The Brilliant Economics Of “Bad” Health Insurance

There’s been much written by progressive pundits and in Lefty fever swamps about the “bad” individual policies, especially the sort of health insurance the young and healthy typically buy.  The Loud Left’s panic-stricken scramble imagesto save ObamaCare from the trash heap of failed laws has led to apologists arguing that the cancellation of “bad” health insurance is a good thing.  President Obama refers to these “bad” policies as “house insurance”, referring to the fact that home coverage doesn’t pay for minor repairs and usually has a healthy deductible even on damage it does cover.  “Bad”, however, like beauty, is in the eye of the beholder.

In less derogatory terms than the progressive press uses, health insurance of this kind is called “major medical.”  It’s a high deductible, low premium, cover catastrophic illness or accident, pay for minor dings and bruises out of pocket insurance plan.  And in the right circumstances it’s a brilliant solution medically and economically.  Let me give you a first hand illustration … from my own experience with major medical coverage over 20 years.

For reasons of personal choice my wife and I have purchased “bad” individual insurance since the early 1990s.  While I was teaching at the University of Texas @ Dallas I was covered by a university policy, but my wife was not, so even during this 6-Major-Illnessperiod she has been on individual coverage.  I studied the market, educating myself as any good finance and economics guy would, on the pros and cons of this sort of insurance.  Here’s the economics of it from my experience.  The dollar amounts are averages over many years but are honest representations of the costs involved.

The premium on a $500 deductible, standard co-pay for prescription coverage, “good” (by the progressive’s definition today) policy would have been about $750 a month for both of us, on average, over 20 years.  That would be a total premium payment of $180,000 total for two decades of coverage.

The premium for a $10,000 deductible, standard co-pay for prescription coverage, “bad” (by the progressive’s definition today) policy … the same policy as the “good” one but with the higher deductible … would have been $375 a month for both of us, on average, over 20 years.  That would be a total premium of $90,000 for two decades of coverage.

Because we chose the major medical policy I started out with $90,000 in my investment account rather than in the insurance company’s profit statement.  Out of that $90,000 must come, of course, all the cash outlays for routine medical care, the out of pocket expenses like booster shots and annual physicals and such, as well as all non-routine accident and illness costs.  The math is straightforward.

My wife and I could spend $4000 a year on all of these routine and non-routine cash out of pocket medical costs and still break even.  With the “good” policy I’d have paid just the first $500, or $10,000PiggyBankInsurance over 20 years, if I had spent more than $500 a year on medical expenses every year.  So that  $10,000 comes out of the $90,000, leaving me $80,000 with which to work.  $4000 a year.

Anything we spent over $4000 would have been a loss for that year.  But we’d have had to overshoot that $4000 every year for 20 consecutive years to lose on the purchase of the major medical policy.  Very unlikely.  Our actual out of pocket costs, from tax records, over this two decades was $955 a year.  $19,100 all in.  I have, today, $60,900 ($80,000 less $19,100) more in my investment account than I would if I had bought the $500 deductible “good” policy.

Another way of looking at the economics is to focus not on routine costs but on catastrophic expenses.  Suppose we had cancer or a bad car accident or heart attack.  Suppose we each had one of those $500,000 hits over the two decades.  We’d pony up $10,000 in each of those years.  $20,000.  We’d still have $40,900 ($60,900 less $20,000) more in our accounts today.

do-the-math-big-428x272The catastrophic breakeven is just as easy to calculate.  Do the math.  Essentially, The Wizard and I would have had to have suffered 7 separate catastrophic injuries or illnesses between us … 7 at $10,000 each, burning through $70,000 in 7 years, plus another 13 healthy years at the average $955, for another $12,400 paid out, for a grand total of $82,400 ($70,000 + $12,400) over the two decades.  This is what would have had to have happened to make the “bad” policy a failed proposition.

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

Unless you are riddled with congenital conditions that make a large number of catastrophic illnesses over the next decade or two pretty much a sure thing, it is almost impossible to suffer the number of major illnesses and accidents it world take to make the purchase of a “bad” major medical insurance policy, of the kind Obama and the progressives are denigrating right now, uneconomic.

Buying a major medical policy simply allowed us to bank money that would have been wasted on premiums.  And if you bought into the progressive spin that these are “bad” policies … and you may still think so … you are not alone.  Medicine Man, the excellent MD to whom I’ve been a client for many years, once asked me what sort of coverage I had.  When I told him he opined “So, you really don’t have any insurance, do you…”  It wasn’t a question.  It was a statement of disapproval.  He didn’t understand the economics of it then and still may not to this day.  Perhaps he will read this post.

For the young and healthy, and even for the old and healthy, major medical coverage is a brilliant way to insure against the economic devastation of a major accident or illness, while profiting from one’s own healthy lifestyle over extended periods of time.  Contrary to the Loud Left’s ignorant statements as they struggle lamely to cover for the incredible damage ObamaCare is doing, major medical can be a very useful and very wise way to go.  Efficient and profitable.  The young and healthy who naturally, instinctively migrate to these “bad” major medical policies are not stupid and really don’t need any stilted, abusive advice from Obama.

And besides, what’s “bad” about home insurance policies that rebuild your house after the fire but leave minor repairs and routine maintenance to you to pay for out of pocket?

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