It's Time We Rethink Health Insurance

In the healthcare debate, many people are calling for lower deductibles and richer coverage. You need to spend more to save more, they say. However, that’s not likely to reduce the healthcare slice of the gross domestic product pie. The same group tends to deride high-deductible plans, even as their enrollments top 21 million and use of health savings accounts grow. Their intentions stem partly from the lofty goal of protecting consumers from themselves. The oft-cited statistic from the Federal Reserve Board is that 40% of people can’t afford a $400 emergency with cash on hand. Yet, somehow everyone has iPhones.

The same report also found that “74% of adults said they were either doing okay or living comfortably in 2017.” The 40% statistic includes a portion of the 83 million people who are either on Medicaid or receive subsidies through the Affordable Care Act; that’s 25% of the total US population. Their out-of-pocket costs for healthcare will almost always be lower than those with employer-sponsored insurance. I don’t mean to be insensitive about personal finances or Pollyannish about what higher deductibles can do, but much of the critical $400 emergency fund can be lost to too much insurance. Low cost-sharing coverage offers no free lunch. Peace of mind aside, money spent on premiums is gone, and richer plans cost more than higher deductible plans.

What Is Insurance For?

Insurance compensates for a specific loss in exchange for a premium paid. It’s meant to protect against ruin. That’s why there is no oil change insurance or insurance for an overcooked steak. Great insurance is a backstop for risk, but it does not equal great health. In fact, social determinants of health (genetics, behavior, social, and environmental factors) account for an estimated 90% of the risk factors for a premature death.

Unfortunately, the high-deductible health plans (HDHPs) took on the ugly euphemism of consumer direct health plans (CDHPs) and, understandably, brought suspicion. Despite branding issues, places like Harvard are setting up the high-deductible option to be the best choice for the 90% of people, even assuming one reaches his or her out-of-pocket maximum. The below chart shows the total employee spend (premiums plus copays) for 4 different healthcare claims scenarios.

HMO stands for health maintenance organization and POS for point of service

Too Much of a Good Thing

Being overinsured means you’re financial divorced from both the short-term cost and the impact of long-term health decisions. If I pay nothing for my blood pressure medicine, I’m less likely to control my blood pressure through diet and exercise. I’m also less likely to shop for medical care and more likely to have wasteful care. Past experience with a navigation and transparency company taught me that those with higher deductible plans were twice as likely to shop for coverage than those with lower deductible plans.

There are other angles worth considering. I recently wrote how over 30 years it can conservatively cost $45,000 to be overinsured. The very protection we buy can hurt our finances. Those with few or no assets are the most exposed to inflation since they have no hedge against rising prices. Those with the most delicate of finances, are also the ones who need to realize how much they could often save by having the right kind of insurance. Improved healthcare literacy and help with framing plan selection can bridge the gap, even if the impact is modest.

Insurance should be to protect against ruin. Like eating carbs, too much is not good.