Iowa researcher points out that health insurance really isn't insurance

Lost in the debate over a public option health insurance plan, says a University of Iowa insurance expert, is the fact that health insurance differs in many ways from other types of insurance.

“Insurance manages risks that are unknown, such as a house fire or an automobile accident, by transferring them to an insurance company in exchange for a premium,” says Ty Leverty, assistant professor of finance in the Tippie College of Business and Tristar risk management fellow. “The insurer, in turn, manages the risk by pooling together a large number of risks. Health insurance, however, frequently covers things that are known.”

Leverty says economists suggest health insurance differs from other types of insurance in three key ways:

Health insurance covers routine expenses. Health insurance covers the cost of predictable things, like an annual checkup, mammograms or cholesterol tests. “That’s like asking auto insurers to cover the cost of a tune-up,” Leverty says.

Health insurance covers small, random expenses. People expect health insurance to pay to visit a doctor for minor things, like confirming that we have the flu or wart removal. “We don’t expect our auto insurance to pay for the costs of replacing a burned out headlight,” Leverty says.

Many Americans get their health insurance through their employers, not on their own. As a result, a lot of people don’t really know how much they’re paying for it, and thus, don’t know how much their health care really costs.

“In the health care debate, it seems many people who are opposed to change say they like their current insurance because they don’t pay much for it, or so they think,” says Leverty. “If they knew how much that insurance costs them, they might not like it so much. Moreover, many people like their insurance because they have never really tested it for uncertain events. One only knows how good their insurance is when they really need it.”

Leverty says a part of health insurance really is insurance—the part of the policy, for instance, that pays to cover injuries that truly are unforeseen, like covering the cost of stitches after you cut yourself while slicing a bagel or the costs associated with catastrophic illnesses.

But most expenses that Americans expect their low-deductible health insurance to cover—annual checkups, prescription drugs, wart removal—are not unforeseen expenses. In that case, he says health insurance is often more like a cash-flow management policy.

by Tom Snee