What is the purpose of medical insurance?

Recently Oregon did a field experiment (the experiment part was initially unintentional, but intentional as soon as famous health economists Kate Baicker and Amy Finklestein heard about their plans) in which they expanded Medicaid to some people and not to others.

More and more of the results are coming out.  They’ve found that Medicaid stops catastrophic medical expenses.  They’ve found improvements in mental health just from having coverage.  At this point, they haven’t found improvements in health compared to the control group.  Some conservative groups are citing this last fact as evidence that health insurance is unnecessary for poor people.

Now, there’s several reasons they might not have found improvements in health compared to the control group.  Oregon might have a better social safety net than other places.  Or, Oregon may have a worse problem with the ability to find doctors who take Medicaid because it doesn’t reimburse enough, in which case both insured and uninsured people would be getting the same emergency room treatment.  Or, we may see health improvements down the road as we see the effects of people taking their diabetes and heart medications more regularly.

It is, in fact, a little odd to think that health would be improved with access to coverage– after all, didn’t Mitt Romney say that anybody can get health care because emergency rooms can’t turn people away?  Still, plenty of other evidence suggests that some baseline of insurance helps people to get preventative care, to stay away from emergency rooms for routine care, to take medications for chronic conditions, to see the doctor before problems become complicated, and so on.

But even if Medicaid expansions don’t improve health, that doesn’t mean they’re a failed policy (unless, of course, it is lack of access to doctors who will take Medicaid that is the problem, but the solution to that problem is to increase reimbursements).  The purpose of insurance isn’t to provide access to care, although it may have that effect.

The purpose of insurance is to smooth consumption over states of the world.  It is there to make sure that you don’t end up with a catastrophic loss when times are bad.  Car insurance doesn’t prevent you from getting into a car wreck, but it helps pay out when you get into an accident.  Life insurance doesn’t prevent you from dying, but it compensates your heirs when you lose your life.  Home insurance doesn’t prevent you from getting robbed or keep your house from burning down, but it pays you back when you suffer a loss.  Unemployment insurance pays out when you lose your job through no fault of your own but doesn’t do much to keep you from getting laid off.

Medical insurance is the same thing– it provides financial protection when you’re hit with large medical bills.  In the case of Medicaid, the government is picking up the premiums, but it is still health insurance.  Better health would be a great outcome, and it’s one we were expecting, but lack of better health doesn’t mean we should toss out Medicaid expansions.

What do you think the purpose of health insurance is?  Why (or why not) do you buy coverage?

30 Responses to “What is the purpose of medical insurance?”

  1. First Gen American Says:

    I would classify myself as overinsured right now. I have insurance for most things, even umbrella insurance. There are certain things in your life that are out of your control..for those times, insurance helps level load the expense over a lifetime. The last thing you want to have to deal with is financial problems when something catastrophic happens like a home, job or love one is lost..or a crazy debilitating illness hits you or a family member. Of course, when my income was low, I also didn’t have any dependents, so I did a lot less with coverage. I didn’t have life insurance, etc back then.

  2. Your Daily Finance Says:

    I honestly have medical insurance for the children. Before them I really had no need for it. I rarely go sick and usually just got some over the counter stuff. With kids they are always sick, hurt or breaking something. Just better safe than sorry.

    • Donna Freedman Says:

      Of course you had “need” for it. You were just super-lucky all that time.
      Had you been out for a walk and gotten hit by an uninsured driver, or were suddenly stricken by a serious illness, you’d have been SOL without the insurance.
      My superbly healthy 19-year-old was felled swiftly and completely by a fairly rare neurological disease. If not for insurance my then-husband and I would have been bankrupted by 18 days in the ICU at a top-notch university health care system, a couple of months in a long-term respiratory care hospital, and two weeks of intensive rehab to relearn how to walk and use her hands again.
      Before GBS hit her, she was the picture of health, i.e., she “rarely got sick.” Until she did.
      *Everyone* needs insurance.

      • nicoleandmaggie Says:

        I used to have a lot more uninsured college students in my classes (before they could stay on their parents’ insurance longer), and there was almost always one (always a guy) who had broken a leg without insurance and was in debt because of it.

  3. plantingourpennies Says:

    I tend to look at insurance as something to use when the poop hits the fan, not for everyday life. So if I were footing the bill I’d likely have a HDHP with an HSA like Mr PoP had the option to take at his office. As it is, I have more first dollar coverage than I really need as a healthy 30 year old. And I find myself using more health care as a result. 1 year check-up at the allergist? Sure. Is it really necessary for a full checkup if all I need is an Rx renewal, though? And my primary care doc would probably do that for me if I asked and charge the insurance co a lot less

    • chacha1 Says:

      I’m with you. My husband and I (53 and 47) have a high-deductible plan with Kaiser, which we bought ourselves when my employers’ offerings got egregiously expensive. We have essentially no first-dollar coverage. :-) But if one of us develops a serious illness or is seriously injured somehow, the insurance is there to keep us out of bankruptcy.

