Insurance Is About Protecting Against Risk

Rather than using insurance to subsidize the consumption of all medical care, Americans should use it only for catastrophic expenses.


By George P. Shultz, Scott W. Atlas and John F. Cogan
January 5, 2014

As the acute problems of the Affordable Care Act become increasingly apparent, it also has become clear that we need new ways of ensuring access to healthcare for all Americans. We should begin with an examination of health insurance.
Insurance is about protecting against risk. In the health arena, the risk at issue is of large and unexpected medical expenses. The proper role of health insurance should be to finance necessary and expensive medical services without the patient incurring devastating financial consequences.
Over the last decade, however, Americans have come to expect their health insurance to subsidize the consumption of all medical care. Rather than simply protecting against financial catastrophe, insurance has become a pass-through mechanism to pay for every type of medical service, including routine ones.
This shift in expectation has meant that health insurance stands out as entirely different from all other types of insurance. Ask yourself: Would you use automobile insurance to buy gasoline? Would you use homeowner insurance to finance painting your house?
This wrongheaded view has played an important role in contributing to rapidly rising healthcare costs. Patients with insurance do not perceive themselves as paying for the cost of routine services, nor do their physicians and other healthcare providers. The natural result has been a more-is-better approach, with patients and doctors embracing costly healthcare services that are often of little value to the patient. Given healthcare's crucial role in well-being, it is important to assist individuals who can't afford even routine medical expenses, but it shouldn't be done through hidden insurance subsidies.
The entire concept of health insurance must be reconsidered. One attractive option for insuring those in need would be to expand the use of high-deductible health plans in combination with health savings accounts. This approach provides a cost-effective vehicle for insuring against catastrophic medical expenses while simultaneously helping individuals defray the costs of routine medical care.
Such coverage protects individuals from losing a lifetime of assets and from the devastating consequence of financial bankruptcy due to unpaid hospital and associated medical bills, a contributor to financial stress for millions of Americans every year. Such coverage means less-costly insurance policies, since they cover only major expenses and thereby reduce the bureaucracy and expense of smaller claims. And, with high deductibles, the hidden prices of medical care become far more visible, a necessity for containing costs. Price transparency coupled with greater availability of accurate information on health outcomes and provider quality are essential if patients are to choose healthcare services based on value.
Combining high-deductible insurance with health savings accounts provides a way to help individuals defray the costs of necessary, but routine, medical expenses. Such savings accounts allow individuals to set aside money tax-free to purchase immediate or future medical care.