Most Americans do not have health insurance as the term is traditionally understood. Insurance is a tool for managing risk. In exchange for periodic payments from a customer, an insurance company provides protection against a large but uncertain potential cost.
Take disability insurance. A potential risk for many families is the possibility that the primary (or one of the dual-income earners) might meet with an accident that prevents him or her from working for a prolonged period of time. In such a case, a family could face potential financial ruin. To protect against this risk, many primary income earners will purchase a disability insurance policy. In return for annual (or quarterly/monthly) payments to the insurance company, the company will pay a pre-determined amount of money to the income earner should an unfortunate accident or disabling illness occur.
Health insurance does not work this way. As opposed to covering only true health risks (the costs associated with broken arms or major surgeries), health insurance pays the costs for routine health events that are not risks in the true sense of the word. An analogous situation would be for disability insurance plans to pay an individual's disability claims for missing work due to a cold. The basic principles of risk and insurance have been distorted. The expected result from this distortion is diminished quality and increased prices.
Imagine if another form of insurance, such as automobile insurance, worked like health insurance. As opposed to covering the costs from major automobile accidents, costs of routine maintenance such as oil changes and tune ups would also be covered. Additionally, to ensure that car owners are all treated equally, insurance companies would be prohibited from charging different rates for specific drivers who cause more accidents, or from charging different rates to groups with different driving habits-married women in their 50s, for instance, who might qualify for lower rates than single 18 year-old males.
If indeed automobile insurance worked like health insurance, safe drivers would end up paying more for automobile insurance to subsidize the costs of unsafe drivers. Car consumers would also have no incentive to shop for the best deal when it came to changing the car's oil, getting a tune up, or performing any other routine maintenance service. The cost for routine maintenance services would be expected to increase. Additionally, because a car owner would not bear costs resulting from improper maintenance, the incentive to properly maintain cars would decline. The number of major car repairs, and the cost of these repairs, would all be expected to increase as well.
Automobile insurance companies, trying to arrest the rising costs of car repairs and car maintenance, would begin to increase the amount of rules and regulations. The result would be significant market distortions in the automobile insurance market, skyrocketing costs of repairs, and an increase in the quantity of major repairs. In short, both the automobile insurance market and the automobile repair market would become much more inefficient to the point where people might even begin to wonder whether the automobile repair market is special, needing the government to mandate prices and repair schedules.
