Insurance is a product, for sure. You pay the premium every month and get the guarantee of future life from your insurance company. Insurance is supposed to ensure your income is not affected by accidents or illness so you will not go bankrupt. When there exists demands and supplies, a market is created. Many insurance companies are competing in the market with two instruments, segregation and aggregation.
Segregation means insurance companies offer different plans to different people. Because people are taking different risks. For example, your grandma has a greater chance to have the flu than you in flu season, because she’s old and in bad health condition. By doing so, everyone can purchase the most suitable insurance plan and pay the premium according to the plan. Segregation improve the service quality of an insurance company, so that the company is more competitive in the market.
But the interesting point is that, many Americans see this segregation as discrimination. From the perspective of economics, it is differentiation, which is quite normal.
Another thing insurance companies would do is aggregation. Insurance companies separate people into different groups by offering different insurance plans. Aggregation means insurance companies add more people in each group. More people buy the same plan, insurance companies have more money, thus the premium may decrease.
That is how insurance works.
As regards to the area of health, some may argue that health insurance is different, it’s about life and humanity. Hence, some people propose a universal health care, like Canada. In fact, the US is the only western developed country without a universal health care. Obamacare was a try, ended up in complaints.
Why we don’t want a universal health care? Is it bad for us if the government pays everything for medical treatment?
John Stossel mentioned an interesting case in his book, No, They Can’t. in Canada, if you want to see a doctor, you have to spend hours in waiting. Only pets don’t have wait. Why? Because you pay for it. It’s the market economy that works.
Because it’s free, so more and more people will go to clinics and hospitals, prolonging the waiting time for each other. In fact, sometimes it is not the disease that kills people, it’s the delayed treatment.
If government provides universal health care, the administration expense will increase. We know that when a country has a universal health care, the medical resource will be abused to some extent. If the mechanism wants to work, government has to step out and watch over.
Imagine that if the government provides free food for us. Suppose most of us like steaks rather than rice, soon steaks will be in short. In order to avoid that, government has to regulate how many steaks per week for an individual, how many eggs or pork and so on. That’s a lot work to do and a lot money to spend.
Insurance is a product, so does health insurance. Despite the well intentions of universal health care (it does good to poor people), the inappropriate distribution plan may cause more problems.