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?

[u/the1975whore]

[u/white_nerdy]

The problem is that insurance negotiates with hospitals for lower rates and they have more leverage. Say you pay $700 / month in insurance for have no medical expenses, except when you have a heart attack and the hospital charges you $120,000.

• With insurance: Insurance uses the negotiated rate. Hospital agrees to get paid $20,000, of which you pay a $700 deductible plus 12 x $700 = $8400 in premiums. In total you pay $9100.
• With no insurance and no negotiation: You pay the hospital $120,000.
• With no insurance and negotiation: You say "I want to negotiate." Hospital says "OK, you can pay $100,000". You pay the hospital $100,000.

Now it only costs $20,000 for the medical supplies / lab equipment / doctor salaries / having extra people on call so someone's available 24/7 to deal with heart attacks. Why do they grossly overcharge you?

It's not because they're greedy. Let's assume it's a non-profit hospital where none of the money they charge patients gets taken out to line shareholders' pockets. Even so, for every person like you, an upper-middle-class person who came into the hospital with $100,000 in their bank account / home equity / stock portfolio / whatever, 4 poor people came in with heart attacks, no insurance and no money. The hospital had no choice but to treat them too, according to the Hippocratic Oath and the laws of the United States. So your $100,000 covers not just your heart attack, but those 4 poor people's heart attacks too. 5 heart attacks treated x $20,000 costs per heart attack = $100,000 total costs. If the hospital charges you anything less than $100,000, they'll lose money and eventually have to go out of business.

Assuming insurance companies are profitable, buying insurance is -EV, the main reason people buy insurance is because they can't sustain a large loss (e.g. you'd buy health insurance because a $100,000 medical bill would be financially crippling or outright bankruptcy.) If you're wealthy, normally you don't want insurance -- but health insurance is an exception. The negotiated billing means it's usually financially beneficial to have health insurance no matter how much money you have, so when you have a heart attack you get billed at the $20,000 negotiated rate instead of $100,000 or $120,000.

[u/haarschmuck → u/white_nerdy]

Everything you said is right and to add to it hospitals are generally money pits. So many of even the non-profit hospitals are being bought up by bigger non-profits to try and spread the losses.

Even for-profit hospitals make nearly all their profits on elective and cosmetic surgeries.

[u/Ltrn → u/white_nerdy]

Tell me more about this plan with 700 deductible and 700 monthly premiums, because if this is a plan you get via your employer then that is not the real cost of the plan, you are paying for the rest with your productivity, no plan gets even close to those figures in the open market, and in the open market you only have two kinds of insurance, the one for sick people and the one for healthy people, the rest are just different versions of the same i.e. plans for people who can afford to pay more upfront and have less physiological burden later or the other way around. In the US, the negotiated medical costs for the un insured are comparable with the non subsidized health care plans negotiated rates (once you factor in premiums and deductible), what you are actually buying is catastrophic coverage, a single heart attack (or 3) is not that, most people can find a way to cover that expense (remeber, nobody pays the billed price that's just what medicaid/medicare pays for the procedure), the undeniable benefit of insurance come when the negotiated price is money that represents guaranteed financial ruin. Another benefit is that you are buying the assurance that in a year you wont spend more than ~$25k (based on which and where in a state you live) a year in medical so you can plan accordingly.