiums to offset the greater risk InsureCo would be accepting.
“Health” “insurance” turns this all completely on its head, but that is mainly because Americans have been conditioned to have bizarre expectations unlike any other form of bona fide insurance. Pricing risk accurately runs afoul of regulations, so “health” “insurance” becomes a transfer scheme under which younger, healthier customers are overcharged to make up for regulatory requirements to undercharge older, sicker customers. We do not expect homeowner insurance to pay for new light bulbs, cutting the grass, or other routine maintenance. Car insurance does not pay for oil changes, new tires, replacement radiators, and so on. Bona fide health insurance which used to be called major medical but is now derided as “junk insurance” worked similarly in that it has a deductible where expenses below it are the insured’s responsibility. This means less risk to the insurer and thus lower premiums. With all other insurance, we recognize that attempting to take out a homeowner policy after a house has already burned down is silly at best and fraudulent at worst. That’s because it is a preëxisting condition. With the negative event having already happened, it is no longer a risk but a reality and beyond the scope of insurance.
The complexity does not end here. In America, health insurance is connected to employment. Tracing backward through the economic cause-and-effect leads to the Stabilization Act of 1942[0], signed into law by FDR. This economically wrongheaded policy capped executive pay, and to attract and retain talent, companies routed around this brain damage by offering other fringe benefits including health insurance. Over time, more and more employees wanted in on the game. It seems fine until someone has both a gap in employment and a negative health event.
[0]: https://en.wikipedia.org/wiki/Stabilization_Act_of_1942
But why are the costs of health services so expensive to begin with?
For that, and pardon the driving tour, we have the American Medical Association to thank. Being a self-interested industry group, they wanted to develop ways to increase their fees — beyond what ordinary Americans wanted to or could afford to pay. By panning price competition among physicians as “unethical” and pushing for more employer-sponsored insurance plans, the result was setting up large pools of money to be mopped up.
Large insurers are necessarily much less price sensitive than families who are paying out of pocket. This pushes prices up. Perverse medical and health insurance regulations drafted by politicians whose primary concern is re-election and who pay no price for being wrong or inflicting massive damage on industry push prices up further.
Consider that when you pay comparatively small or zero price for a service, you are not the customer: the one who pays the bill is. TV, radio, Google, and daily newspapers are essentially free. You are not the customer: the advertisers are. When you go to the doctor and pay a $20 copay, you are not the customer: your insurer is. You have no money by comparison, but your insurer has lots. You are a vector to get to the real customer.
The sad reality is the system is working exactly as it is designed, but the object is not positive health outcomes. The health care industry gets their payola, and tax policy and other regulations protect the flow of premium payments to the big insurers. Coincidentally, all of these industries contribute generously to politicians’ campaign coffers, PACs, and so on.
Call “single payer” what it is: a welfare rationing scheme. It is far better to be a valued customer than a liability. The country’s crumbling infrastructure is in the condition it’s in because it is on the public books and viewed as a liability rather than an asset. Infrastructure spending is barely enough to keep it maintained, which also conveniently serves as a hotbutton issue for political campaigns. Government schools and other public services are chronically underfunded. “Single payer” public services will work out the same way. Canada makes no secret about their waiting-time “challenges,” which they attempt to sweep under the rug by saying waits are for elective procedures only, but they do not stop to define elective.
The deplorable state of “health” “insurance” in America is a symptom of the problem. The real issue is that health care is so obscenely expensive in the first place, and that is because we the patients have been displaced from customer status. The market already provides essential and life-critical services cost effectively. Look around you: food, water, computers, clothing, shelter, etc., etc. Amazingly, they do so even at a profit. Sure, government bureaus have attached themselves to these industries in various places, but do not allow emotion or ideology to cause you to confuse the direction of economic cause-and-effect.
The American health care market is so heavily regulated and tax-favored that it is a textbook failure of dirigisme, where failure is success. Liberate and liberalize one-sixth of the economy to fix the problems.