Why Is Health Insurance so Complicated?

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Sep 4, 2017

Why is health insurance so complicated, while car insurance and life insurance are so simple? Can health insurance be more like, well, insurance? Lanhee Chen, fellow at the Hoover Institution, explains.

Why is health insurance so much more complicated than other kinds of insurance? Because it’s not really insurance—it’s pre-paid plans.

  • Insurance is a straightforward concept: You pay a monthly fee which provides financial protection against unforeseen, sometimes catastrophic events.View Source
  • Health insurance isn’t really insurance at all. They’re really pre-paid health care plans. They cover routine check-ups, less serious illnesses, and recurring expenses, like prescription medications in addition to protecting you from a health disaster. All of this has made healthcare much more expensive and complex than any other form of insurance.View Source
  • Related video: “Why is Healthcare So Expensive?” – PragerUView Source

Health insurance and medical industry regulations make it impossible to determine the true price of medical procedures, inflating costs.

  • Regulation on the health insurance and medical industry has made the true price of medical procedures impossible to determine. This has inevitably inflated the costs of procedures and, as a result, insurance premiums.View Source
  • One of the major problems with health insurance is that it’s not actually insurance, which is designed to cover people for unforeseen, sometimes catastrophic events. Instead, it’s pre-paid healthcare plans. Health policy scholar Lanhee Chen: “[Insurance] should be a backstop against catastrophic events.”View Source
  • Related video: “Government Can’t Fix Healthcare” – Bob McEwen, PragerUView Source

Obamacare promised it would lower costs and provide more options to more people. It ended up raising costs and limiting options.

  • While the Affordable Care Act promised to offer more options to more people, after Obamacare “many Americans...have seen their choices of doctors, care providers, and hospitals dramatically restricted.”View Source
  • Requiring all policies to include certain coverages and not allowing insurance companies to charge more for riskier clients has caused the price of insurance to rise dramatically. In Arizona, for example, the price is expected to rise 116% in Arizona between 2016 and 2017 alone.View Source
  • WATCH: Health policy expert Lanhee Chen on Obamacare.View Source
  • Related reading: “Replacing Obamacare: The Cato Institute on Health Care Reform” – The Cato InstituteView Source

Why have health insurance prices gone up under Obamacare? One big reason is it forces people to buy more coverage than they want.

  • The Affordable Care Act mandates that every health insurance plan has to cover the same set of ten health benefits, including preventive care, maternity care, mental health care, and contraception.View Source
  • This mandate has resulted in increased costs of insurance premiums, which have risen by double digits every year under Obamacare.View Source
  • Related video: “Why is Healthcare So Expensive?” – PragerUView Source
  • Related Reading: “Why ObamaCare is Wrong for America” – Grace-Marie Turner et alView Source

Obamacare imposes regulations on the insurance industry that raises costs by limiting options and competition.

  • The Affordable Care Act limits the variety of health insurance plans private companies can offer by mandating that every plan has to cover the same set of ten health benefits, including preventive care, maternity care, mental health care, and contraception.View Source
  • Obamacare does not allow insurance plans to be traded across state lines, limiting choices for consumers.View Source
  • Obamacare also prevents insurers from charging premiums based on the risk they are assuming.View Source
  • As health policy expert Lanhee Chen puts it, the “Affordable Care Act is based on more federal spending, regulation and coercion.”View Source
  • WATCH: Health policy expert Lanhee Chen on Obamacare.View Source

PolitiFact’s 2013 “Lie of the Year”: Obama’s repeated promise that “if you like your healthcare plan, you can keep it” under Obamacare.

  • In his promotion of the Affordable Care Act, President Obama claimed that Americans who liked their healthcare plans could keep them. That repeated promise ended up winning PolitiFact’s 2013 “Lie of the Year.”View Source
  • Under Obamacare, millions of Americans have been forced out of their plans into higher cost plans with fewer options for physicians. Premiums have increased by double digits, even for the cheapest plans offered from Healthcare.gov.View Source
  • Related video: “Government Can’t Fix Healthcare” – Bob McEwen, PragerUView Source

Health insurance reality check: Higher risk individuals must pay more to be insured. If they don’t, everyone’s premiums go up.

  • Higher risk individuals have to pay more to be insured. If they do not, it will contribute to increased premiums for everyone.View Source
  • Obamacare prevents insurers from charging premiums based on the risk they are assuming. A person with a much higher risk of getting sick cannot be charged more than a person with a much lower chance.View Source
  • Obamacare incentivizes older, sicker people to join. Younger people do not need to join and pay into the system until they get sick because they cannot be denied coverage.View Source
  • Related video: “Why is Healthcare So Expensive?” – PragerUView Source

Doesn’t Obamacare at least protect people with pre-existing conditions? That issue could have been solved for a fraction of the cost.

