Tuesday, February 24, 2009

Reverse Health Insurance Coverage

The basic idea of insurance is that you pay a premium to an insurance company who agrees to cover you for a low probability large loss. For example, you might pay $500 per year for house insurance, and the insurance company agrees to rebuild your house if it burns down. For some reason, typical health insurance plans have this basic idea of insurance backwards.

To illustrate what I mean, I’ll look at Sun Life’s basic personal health insurance plan. I don’t intend to promote or criticize Sun Life in particular; other insurance companies have very similar plans.

Sun Life’s basic plan has fairly low yearly dollar limits:

- Prescription drugs: max $750/year
- Dental: max $500/year
- Alternative treatments: max $25/visit and $250/practitioner
- Hearing Aids: max $400 per 5 years
- Dental accidents: max $2000/injury
- Medical equipment and in-home nursing: combined max $2500/year and max $20,000 lifetime

To run a profitable business, an insurance company has to charge more than it expects to pay out in claims. This means that the yearly premium you pay is likely to be more than the amount you claim in a year. This can still be a good deal for you if you are being protected against a large, devastating loss. But, most people could afford to pay the maximum amounts in the list above.

Even worse, if you get a serious condition requiring $10,000 worth of drugs each year, you’ll pay $9250 of that out of your own pocket in addition to the health insurance premium. This health insurance plan offers no protection against serious loss.

These health insurance plans would make more sense if they were reversed to pay for everything above some limit instead of paying for amounts below the limit. Of course, there would have to be some upper limit; insurance companies shouldn’t be expected to take on unlimited risk, but these upper limits would be high. Think of the roughly $1 million liability limit in most car insurance policies.

Many employers offer health insurance plans with similar low caps on claims. These plans aren’t really a form of insurance because they offer little protection against serious loss. They are really just extra income.


  1. I totally agree. My wife has a Blue Cross plan through work that is over-priced for the limited coverage we get. Thing is we can't opt out, either. It's a dreadful deal.

    I've heard of an interesting plan in the US for health coverage that makes sense from your perspective. It allows a subscriber to pay a relatively small premium and also put money into a savings account and save up for major medical expenses. However, it works like car insurance. It has a high deductible, say $2500. The insurance premium you pay covers anything above that, and anything below that threshold, you can choose to pay from your health savings account.

    If you're lucky and don't have major expenditures, your health savings account grows to a tidy sum.

  2. I think the employer health "plans" are good ways to incentivise employees to stay healthy, do preventative check-ups, take their medicine, etc... but they're pretty lousy "insurance".

  3. Gene: The health plan in the US that you describe sounds like a good idea. The premium is low, and the insured person pays only affordable amounts of health costs. From the insurance company's point of view this isn't as good, because of the low premium, higher volatility of claims, and the need to check large claims for fraud.

    Potato: That's an interesting idea. Employers may be willing to pay for health needs to prevent employees from being cheap and skimping on regular health checkups, etc. I still think the main reason employers offer health plans is that employees overvalue them compared to their pay, but the side benefit of healthier employees has value as well.

  4. I suppose the need for health insurance is lower in Canada due to our public health system.

    I had a job at a mine in northern Manitoba that had great health benefits. The employer covered the premiums, and we had broad coverage. Prescriptions were $0.50, eyeglasses were covered for the first $150 every other year, and the company covered 100% cost of routine dentistry and 80% of more complex procedures, such as wisdom tooth extractions.

    At the time I took it for granted, but it had to be a $200 a month plan, based on the much lesser plan we have now that is over $100 per month.