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One concept of health insurance is a policy that pays for just about everything. That is insulation, not insurance.
Another concept of health insurance is catastrophic coverage--you pay for everything until you reach a high "deductible" of, say, $10,000. That is closer to real insurance.
Origins of health insurance
Suppose that we had "blue eats," where you pay for restaurant insurance, and then it's all you can eat
Real insurance, e.g., fire insurance
events occur rarely, are expensive, and are unpredictable
exchange small premium for occasional big payoff
an example of real health insurance
| Year | health expenses | 5-year total | insurance pays |
|---|---|---|---|
| 2006 | $2,000 | -- | $0 |
| 2007 | $2,000 | -- | $0 |
| 2008 | $2,000 | -- | $0 |
| 2009 | $6,000 | -- | $0 |
| 2010 | $10,000 | $22,000 | $0 |
| 2011 | $10,000 | $32,000 | $2,000 |
| 2012 | $10,000 | $38,000 | $8,000 |
| 2013 | $5,000 | $41,000 | $11,000 |
| 2014 | $2,000 | $37,000 | $7,000 |
| 2015 | $2,000 | $29,000 | $0 |
What about elderly?
Medicare is like insulation
High cost predictable--on average $88,000 from age 65 until death
Require people to save, say $100,000
Remaining Lifetime Catastrophic Health Insurance
Pay $25,000, have limit of $75,000
If your remaining lifetime cost is more than $75,000 then insurance pays the rest
Advantages of real health insurance: can target assistance to the poor; reduce incentive for people to over-consume; insurance more affordable; less claims processing; people don't lose their health insurance just when they need it