by David Guzman

Created on: July 07, 2011   Last Updated: July 11, 2011

The paradox of excessive health insurance costs is that not enough people have health insurance.

The basic reason for this is that more insureds lower the average cost, and decrease the average number of claims per insured.  A larger pool of insureds is less risky because the costs are distributed among a large population.

When there is no requirement for everyone be insured, people will buy only the insurance that they think they will need. Known in the industry as adverse selection, this is a fundamental challenge for any line of insurance. In this case, it means that younger, healthier people will be less likely to buy health insurance than older or less healthy ones, which makes coverage more expensive. The situation gets worse over time as the insured population ages: the healthier risks tend to leave the insured pool, leaving less healthy ones to make more claims, further increasing the cost. Healthcare costs increase with age, and these costs tend to trend higher with inflation and other causes. Making this problem even worse, the aging baby boomers are already beginning to increase demand for healthcare, which further increases costs. This is a serious problem in health insurance, and explains many of the problems we encounter in obtaining affordable health insurance as we get older.

Adverse selection is only part of the problem. As premiums increase, the better risks stop buying the insurance. Why should they pay increasing amounts if they don’t think they will pay as much for healthcare as they would in premiums? As they drop their coverage, costs increase for everyone else, driving the next best risks away, further increasing rates. This cycle continues until only the worst risks are left, paying impossibly high premiums. This assessment spiral can destroy an entire line of insurance. Thus, the four horsemen of the health insurance apocalypse are: good risks avoiding insurance, an aging population, cost increases, and assessment spirals.

Unseating these horsemen is a simple, albeit difficult task: mandate health insurance for everyone from birth to death. This spreads healthcare costs over the broadest possible base, minimizes adverse selection, and continuously replenishes the insured pool with young, relatively healthy lives. It also mitigates the problem of overall system cost increases, because a higher proportion the healthcare would be less expensive services.

The problem of increasing healthcare cost remains to be dealt with, of course, but insuring everyone provides several partial solutions. Universally available healthcare will mean that emergency rooms will be used less frequently.  Over time, contagious diseases will be identified sooner and epidemics stopped earlier. Chronic or serious diseases will be diagnosed and treated sooner. The cost reductions resulting from earlier diagnosis and treatment will reduce costs, will allow people to live healthier, happier lives, and keep them productive members of society.

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