Health Coverage: We Aren't Insured, We're Insulated

Health coverage that covers events that occur catastrophically or infrequently is called health insurance. Health coverage that covers almost anything is called health insulation, because we become insulated from the costs of the health care we receive. When we don't care about the cost of a product, we nearly always demand more of it. So it is with health care.

In 2002 there were only two countries where the people receiving the health care paid less of the costs for that care than in the United States. In the US, government and private insurers pay for nearly 90% of all health costs.

This is one significant reason that the cost of health care is so high in the US. (The other is because we have better health care technology, which costs more to provide.)

Until recently, insurance has always meant to insure against usually unexpected events that are "large" or "infrequent". Somehow, more recently, we have come to demand coverage for nearly everything, and we wonder why the costs climb more than 10% every year.

If health insurance worked the way it should:

...benefits would rarely be paid out. Large but predictable expenses, such as the cost of obstetrics for a normal baby, are not risks that can be spread [over a risk pool], so they are not insurable. Unpredictable expenses, such as the cost of caring for a high-risk infant, are more properly considered an insurable risk. Unpredictable but small expenses, such as the cost of diagnosis and treatment for strep throat, are inappropriate for insurance. Because the cost is low, even a risk-averse consumer would not pay an insurance premium to protect against such expenses.

Yet most of us have employer-purchased health plans, where we pay little--or sometimes no--of the premium. So we have come to expect the strep throat to be covered by the health plan, and we for sure think that normal baby deliveries should be covered.

But that's not what insurance is for. And until we learn that one issue, we will have a blind spot for the fact that government cannot solve the health care crisis. Some people's blind spots are so burned into their perception that they even think government should be called on to solve the health care crisis.

The crisis will be solved when we stop insulating ourselves from all the everyday costs of health care and start taking responsibility for ourselves.

The solution for most health insurance consumers is a Health Savings Account (HSA). An HSA in NOT a Flexible Spending Account (FSA)--you get to keep the money you don't spend on health care when the end of the year rolls around. This is a huge incentive to cut back on those health care events that fall into the "gray area" of being neither completely necessary or completely unnecessary.

Between myself and my employer, we pay over $15,000 for the health plan for my family. We don't even come close to spending (including health insurance billing) $15,000 in one year for non-catastrophic coverage, even though all we pay usually are $15 or $20 co-pays for office visits. I sure would like to have most of that $15,000 as part of my salary. The health care for me and my family would be just as good (if not better) and I'd feel a lot less poor.


  1. I'm glad you noted the difference between the FSA and HSA because it seems like most folks think they're the same thing. (I've even had some folks in payroll departments swear that they're the same thing. These are the people setting up paycheck deductions!) I'd love to be able to opt out of our company's "normal" insurance plan for an HSA with high-deductible insurance for emergencies. I'd feel a lot more in control of my finances and I'd be able to save up for the expensive health care of my golden years (albeit they're a good 40 years away).

  2. Before I had ever studied this issue, I asked my employer if they could offer a catastrophic health plan, which now I understand it to be the same thing as an HSA. It seemed logical to me before anyone ever described it, and now it seems even more like it will solve the health cost crisis that we have.

  3. HSA can only solve this crisis to the extent that people chose that option. I have a friend who chose not to participate in his employers health coverage - choosing instead to pay for his own High Deductible plan with an HSA.

    I am lucky to have an HSA plan option through my employer - between my employer and me we pay $6000 in premiums plus I am contributing to the HSA so this route costs just over half of what you are being offered. We have spent less than $1000 so far this year from the HSA. It really does make me feel richer knowing that I'm putting money away in case I need any expensive health care treatment.

    So my point is that more employers need to offer an HSA option, and more people need to know what it is and choose it. Unfortunately most people look at the high deductible and choose the more expensive options (I think I'm the only person at my company using an HSA).

  4. I have an HSA at work, and it's great. My employer even puts a little in my account every month. But several people at work don't like it because of the deductible, like David said. That's only an issue for a year or so; once you get your account balance up, you're all set.

    Bush's plan, which won't go anywhere, is to create a health insurance tax deduction. This would make it more attractive for people to buy their own insurance, and help break the job-insurance link that you correctly point out is so detrimental.

  5. David and Craig,

    It's extremely interesting to hear from people that have HSAs, and even better that you like them.

    For how so many of us live on the edge, the large deductible would be a bit of an obstacle, but it seems once you get on top of that, you're in great shape.

    I guess the HSA option came about thru federal legislation in 2003? I don't know much about it, but David Gratzer wrote that it's still pretty limited in what it allows. Is this true?

  6. FYI,

    I just contacted my health insurance provider, Deseret Mutual, and the first person I talked to didn't even know what an HSA is, the second person did probably only because the first person explained it to him before she transferred me, and the third person told the second person to tell me that they still (see my comment, comment #2 in this post) don't offer it, but if I wanted to I could use their online Customer Suggestion form!

  7. The criticism you will get from another perspective on this is that HSAs provide a high incentive for people to forego early and/or preventative care, so that costs down the road (financial and healthwise) will be more severe. I do not know if there is any research that backs that up.

    You may be interested to know that a broad group of movers and shakers in Utah are planning to try to push a universal health coverage plan through the 2008 legislative session that is based on the Massachusetts plan (see here).

    This plan would force everyone in the state to buy a minimum insurance package from any qualified insurer. A board of political appointees would determine what the minimum package has to include. People would be free to buy more insurance. Those that "can afford to pay more" would pay more, while the poor would pay little or nothing. In other words, it's a wealth transfer system where people pay different prices for the same thing depending on how much money they earn. The unelected central board would have astonishing control over every single person's medical access.

  8. I saw a small blurb in the paper the other day about the universal health care in Utah. It's interesting how these people feel almost like it's their messianic mission to force health care on the rest of us, and ruin things in the process.

    I think there is no evidence that HSA's would discourage preventative care (but I need to study more on this), simply for the fact that people who don't prevent would be required to pay for the consequences.

  9. In my humble opinion, I think having an HSA discourages initial care, but I think the benefit is that it makes people think before they go to see a doctor, and so doctors can focus on real problems, not people who are just nervous about a cold or flu.

    I think the government offering a tax credit for Health Insurance would be a good step forward, although I think this is offered already. The problem I see, is that once the government get's it's nose further into the tent, we're closer to them becomming the proverbial camel that knocks everyone else out of the tent.

    I'm switching to an HSA as soon as re-enrollment comes around again here at work!

  10. I'm looking for an agent who is knowledgeable about HSAs in the Provo area. I'm self employed. Any recommendations? Thanks

  11. I wish I did. There were a couple of other commenters here who do have HSA's but I'm not sure where they're from.

    If you find out, let me know.

    But the only way it would work for me is if my employer would pay me what it pays for my health care if I decided to go for an HSA policy externally (not sponsored by my employer).


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