Hi, I’m from the UK, the healthcare industry in the US has always confused me but one thing I can’t seem to get my head around is how the insurance companies don’t go bankrupt.
I understand how insurance companies work in the fact that they accurately calculate premiums and invest the money whilst not receiving more claims than premiums.
However, in the healthcare industry wouldn’t they receive many claims on a regular basis? Especially from people who require medication on a regular basis e.g Insulin
Furthermore, with hospitals bills and medication being so expensive will they not payout more in bills than they receive in premiums from people?
In: Economics
Insurance is like gambling, but with statistics and actuaries. Just as a casino knows the odds or sets the odds of having a large payout, insurers know what the likelihood of payouts are. They are the house and the house always wins.
They set premiums high enough to cover these eventualities. They spread the risk across a much larger pool. In the United States, only the very foolish and very poor can get by without having health insurance because charges for a medical catastrophe in one’s life would be a financial death even if one survived the medical difficulty. So many people carry insurance they may never use.
Secondly, the insurers have set deductibles. For most people in most situations, they will not have a catastrophic or chronic medical issue emerge. For example, I have a deductible of $8,000. Anything below this, I must pay. However, if in one year I were to have some medical problem where I’d be billed more than $8,000, say I got in a car accident, then I would pay the first $8,000 and only then would my insurer be responsible for any charges.
Finally, insurers negotiate how much they will pay. Many insurers only pay for care that is delivered within providers and hospitals who have agreed to certain rates. If those facilities wish to continue to see the insureds of the insurance company, they have to negotiate all their bills with the insurance company.
These are the three tactics that insurance companies use. They charge more premium than they are liable to pay out, they spread risk among a much larger group than is liable to become catastrophically sick, and they badger and force providers to take lower prices than those providers would otherwise require..
Eta: just for reference, I pay about $400 a month for insurance that I hardly ever use. All of my doctor visits in the past few years I have paid for more or less out of pocket. They were less than the $8,000 deductible that my insurance carries. So for me, and so many other people like me, the $3,600 or so I paid out in premiums are completely profit to the insurance company.
Latest Answers