Our Health is Overinsured!


One of the arguments for healthcare reform is that millions of Americans with employer-provided healthcare are underinsured. Proponents of this view are saying that people are underinsured if they are paying too many of their healthcare costs out-of-pocket. Quite the contrary, a little reflection on what insurance is and is supposed to do suggests that the problem is really the opposite: many, if not most Americans are overinsured—they have too much health insurance coverage.

On what basis can I claim that Americans have too much health insurance? The purpose of insurance is to protect people from risk. Private companies offer affordable insurance against losses from automobile accidents, accidental death, fires, storms, and floods, among other things. These kinds of insurance arose in response to people’s willingness to pay for a contract that will compensate them for losses due to a relatively low probability event over which the insured party has little or no control. Yet, unlike other kinds of insurance, most of what is covered by many health-insurance plans does not fit this description. This is why so many people who do not have employer-provided health insurance are either uninsured or purchase only catastrophic coverage.

The problem with many existing health-insurance plans is that they cover the cost of routine treatment for illnesses, such as colds and flu that occur frequently, or the cost of care for conditions, such as pregnancy, that are heavily dependent upon the choices of the person who is insured. Basic economics teaches that paying for routine treatment via a third-party insurance company will raise the total cost of that treatment. This happens for two reasons: First, the insurance company, as middleman between the consumer and the healthcare provider, has costs that must come out of what the consumer pays. Second, insurance that pays for routine care lowers the cost of each doctor visit to the consumer, thus increasing demand. Higher demand with a given supply means higher prices.

It does not matter whether consumers or employers pay health-insurance premiums. The premiums are part of the cost of healthcare. Eliminating routine care from being covered by health insurance would mean premiums would decrease and employers could pass the savings along to their employees as higher wages. The average consumer would be better off as a result. If it were not for the tax deductibility of health-insurance premiums, employers would not cover routine care and treatment for preventable conditions as much as they do.

This is not to deny that many Americans do not have sufficient access to affordable healthcare or that the inability of some to afford health insurance is something we should be concerned about. Although it does not make sense for insurance to cover the ordinary medical costs of child birth, treating chronic asthma, or flu symptoms, it may be a good idea to have insurance in case of complications resulting from childbirth or to cover hospitalization for pneumonia and other serious illnesses. 

The best way to help those who cannot afford basic health insurance is not to require or subsidize the kind of comprehensive health-insurance plans that most employers now offer. On the contrary, healthcare costs and the cost of health insurance that would cover life-threatening illnesses and serious accidents would be considerably lower if the existing system of taxes, subsidies, and government regulations did not result in so many people being overinsured.


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  • It seems to me that health insurance is also about spreading around the risk of having to pay large sums for health care costs that have nothing to do with lifestyle choices. Healthy people benefit, because they are covered for catastrophic situations such as car accidents. Less-healthy people are the main beneficiaries, though, because without the risk-spreading mechanism they would be unable to afford the care they need.

    In my case, I take a very expensive drug (between $300 and $400 a month, if I bought it on the market) for a chronic condition, not of my own making. There is no good alternative to this drug and it is not available as a generic (it is still protected by patent, which is another issue). I’m fully aware that healthy people are subsidizing my purchase of this medication, so that it is available to me each month for a miniscule copayment of $3.30 to my pharmacy.

    Later this year the patent runs out, and I look forward to buying the generic much more cheaply. But I’ve been on the brand-name for 11 years now, and I’m sure I’ve run up quite a tab. I’m grateful that I’ve been able to take this medicine as it has been life-changing.

    Insurance schemes are a mechanism for solidarity, that is, people helping each other out in reasonable and limited ways according to their means. Faced with someone in my situation, what can I expect from my fellow citizens? A pat on the back and a “good luck”, or material help that makes a difference in my life?

    I believe in limited government, but I also believe we can help each other. Is government the way to mutual aid, or do we need a better structure for solidarity?

  • fishman

    hmm… i think the article makes a good point. Part of the problem is that ‘insurance’ is not supposed to provide the function of spreading risk. That is more the place of a co-operative. Usually a non-profit.

    I would love to see some non-profit insurance companies out there I think there are a few.

    One of the problems is the technology is so complicated that most people cannot make well informed decisions about their health as opposed to cost any longer.

    We are told we should see the doctor whenever we have pain or feel ill for more three days. So the increasing demand has lead to a severe shortage of supply raising costs.

    The aging population is adding another factor to that.