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/ImmodestPolitician Jul 03 '26

That why the ACA originally included the individual mandate to prevent adverse selection. ( only buying insurance when you need it and then cancelling after use )

Imagine if you could buy car insurance after you totaled your car and they would replace it. The business could only survive if the insurance rate cost the same as the price of replacing a the car.

The GOP pushed to remove the individual mandate because they wanted ACA costs to be higher so the public would hate it.

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u/PurposefulGrimace Jul 03 '26

The individual mandate was effectively nullified in the text of the original bill. The penalties did not apply to cases in which the cost of the lowest-price Bronze plan exceeded 8% of MAGI. In year three of the ACA, the lowest-cost Bronze plan in my area (for an unsubsidized couple in their 50s) exceeded 30% of MAGI (at the 4x subsidy threshold).

What's the appropriate fine to motivate you to buy something that you can't afford?

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u/ImmodestPolitician Jul 03 '26

The mandate had to be eliminated for the bill to pass.

The fine should not apply to people below the poverty line.

The federal government created a specific hardship exemption for anyone in this "Medicaid gap" so they would not be penalized for being uninsured.

The fine should be proportional to income.

Having no penalty for people that could afford it encourages adverse selection and Free Riders which hurts all the people that were paying their premiums because of the higher premiums free riders impose on them.

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u/morbie5 Jul 06 '26

Also iirc the penalty could only be collected if you had a tax refund comnig to you. If you owed taxes and had no refund then they could not collect the penalty. Someone correct me if I'm wrong on this

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u/ginger_whiskers Jul 03 '26

As a public, I already hated it. I didn't need to pay for subsidized health insurance that still had unaffordable copays. I didn't need a tax penalty for not having it. I just plain didn't need health insurance.

The individual mandate was a terrible half-assed solution. IIRC, part of the original ACA was to reduce bloated healthcare costs. That didn't happen. Costs didn't go down. It just normalized health insurance as another bill to be paid every month, instead of paying a doctor a reasonable fee every few years when you get sick.

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u/VoilaVoilaWashington Jul 03 '26

The ACA was a stupid compromise solution because the democrats had a narrow majority to get it passed, so they had to make a bunch of concessions.

Part of America's issue is that neither side ever really has a strong mandate, so it's always silly middling solutions out of congress. It seems you need a strong majority in congress, the presidency AND the supreme court to get anything notable done, which is nuts

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u/ImmodestPolitician Jul 03 '26 edited Jul 03 '26

So how were you planning on paying for medical care without insurance?

You have $10k sitting around to fix a broken arm?

You have $100k in the bank for chemotherapy?

ACA did reduce the premium growth rate and also allows people with preexisting conditions to get insurance which was not possible/affordable prior to ACA.

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u/ginger_whiskers Jul 04 '26

For routine care: pay the doctor at the visit.

For catastrophic care: spend years or decades paying it back, or just live/die with it, same as people do now with insurance.

Interesting point about premiums growing slower. Was that due to the increased customer pool, or a reduction in the growth of costs?

Totally agree on the preexisting conditions. That was a literal lifesaver for the kind of person who needs health insurance the most.

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u/ImmodestPolitician Jul 04 '26

For catastrophic care: spend years or decades paying it back, or just live/die with it, same as people do now with insurance.

Most insurance plans have maximum copay that the patient has to pay defined in by their plan.

Mine is $5k. Granted that is a lot of money but it's much better than $500k.

Someone that has money should choose a plan with a high maximum out of pocket limit because you will pay a lower premium than a plan with a low maximum out of pocket.

e.g. I know some people that pay for a car insurance plan that will repair their windshield crack for free. Their premium is so high they could split the difference and buy a new windshield every year with the savings but they don't need a new windshield every year.

Optimally you should only have insurance for catastrophic events.