Why is Medical Insurance Such a Problem?
Consider the difference between insurance and gambling. Actually, there is only one real difference. In gambling, the risk of loss or gain is created by the transaction. I have no risk of loss or gain before I enter the casino. However, in an insurance transaction, the risk of loss exists prior to the transaction. The insurance transaction merely shifts part of that risk from one party to another. Further, the ideal insurance transaction is one where the transfer of the risk has no impact on the risk itself.
Think about some of the most successful insurance markets. Life insurance has been a successful market for many years. That’s because the purchase of life insurance has little impact on the risk of death. Sure, some people might purchase life insurance and then commit suicide. However, the suicide exclusion became part of life insurance policies early on. Another successful market is fire insurance. Some people might burn down a building in order to collect the insurance money. However, that is a felony, and they are likely to go to jail. Further, fire insurance is required by most mortgage lenders. Thus, the existence of a fire insurance policy has little impact on the risk of fire damage.
Now consider disability insurance. Does the existence of a disability insurance policy increase the risk of a person becoming disabled? Absolutely. In fact, some disability insurance policies cause people to receive more money (net of taxes and including Social Security benefits) when they are disabled than when they are actively working. Disability insurance is a very difficult market, and not particularly successful.
Finally think about medical insurance. Does the existence of a medical insurance policy increase the risk of a person incurring medical expenses? Widespread medical insurance has expanded the market for medical care services dramatically. Costs of medical care have been out of control for over 50 years. Medical insurance, both public and private, has been the primary reason. Medical insurance is a fundamentally unsound insurance coverage. It will always be challenging.