Risk and Why We Buy Health Insurance

Risk and Why we buy health insurance

What is Risk?

Risk is defined as a situation involving exposure to danger, harm, or loss. We are surrounded by risk as a normal part of our daily lives. Life is about reducing risk. For example, we buy car insurance to reduce the risk of losing our $30,000 car and having to pay for hospital care for injured parties in an accident. We also use seat belts, install smoke alarms in our houses, and shovel snow from our front steps to reduce risk. We also transfer much of our risk of harm to government which provides such vital services as police and fire protection, housing building codes, transportation upkeep, and food/water supply testing.

Our risk of needing health care can be broken up into two distinct risk categories; namely,

  1. the risk of getting sick or injured and needing health care (personal risk)
  2. the risk of not having enough money to pay for our health care costs if we become sick or injured (financial risk)

Both aspects of health risk are important to consider and manage.

Managing Risk

Let’s first look at the management of our personal health risk as illustrated in the graphic below.

Managing personal health risk

While diseases and injuries can happen to people who do everything “right”, we still have control of various lifestyle choices that can reduce our chances of getting some diseases and conditions. For example, smoking,  drinking excessively (especially when combined with driving), and obesity, all increase your personal risk of developing a slew of diseases and shortening life span. You can “avoid” addressing these risk factors and take your chances that you will be “lucky”. Most of us are “risk-adverse” and practice some of the management techniques given in the “accept” and “reduce” categories.

The more “engaged” you become in the management of your personal risk (moving to the right in the figure above), the more likely you are to decrease your personal risk of needing health care. The “reduce” people spend time learning about health risk factors and are more likely to implement what they learn than do the people who fall in the “accept” risk management category. People who actively work to “reduce” their risk engage in regular physical activity, eat healthy foods, get recommended preventative care, and maintain a healthy weight. No one WANTS to get sick or injured, they just are not motivated to do the work necessary to stave off some future event that may or may not happen!

The second part of managing health care risk involves money. Because of the high cost of health care, we risk not having enough money to pay for our care. Unlike healthcare systems in other industrialized countries, our government does not provide universal health insurance coverage and therefore we are individually responsible for the cost of our own health care. I have summarized the thinking behind the management of financial risk of health care in the figure below.

Managing-Financial-Risk-healthcare
I could have called the “accept” category, the “avoid/accept” category, because only the wealthy are able to pay-as-you-go for all health care.  Managing health care costs without insurance and crossing your fingers that you do not incur unaffordable health costs is not fiscally prudent behavior. While wealthy people can forgo buying health insurance, under Obamacare (PPACA) they will have to pay a yearly fee for that right to “self-insure”.

Without health insurance or sufficient funds to pay for health care, you can find yourself without adequate treatment when you really need it.  In the United States, medical providers have the right to refuse their services to people who cannot afford the price of health care (many medical providers refuse to treat Medicaid patients because the reimbursement rates are lower than they want). It is only in the hospital emergency room where people, who cannot afford to pay, must be treated by law . The hospital is only required to stabilize you and then can have you removed to minimize their financial loss. The cost of treating people who cannot pay is passed onto all over paying patients in the form of higher prices.

Because most people cannot afford to “self-insure”, we buy health insurance and “transfer” the risk of financial loss to the insurer. Some insurance products are designed to “reduce” your financial risk like the higher cost-share “bronze” and “silver” plans.  Other plans are designed to “transfer” more of the risk with the lower cost-share “gold” or “platinum” plans. When you opt to only “reduce” your financial risk, it is important to save for the higher cost-share you will incur with these products.

You do not have to get sick to experience the financial risk of health care. In its 2013 price report, the International Federation of Health Plans (IFHP) reported that a normal delivery of a child cost on average $10,002 (and as high as $17,354 in parts of the U.S). A cesarean delivery (called c-section) cost $15,240 (and as high as $27,446). In addition, accidental injury and its associated cost of care can happen to anyone. For example, while we try to maintain a safe environment for our children, they still seem to end up in the emergency room with the occasional broken arm or leg. Anyone who has had to utilize a hospital emergency room services knows firsthand how costly they can be. The bottom line is that we attempt to minimize our family’s health care risks, but we are not always successful.  We need to consider managing the associated financial risk this entails.

I looked at my family of three’s health care charges (excluding over-the-counter products) over the past five years and the total charges are given below.

My Family’s Five Year Health Care Charges

YearTotal Health Care Charges for My Family of ThreeUnusual Medical Problems?
2015$5500Physical Therapy for Neck Problem
2014$7900One tooth needed capping, $2000 lab work
2013$1400None
2012$13,700Son injured his neck and needed physical therapy, colonoscopy for husband
2011$54,500Son had to be hospitalized for four days (hospital bill alone was $36,000)
TOTAL:$83,000

Can my budget take the financial hit that the health care bills given above represent? The answer for me is yes in some years and definitely no in others. Because of the high cost of health care, even relatively “healthy” years of costs can add up. My risk management involves buying health insurance for the potential times the bills are greater than my ability to pay. The price tag for “transferring” the risk is called a premium.  The more of the risk I “transfer”, the higher the premium.

How much health insurance do I buy? Do I buy a “bronze” type health insurance and use savings to pay for my higher cost share? Assuming I can afford to pay the higher premiums, do I opt for the more expensive “gold” or even the “platinum” health insurance policy?  Is the higher premium worth paying for the lower cost share offered? These decisions require taking a (hopefully educated) guess at the likelihood that you will need expensive health care in the next year. To many Americans, the higher cost “gold” and “platinum” plans are simply not affordable and you end up buying a lower priced plan and hope you don’t need too much health care.

The Bottom Line

None of us is immune from the personal and financial risks associated with our need for health care. Our bodies do not come with guarantees never to break down or become injured. If we live long enough, all of our bodies will slowly deteriorate with age and require more and more health care. The health risks associated with sickness or injury need to be managed and reduced. Because of the high cost of health care in the United States, even the health costs from many “healthy” years can add up to unaffordable levels. Managing the financial risk of health care requires the purchase of health insurance for all except the wealthiest among us. We manage and plan for many aspects of our lives. We need to recognize the need to do so with health care also.

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