Insurance works if

You have a sufficiently large population of people at risk of some loss. Otherwise, the insurance company can’t get started, since it can’t earn enough in fees to pay off the loss when it happens. The loss is large enough that most people are unable or unwilling to take a chance on having it happen to them. Otherwise, most people simply self-insure. E.g., most people do not buy insurance for their bikes, because they can afford to buy a new bike if necessary. The loss occurs unpredictably. Otherwise, the only people who buy insurance will be those who are likely to suffer the loss, and so the insurance company is forced to charge fees commensurate with the loss, violating clause 2. The loss occurs to a sufficiently small percentage of the population. Otherwise, the insurance company again must charge fees commensurate with the loss.

Health care meets conditions 1 and 2, but fails to meet conditions 3 and 4. As people get old, they predictably require health care. As people get old, they all require health care. Therefore, health case is not amenable to an insurance solution.

There is an aspect of health care which is amenable to health insurance: young and healthy people are unlikely to require much health care, but they are vulnerable to catastrophic events (in the U.S., typically a car crash or similar major accident). Therefore, there is a valid insurance market in providing catastrophic health coverage for the young and healthy. This would cover all health care charges after some large deductible.

However, using “health insurance” to cover routine care, and using it to provide coverage for people who are old and/or sick, simply isn’t insurance. What we call health insurance is in effect a tax on the young and healthy to provide health care to the old and sick. However, it is a very inefficient tax because it is collected by private for-profit companies which have a strong incentive to increase premiums and reduce payouts, and which in turn requires regulation which is paid for directly by taxes. And, of course, it leads to massive social inequity in that sensible preventative health care—i.e., routine doctor and dentist visits—is simply not available for poor people.

There is a role for private enterprise in health care, of course. There is nothing wrong with having private doctors and private hospitals. But private “health insurance” companies really makes no sense.

As an aside, pregnancy raises another set of predictable costs not amenable to an insurance solution.

This argument seems perfectly straightforward to me. The U.S. only uses private health insurance due to a historical accident: wage freezes in World War II led employers to pay for health care as a benefit to attract workers. Why are so many in the U.S. fixated on continuing a scheme which almost by definition can not work?

The bill which recently passed in the house addresses clause 3 above by simply requiring everybody to purchase health insurance. But it does not address clause 4. Since nearly everybody eventually requires substantial amounts of health care, health insurance premiums must be high, or people must find some other way to pay for their health care. That “other way” winds up being Medicare, which is funded by taxes. So how does health insurance help?

And then there is Medicaid. As long as we are not willing to let people simply die in the streets, poor people without health insurance will get their health care from emergency rooms, where it is vastly more expensive. We all pay for that through our taxes. Getting rid of the tax imposed by private health insurance companies, and paying directly for routine medical care for the poor, will actually reduce our overall tax burden.

If we could strike the word “insurance” from all discussion of health care in the U.S., I think our long-term health care needs would be much better met. Unfortunately, the health insurance lobby is large and powerful.