      We’ve had high-deductible plans ever since they became available, and have “saved” – in the sense of “avoided spending” – thousands of dollars per year because we simply haven’t required much health care. Our health coverage is costing about $4850 this year, versus $7600 last year under my employer’s plan.

      I know a lot of people who think of health insurance as health care, and use low-deductible policies because the money comes out of their paycheck pretax. It hurts less than writing a check, yes. But it’s a lot more expensive; and these people tend to spend a lot more on healthcare overall because they will go to the doctor for every little thing – and take every prescription medication they can get their hands on – versus making lifestyle changes to obviate the need for many lifestyle medications.

      • Rosa Says:

        or they choose it because they need a lot of health care in the first place. Anyone with a chronic illness to manage is going to do better with a low-deductible plan. I have a friend whose epilepsy medication is several thousand dollars a quarter.

      • nicoleandmaggie Says:

        From an economics standpoint, we tend to think of high deductible insurance as being closer to the ideal insurance– less moral hazard but you won’t go bankrupt if you get hit with something truly serious. (And combine this with free preventative care…) But then, as you point out, there’s chronic conditions and we want to encourage people to take that medication so their health doesn’t get worse (but that’s not the insurance aspect– maybe it would be better for the government to heavily subsidize chronic medications). A lot of issues at play!

      • bogart Says:

        I think the major issue here between health insurance and many other types (certainly, obviously, car) is that with a car, there comes a point where you say, “it’s totaled.” And of course if you don’t maintain it and it therefore requires an expensive repair that it wouldn’t have, had it been properly maintained, well, at the extreme, you can (also) replace it.

        Our bodies, not so much.

  4. oilandgarlic Says:

    I think medical insurance is needed for major medical catastrophes, so I would never want to be without it. One major illness or hospitalization could quickly send people into debt. I’m in the universal healthcare camp so I’m admittedly biased. I just don’t think anyone should have to decide on care based on having insurance or not. Off-topic, I did have limited experience with medi-cal for my kids (as secondary insurance). Honestly I was surprised at the limited selection of doctors and felt like a second-class citizen! I’m very grateful that my state/government provides this but I do think more doctors should accept it. Medi-cal reimbursement is an issue but so are cost-containment and I’m not sure of the solution unless we have universal healthcare.

    • Debbie M Says:

      Supposedly the low prices the government programs pay are not out of line compared to prices in Europe for comparable services. But then I wouldn’t be surprised if US doctors have to pay a LOT more for their degrees and their malpractice insurance.

      One of my doctors quit taking any kind of insurance at all because of all the paperwork required. Of course a lot of his patients (including me) switched to new doctors, but I think he was ready to semi-retire anyway.

      • chacha1 Says:

        If our government paid for schooling for M.D.s our society’s medical-care costs would go down a lot, I think, because physicians wouldn’t be saddled with a quarter-million dollars in student loans.

      • hush Says:

        I blame the insurers, not the cost of medical school. Why does our system put up with these insurance companies anyway when they’re essentially for-profit middlemen who add pretty much no real value?

      • nicoleandmaggie Says:

        The private insurance alternative is HMOs, but people don’t like them.

  5. Debbie M Says:

    I like to think of insurance as something that everyone pays into so no one has to go bankrupt. So I like high-deductible, low-cost plans (at least in those cases where I could afford the deductible).

    When I had a low income, I had insurance only when I got it from work. At my job of 21 years, I had free health insurance. Now I buy my own insurance that pays everything after the first $5000 but also gives me insurance prices on everything.

    I’ve read that when people have the kind of insurance with no deductible, they’re more likely to get preventative care, but so far I seem immune to that problem. Well, I do feel the temptation, but I fight it. Oh, another thing I like about the last two kinds of health insurance I had is that they have a (free) nurse line. I’ve called it several times to get advice on whether to see a doctor or not. Usually the answer is that if I still have the symptom in X days, then yes. And my symptom goes away before X days. Woo!

  6. MutantSupermodel Says:

    I like the way you sum up the purpose of health insurance. And yeah, two years doesn’t seem like a lot of time to really improve health.

  7. Comradde PhysioProffe Says:

    Health care in the United States costs f*cketonnes more per capita than in any other industrialized country, and for the average person the care is worse, because people and corporations are getting rich making huge profits: drug and medical device/supplies companies, doctors, hospitals, and insurance companies.

    • chacha1 Says:

      What I’ve been curious about, and haven’t been able to find a quick answer to, is whether the “healthcare per capita” figures given for the U.S. include what we pay for insurance.

