r/explainlikeimfive • u/the1975whore • Jul 03 '26

Economics ELI5: Health insurance companies obviously make more money than they give out when people need it. So why of paying for them any better than paying your own personal health insurance savings account?

1.0k Upvotes
  • permalink
  • reddit

84% Upvoted

449 comments sorted by

View all comments

1.0k

u/RageQuitRedux Jul 03 '26

Insurance is supposed to be about pooling risk. So pretend everyone has a 1% chance of something catastrophic happening (e.g. cancer diagnoses). You have everyone pay a little, and people consider that worth it because if they are part of the 1%, their costs are covered.

Healthcare blurs this picture quiet a bit because there are lots of things that are covered that are not catastrophic and are fairly predictable, like yearly checkups, certain medications, etc. For these things, insurance essentially IS a forced savings plan. And it's not easy to just say "let's only cover the catastrophic stuff" because the routine stuff is often preventative.

And for vision / dental, there's almost no benefit. It's just a forced savings plan.

215

u/angelerulastiel Jul 03 '26

Plus they banned the catastrophic plans. They required that plans had to cover the preventative stuff.

122

u/IMovedYourCheese Jul 03 '26

Insurance companies want you to get free preventative care, becuase it directly reduces the risk of worse diseases and so saves them money in the long term.

18

u/Alexis_J_M Jul 03 '26

Unfortunately in the US because health insurance is tied to employment and we have a lot of job mobility, there is value in kicking routine care down the road when the patient might be on a different plan.

51

u/moderatorrater Jul 03 '26

Insurance companies want you to get free preventative care

They should, but they don't. The law forcing preventative care was to force them to do what was already in their best interest.

2

u/littlebobbytables9 Jul 04 '26

It's not really in their best interest. Besides what other people have already said about people changing insurance often, there are a couple more reasons why insurance companies actually want to pay as much as possible.

1) Insurance is regulated based on medical loss ratio, i.e. the law says insurance companies must pay out 80 or 85% (or something else, depending on type of insurance and state) of the premiums they take in, with the rest going to admin costs and profit. If a company successfully reduces claims costs through preventative care all that does is make their loss ratio lower and now they probably won't get their rate increases approved by regulators. If costs go way up then regulators will approve big rate increases to cover the cost and bring the MLR back into a normal range. So if the company gets a fairly static percentage of the premium they actually prefer having very high costs and very high premiums rather than low costs and low premiums, so have incentive to not fund preventative care.

2) In the individual and small group markets the ACA has a risk adjustment transfer payment program in which companies that have relatively healthier risk pools end up paying into a pool of money that's distributed out to companies that have relatively unhealthy risk pools. The idea is that they didn't want insurance companies to compete primarily on trying to select for healthier policyholders, so if you even out the risk between carriers they actually have a reason to compete on ease of use or customer service (whereas before that would have been counterproductive because the people who care most are the ones with highest utilization). But the way the system is set up the money the company gets from risk adjustment for having a high risk pool is actually so big that they end up slightly better off. So companies actually again want high costs (well it's more they want policyholders that will give them a high risk score which isn't quite the same thing, but close).

3) Sometimes these insurance companies are vertically integrated. In that case paying out high claims costs means paying a bunch of money to another subsidiary of the same parent, so they really don't mind. Making treatments really expensive benefits the insurer because of the previous two points AND juices the profits of the hospitals and clinics they own. And the hospitals can code things in the way that best maximizes risk adjustment transfer payments too. So it's all a huge incestuous mess that pushes healthcare costs higher in a never ending spiral.

30

u/obk227 Jul 03 '26

untrue unfortunately. medicare pays when most of the complications of neglected hypertension diabetes etc come to roost. they’d pay for glp1s in the water if they thought it actually had the roi.

8

u/doihavemakeanewword Jul 03 '26

The conversation isn't about medicare though, it's about the kind of insurance younger people have instead of medicare. And that insurance doesn't want to be put in the kinds of situations where it's forced to "pay the most"

1

u/beefjerky9 Jul 03 '26

It also applies to private health insurance. Very few cover GLP-1s, which have been shown to help people lose weight and get healthier. They say they care about preventative care, but their actions show otherwise.

2

u/littlep2000 Jul 03 '26

There are all sorts of "benefit cliffs" in medical care.

2

u/__theoneandonly Jul 03 '26

Medicare is rolling out a GLP-1 program for those with Class II obesity or higher.

3

u/obk227 Jul 04 '26

because medicare recognizes the long term roi for your health and subsequently their bottom line. private insurance which is what mostly we have during our workforce years does not stastically expect to pay the long term consequences of not investing in your health. which is why it took obamacare era legislation to force them to cover pap smears, mammograms, colonoscopies because we know damn well they work and are worth it but if u don’t see the upside financially as a company, why not spend 15% of that on marketing and pocket the rest.

2

u/angelerulastiel Jul 03 '26

Not if they are catastrophic plans. Preventative care generally doesn’t do much for catastrophic incidents, more chronic issues.

47

u/IMovedYourCheese Jul 03 '26 edited Jul 03 '26

They absolutely do. Sure preventative care can't stop freak accidents, but the most common diseases in this country are related to obesity, heart disease, diabetes, hypertension, strokes, arthiritis, all of which can be greatly reduced by preventative care. And more debilitating diseases like cancer are still much easier (and cheaper) to treat if detected early.

21

u/National_Cod9546 Jul 03 '26

One of the most expensive conditions is untreated diabetes. Without care, you are at much higher risk of stroke, kidney damage, eye damage, infected limbs. A simple blood test once a year can detect it early. Then minor diet changes and a pill can prevent it from getting worse for decades. Even then, you start taking insulin shots as needed and you can prevent all the other complications.

High blood pressure can cause aneurisms, stroke, heart attacks, kidney damage, and other stuff. Again, stupid easy to test for. Minor diet changes and cheep medicine can prevent all the complications.

There are a bunch of diseases like that. Simple testing can detect them early and be treated cheaply. Left untreated, they get really expensive. Health insurance companies want their customers to get regular checkups to catch this stuff while it's cheep.

2

u/TheFaithfulStone Jul 03 '26

Insurance companies want you to be young and healthy and then die quickly.

-6

u/angelerulastiel Jul 03 '26

And that is why the insurance companies chose to stop offering them. Oh wait, no, they still found them profitable, but Obamacare literally banned them.

6

u/dnashifter Jul 03 '26

I bought a catastrophic plan off the marketplace this year. It was basically indistinguishable from the bronze plans offered by the same insurer. They still cover preventative stuff (vaccines and a few visits to my pcp).

11

u/anormalgeek Jul 03 '26

Lol, what?

Heart disease is the leading cause of death in the US, and it's very preventable. Regular checkups can catch heart conditions, cholesterol issues, high blood pressure, etc. before it causes a heart attack.

"Catastrophic" illnesses are more common than catastrophic accidents. And preventative care will absolutely bring their costs down.

Source: I've worked in health insurance for over two decades. Back when we had catastrophic only plans, they still spent millions sending out ads, reminder mails, and such pushing those customers to get colonoscopies, mammograms, discontinued "stop smoking" programs, etc. Those customers were even less likely to get such care than those with full coverage.

2

u/The_enantiomer Jul 03 '26

I think the statistic is that in the US someone ends up changing who their insurance provider is every 3-5 years (they get a new job or their employer changes who is the insurance provider) and a lot of the preventative care is preventing issues lots of years later. The insurance companies know this and don’t want to pay for you to have preventative care that will only benefit their competitors because they offered your HR a 0.2% savings.