Understand How Insurance Works Before Debating Health Care Policy

Commentary from Gary M. Galles on FEE.org (Aug. 7):

Unfortunately, if accurately applying principles of insurance is the standard, both single-payer and Obamacare fans compare poorly to pots calling kettles black. Their preferred policies sharply conflict with insurance principles on multiple fronts.

Insurance Is All About Risk and the Unknown

Insurance is about reducing risk from uncertain events. It makes outcomes for a group with similar risks more predictable. But that must be weighed against the additional administrative and other costs of insurance. That would mean that people would not insure against what would happen for certain nor where there is only a small amount of risk reduction provided if they were spending their own money.

Insuring things which would occur with certainty, say certain inoculations and annual checkups, offers no risk reduction.

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Insurance Is Not About Price Controls or Mandated Coverage

The price controls government health care proposals incorporate also violate insurance principles. For instance, my age makes my actuarial risk roughly six times that of my students. Pooling risks among those similarly situated with me can benefit us; pooling risks among those similarly situated with my students can benefit them. Insurance is based on pooling risks among people whose risks are comparable. But incorporating more people with risk differentials (say, 6 to 1) that are different from their premium differentials (say, 3 to 1) forces the overpriced people to subsidize the underpriced people. That is not motivated by insurance principles. It is wealth redistribution.

It is redistribution, not insurance, which motivates that, and explains why Obamacare imposed penalties to force the losers to accept a bad deal. [read more]