Healthcare Insurance vs Subsidy

No visible means of support
And you have not seen nothing yet
Everything's stuck together
--Talking Heads

Nice point made at the beginning of this piece--one that cannot be overstated. The notion of insurance has become badly distorted in the context of healthcare.

Markets for insurance come about because people want to manage risk. Simply defined, risk is potential for loss. 'Potential' is an important word here because insurable losses cannot be certain. I cannot buy insurance for 'losses' (expenses) incurred when I buy food at the grocery store. Few insurers would write such a policy because there are few ways to price or pool events that occur with certainty (e.g., buying food) such that the economic costs are not simply transferred from insuree to insurer.

As such, routine costs are typically uninsurable and must be paid for out-of-pocket.

More attractive for both buyers and sellers of insurance are policies for insuring 'tail risk.' Tail risk is associated with events that occur infrequently, but incur large costs if they do occur. Events such as house fires, car crashes, and major illnesses exemplify tail risk.

Because the financial consequences can be devasting to people who experience such events, there is certainly demand for ways to insure against this risk. And because of the infrequency of such events and associated tools for managing underwriting risk, there are also suppliers willing to insure against tail events.

This is why there are generally markets for insuring against car crashes but not oil changes, and for insuring against house fires but not against replacing kitchen countertops.

If healthcare markets were unhampered, then we would observe similar structure. There would be fluid markets for insuring against catastrophic illness. Costs of insuring against catastrophic illness would rightly go up with probability of occurence, although those costs would be mitigated by competition (which is currently badly hamstrung by regulation) and by risk pooling and other tools that cope with problems like adverse selection.

Routine expenses such as doctor's visits would not be insurable in the same sense because they are by definition certain. Anyone underwriting policies for routine doctor visits would simply be transferring the cost from the policyholder to him/herself.

A critical design flaw of Obamacare is continuation of the trend to combine catastrophic healthcare risk with routine healthcare expenditures.

Healthcare risk is not being insured. Instead, healthcare consumption is being subsidized.