  • Obamacare has been praised for protecting people with pre-existing conditions; however, it has done so at an exorbitant cost. Health policy expert Lanhee Chen estimates that the problem of pre-existing conditions could have been remedied in a targeted way, costing, “about 150 billion dollars over ten years compared to 1.4 trillion.”View Source
  • WATCH: Lanhee Chen on Obamacare.View Source
  • Related reading: “Replacing Obamacare: The Cato Institute on Health Care Reform” – The Cato InstituteView Source

How can the problems of Obamacare be fixed? Make health insurance more like real insurance and reduce regulations. 

  • In order to make health insurance more affordable, we must first stop making people buy plans that include things they won’t use and don’t want.View Source
  • Second, we should give people without employer coverage a tax credit to allow them to purchase insurance freely — and without Obamacare’s mandated benefits.View Source
  • Third, we should allow health insurers to offer more options at different prices.View Source
  • Health policy expert Lanhee Chen explains that more options would allow “consumers to have a choice of plans that include benefits that suit their needs – and to have the option to select a richer set of benefits at a correspondingly higher premium.”View Source
  • Related video: “Why is Healthcare So Expensive?” – PragerUView Source
  • Related Reading: “Why ObamaCare is Wrong for America” – Grace-Marie Turner et alView Source

Americans carry many different forms of insurance. There’s car insurance, home insurance, life insurance, even pet insurance . . . Most of these insurance policies work well and are fairly priced. But there is one glaring exception: health insurance. Only health insurance becomes more complicated and more expensive at the same time. So, the obvious question is: why?

To answer this question, we have to start at the beginning. What is insurance? It’s pretty straight-forward: You pay a monthly fee which provides financial protection against unforeseen, sometimes catastrophic, events. People buy homeowners insurance, for example, to protect themselves from the financial loss incurred in the event of a fire, a flood or theft. Because millions of people are paying into the insurance pool, the pool has enough money to cover the unlucky person whose house does burn down.

And since insurance is meant to share risk, it only stands to reason that higher-risk individuals have to pay more to be insured. Someone who has had two accidents is going to pay more for car insurance than someone who has never had an accident. Why? Because their track record indicates they are more likely to have another accident.

But while insurance provides a bulwark against unforeseen loss, it does not protect against routine expenses. Car insurance protects you in the event that you wind up in a car wreck or your vehicle is stolen, but it doesn’t cover routine maintenance like oil changes, replacing brake pads or tire erosion. Why? Because everyone needs routine oil changes, new brake pads, and new tires. So, there is no risk to protect against.

Health insurance in America works very differently. Many of us have health insurance plans that aren’t insurance at all. They’re really pre-paid health care plans. They cover routine check-ups, less serious illnesses, and recurring expenses like prescription medications in addition to protecting you from a health disaster. All of this has made healthcare much more expensive and complex than any other form of insurance. That is true whether you get your insurance through your employer, through the government, or if you pay for your own plan.

The Affordable Care Act, known as Obamacare, was passed on the promise that it would fix these issues and bring down healthcare costs. But it has actually made the problem much worse.

First, it limited the variety of health insurance plans private companies could offer. It did this by mandating that every plan had to cover the same set of ten health benefits, including preventive care, maternity care, mental health care, and contraception.

Second, Obamacare prevented insurers from charging premiums based on the risk they were assuming. A person with a much higher risk of getting sick couldn’t be charged more than a person with a much lower chance.

These two aspects of Obamacare – requiring all policies to have certain coverages and not allowing insurance companies to charge more for riskier clients – caused the price of insurance to rise dramatically. In Arizona, for example, the price more than doubled between 2016 and 2017 alone.

So, how do we undo this mess?

By making health insurance more like, well, insurance.

First, stop making people buy plans that include things they won’t use and don’t want.  Second, allow health insurers to offer more options at different prices. Do these two things and you’d make health insurance a lot more affordable for a lot more people.

And what about people with pre-existing conditions for whom every insurance plan is just too expensive? We do what any compassionate society does: we make sure they get the medical care they need. But we don’t need to upset the whole concept of insurance and make healthcare more expensive for everyone else to do it.

Most Americans want to do the responsible thing and insure themselves against catastrophic health care emergencies. But with health insurance costs rising every year, being responsible is becoming more difficult.

I’m Lanhee Chen, research fellow at the Hoover Institution, for Prager University.

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