      Because if it does, then I can totally see why our per capita cost is ridiculously high at the same time our outcomes are ridiculously poor.

      If that “healthcare per capita” cost figure *does not include* insurance premiums, then I really don’t know where the hell the money is going. The healthcare I purchase, personally – medical services & products – has been less than $500 retail per year for the past 20 years.

  8. anandar Says:

    This is a tangent, but I talked to a colleague of the Oregon study authors, and he said that the Medicaid expansion group was an overall healthy enough group of people (since it didn’t include groups like seniors and people with disabilities who are the people most likely to have chronic conditions, but who already get Medicaid), that they actually had trouble getting a large enough number of people with hypertension/diabetes/etc to get statistically significant results. Depression was the exception (something like 1/3 of study participants had depression).

    They were really not pleased with the way the study is being characterized by the media, esp the right wing but including the mainstream/liberal press.

  9. bogart Says:

    I think of health insurance as being against catastrophes/long-term problems, though (conceptually if not in practice) those of course have somewhat different attributes (one big sudden event versus ongoing, etc.). But come to think of it, I do also see it as a “peace of mind” thing (more or less consistent, in effect, with the mental health finding of the study). And definitely as a “paying into a pool even if I don’t benefit directly (non-benefitting being in a sense a benefit — or at least, good luck),” as I remind the one of my stepkids who doesn’t have an expensive autoimmune condition (the other does) when insisting on the purchase of insurance by said stepkid (who, just to be clear is an adult).

    DH and I both have insurance through work (him through retirement benefits), and DS has his through me as my employer offers the better of the two plans. I am pretty stubbornly insistent on not wanting to limit my access to care providers in advance of knowing what the heck we have/need (which is of course an inherent trait of medical crises), plus, my employer, which is a university and also a (large, good, research/teaching) medical system limits all but the most expensive of their plan options to *their* care providers. That feels a little too company-store to me, so I pay the highest premium (about $200/month out of pocket for me + DS) to avoid it.

  10. hush Says:

    Agree with everyone here saying health insurance is a form of insolvency protection for people who cannot afford to self-insure. Personally, I feel the sense of security it provides can be somewhat illusory. There is such a pattern and practice of claim denial these days by the insurers that I’m not sure the average insured is actually as protected from insolvency to the extent they perhaps believe they are. Only the ones who document everything and basically make a part-time job of dealing with the insurer can expect to be fully compensated for a catastrophic loss.

    • oilandgarlic Says:

      Hush- very true! I know many people who thought they were protected but were not (or simply denied) when they really needed. Now I have done research and know how to successfully fight back. But insurers know that most people don’t so they routinely deny valid claims. I swear once I retire I’ll make it my mission to help people fight insurers (if we still don’t have universal healthcare).

  11. TodayWendy Says:

    I find the idea of “overusing preventive care” to be totally laughable. I live in Canada, so I don’t have to pay cash to go see my doctor, but the trip is not without cost. I have to wait on the phone to make an appointment – at a time that is probably not convenient to me. I have to rearrange my schedule in order to get there. I have to pay for parking or transit. I’ve got to sit around in the waiting room because most doctor’s don’t actually manage to keep to their schedule. While I’m sure there are some people who go see their doctor more often than they ‘should’, I expect the numbers are the same regardless of whether they’re paying cash to do so. In fact, the ones who have to pay probably feel that they’re entitled to take up the doctor’s time since they are paying for it!

  12. Linda Says:

    I’d really LIKE to think of health insurance in the same way as car or home insurance, but unfortunately medical providers don’t look at it that way. Here’s a recent experience I had that proved how medical insurance has benefits above covering me if I get hit by a bus.

    I had some routine blood work done a couple months ago (a standard panel to check my cholesterol, glucose, B12, D, and thyroid function, among other things). Despite presenting my insurance card at the lab where my blood was drawn, I received a bill that did not reflect any claim to my insurance provider. The bill was almost $1100. I went to the lab website and provided my insurance info. A few weeks later I received a new bill for…about $9. That’s not right or fair. The true cost must be somewhere in the difference, but it’s ridiculous that someone paying cash for a procedure pay so much more.

    I’m at an age where I get a mammogram on a regular basis and will soon be getting my first colonoscopy. Without medical insurance to “negotiate” a lower price, a simple “wellness care” procedure like a mammogram could cost a huge sum. That’s messed up.

  13. Carnival of Personal Finance #418 – State Parks Edition | Adam Hagerman, AFC® – Financial Coach Says:

    […] from Nicole and Maggie: Grumpy Rumblings presents What is the Purpose of Medical Insurance?, and says, “Nicole and Maggie explain the purpose of medical […]


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