What is Insurance?

Lifted from Here:

Now let’s discuss risk assessment. Ignoring pre-existing conditions might sound compassionate, but it is equivalent to declaring that a fire-insurance company must charge the same amount for a modern house with smoke detectors and interior fireproofing as for a century-old, wooden-frame former stable, complete with some hay left over, and a basement full of painting supplies. Taking the analogy further, the same premium must be charged for a well-protected, unscathed house as for one that is already on fire.


The business of insurance is about determining risk and charging accordingly. It’s why insurance companies exist. If we eliminate that, medical insurers are just form-processing companies for the government. Worse, we lose a valuable economic input: that of accurate risk assessment and pricing, without which sensible management of medical expenses is impossible.

‘Don’t Ask’

The desire to help those with pre-existing conditions is laudable. The way to do this is to help. If someone needs more medical care than he or she can pay for, direct state subsidy is far more efficient than making insurance companies pretend that the patient isn’t ill or at high risk of becoming ill. We can separately debate the degree of generosity of this subsidy, but it is efficient and honest. Making insurance companies play “don’t ask, don’t tell” with health status is neither.

Though you wouldn’t know it from the headlines, our system today, and our discussion of reform, isn’t about insurance. It’s about the total provision of health care, largely by employers, with costs hidden from individuals. Furthermore, much of the proposed reform is about eliminating the main function of an insurance company: the assessment and pricing of risk.

Creating a system of real health insurance, along with honest subsidy where necessary, is the simple solution to many of our problems, and an honest first step toward tackling the rest.