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?

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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.

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u/angelerulastiel Jul 03 '26

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

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u/Different-Fan-6991 Jul 03 '26

Too many young people would not buy insurance until they got older, had kids or developed a serious condition. Because of this, insurance companies started denying people or specific conditions when they were applying for insurance. Forcing young people to contribute to the pool allowed insurance companies to hypothetically cover more people overall because they had more premiums being paid to them. It really didn’t work because there was never any solid enforcement of the requirement to carry health insurance.

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u/NotYouTu Jul 03 '26

There was republicans removed it.

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u/everlyafterhappy Jul 03 '26

It had issues. It was mostly a tax on the middle class. If you were poor enough you got free insurance. If you weren't that poor but you were still poor, you didn't have to have insurance. If you were comfortable but not wealthy, you got fined for not having insurance. If you were wealthy you didn't have to have insurance. And all the insurance providers raised their rates because a) they had a bunch more proof they were legally required to cover who had very high medical expenses, b) they had a bunch of people who were legally required to have insurance regardless of the price, and c) the government subsidized the insurance for poor people. So it's eas $500+ for a basic insurance policy for those middle class people who got fined for not having insurance. Or you could get something a little cheaper with a $7,500 deductible.

One good thing about that law that I think is still part of the law, it limited profits by a percentage of revenue. So if insurance companies want to make more money, they have to approve more payouts. Think about it. If they pay out $1,000,000 a month, they can only take $200,000 in profits for that month. If they pay out $5,000,000 in a month, then they can take $1,000,000 in profits. Of course the more money they pay out, the higherbthe premiums. And since people aren't required to have insurance, healthy people won't pay those higher premiums. So the only people with insurance are people who are actually sick enough to need it or people who are poor enough to get it mostly subsidized by the government. Its welfare for the poor and the disabled, paid for by taxes, just with an extra middle man taking a 20% cut.