Richard Rathe, MD

Associate Professor of Family Medicine (ret.) and Medical Informatician

Why Health Insurance is Different

By •• Posted in Medicine

At the most basic level, insurance is about sharing risk. For example, a group of one thousand homeowners band together to create an insurance pool to protect against fire. If homes are worth $100,000 and there is one fire per year, they would have to chip in $100 each. Fortunately the risky event is rare, so the cost of insurance is low.

Now let’s compare this with insuring healthcare. We have the same thousand people, of which five hundred consume an average of $10,000 in healthcare services each year ($5M). Illness unfortunately is not a rare event and the annual premium jumps to $5,000 per person! Many of the younger, healthier people ask why they should be paying for somebody else’s infirmity? They withdraw from the pool and premiums skyrocket. Eventually the pool collapses and those who actually need care loose their coverage, and in many cases financial ruin ensues.

The key difference is that almost everyone will utilize healthcare services at some point in their lives. It’s as if fifty houses (50 x $5000 = $5M) burn down every year, not just one. The insurance model breaks down under these circumstances. We are no longer sharing risk but rather sharing the cost of something that is deemed essential by a large number of our peers.

The two obvious solutions are controlling costs and enlarging the pool. Recent mandates to buy health insurance are an attempt to address the latter. Controlling the cost of healthcare continues to be a conundrum.

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