One of the arguments for healthcare reform is that millions of Americans with employer-provided healthcare are underinsured. Proponents of this view are saying that people are underinsured if they are paying too many of their healthcare costs out-of-pocket. Quite the contrary, a little reflection on what insurance is and is supposed to do suggests that the problem is really the opposite: many, if not most Americans are overinsured—they have too much health insurance coverage.
On what basis can I claim that Americans have too much health insurance? The purpose of insurance is to protect people from risk. Private companies offer affordable insurance against losses from automobile accidents, accidental death, fires, storms, and floods, among other things. These kinds of insurance arose in response to people’s willingness to pay for a contract that will compensate them for losses due to a relatively low probability event over which the insured party has little or no control. Yet, unlike other kinds of insurance, most of what is covered by many health-insurance plans does not fit this description. This is why so many people who do not have employer-provided health insurance are either uninsured or purchase only catastrophic coverage.
The problem with many existing health-insurance plans is that they cover the cost of routine treatment for illnesses, such as colds and flu that occur frequently, or the cost of care for conditions, such as pregnancy, that are heavily dependent upon the choices of the person who is insured. Basic economics teaches that paying for routine treatment via a third-party insurance company will raise the total cost of that treatment. This happens for two reasons: First, the insurance company, as middleman between the consumer and the healthcare provider, has costs that must come out of what the consumer pays. Second, insurance that pays for routine care lowers the cost of each doctor visit to the consumer, thus increasing demand. Higher demand with a given supply means higher prices.
It does not matter whether consumers or employers pay health-insurance premiums. The premiums are part of the cost of healthcare. Eliminating routine care from being covered by health insurance would mean premiums would decrease and employers could pass the savings along to their employees as higher wages. The average consumer would be better off as a result. If it were not for the tax deductibility of health-insurance premiums, employers would not cover routine care and treatment for preventable conditions as much as they do.
This is not to deny that many Americans do not have sufficient access to affordable healthcare or that the inability of some to afford health insurance is something we should be concerned about. Although it does not make sense for insurance to cover the ordinary medical costs of child birth, treating chronic asthma, or flu symptoms, it may be a good idea to have insurance in case of complications resulting from childbirth or to cover hospitalization for pneumonia and other serious illnesses.
The best way to help those who cannot afford basic health insurance is not to require or subsidize the kind of comprehensive health-insurance plans that most employers now offer. On the contrary, healthcare costs and the cost of health insurance that would cover life-threatening illnesses and serious accidents would be considerably lower if the existing system of taxes, subsidies, and government regulations did not result in so many people being overinsured.