Is Health Insurance Even Worth It Anymore?

Open enrollment season demonstrates some shocking annual costs of premiums and out-of-pocket maximums.

The cost of health insurance coverage these days is eye opening and raises a long-standing question: What percent of people is health insurance actually worth paying for? Premiums going up 6 percent a year isn’t a long-term sustainable solution.

Family premiums have increased 6% a year over 26 years. Wages have gone up about 3.3% in the same time period.

Here’s one tweet that’s thematic of my timeline the last few days:

These are annual premiums of over $43,000 with no tax advantage like in ESI plans, since they’re purchased on the individual market.

That leads me to two main questions:

1. If people were to go uninsured but set aside their premiums and annual deductibles or out-of-pocket maximums each year, how would they do under various medical event history assumptions?

2. What would a health insurance system that actually functions as insurance look like?

1. What would happen if instead of buying health insurance, you set aside annual premiums plus your deductible every year and paid out of pocket?

https://x.com/WallStreetMav/status/1981242579409572243

To be clear, I’m not advocating this. I’ve just always wanted to run the numbers. Is there a world in which it makes sense to avoid insurance all together and just pay out of pocket? Even when medical events get expensive? How often and how large do the insurance shocks have to be to be worth it to buy insurance?

Let’s stipulate a simple starting point:

• I’m mapping out a 26 year old for 35 years to age 60. To keep it simple, I’m going to assume they stay single the whole time. They work at a large firm that offers employer-sponsored health insurance.

• Premiums keep increasing at 6% a year. Deductibles and out-of-pocket maxes also go up 6% a year. Investments go up 4% to account for a conservative asset mix.

• This Commonwealth fund report (PDF) has premium costs in 2023 for single and families, split by employee and employer contribution. It also has deductibles. I’m going to assume out-of-pocket max in year one is $5,456 per KFF.

• We’ll waive our hands a bit and say that the employer-side contribution could be negotiated to be given to the employee instead of being covered by insurance. Granted, it should be reduced a bit by the percent of the tax advantage, but we’re keeping it simple.

You may object and say, “A cancer diagnosis costs a million dollars, which would wipe out any fund.” Correct! I’m not advocating people go without insurance. But what matters for running this thought experiment is the average expense per year.

What I’m showing you is why health insurance, in its current format, looks like a bad deal to so many people. The unanswered question is how many people?

Let’s get into three scenarios, from unlikely to more likely.:

1. Unlikely: Medical expenses each year total 75% of the individual’s deductible.

2. More reasonable: Medical expenses each year total the out-of-pocket max.

3. Relatively reasonable: Medical expenses each year total the full deductible, but every five years they total five times the out-of-pocket max as a result of a major medical event.

Over a lifetime, this is not a very realistic scenario. People have big medical expenses every once in a while.

Not surprisingly, this individual would have been vastly better off never purchasing insurance. After all, they pay a premium but never reach the cost-sharing portion where their insurer handles some of the cost.

You’ll need to hit “+ Show 15 more” to see the ending investment balance result, but it’s over a million dollars. That’d be quite a balance to take into your Medicare years.

Unsurprisingly, this is also a scenario where insurance is much more costly than being covered. An insurance company would typically handle some of the cost sharing above the deductible, but it’s still less than the premium and deductible combined.

This is the more realistic scenario. (I know it fits my medical history: Three somewhat routine surgeries in fifteen years.) You can play around with the numbers to get to a net zero investment balance or put together a few major expense years close together to make it go negative, but the numbers are illustrative.

2. What would health insurance that actually functions like insurance look like?

Let’s remind ourselves what insurance is supposed to be for: Large, unexpected, costly events. You pay premiums to cover those costs and pay out of pocket for routine, inexpensive, and predictable costs.

Car insurance is the classic example: You pay insurance for when you get into a major accident. You don’t use your insurance to pay for routine and expected costs like gas, oil changes, and tire rotations.

Let’s also remind ourselves how health insurance differs from normal insurance: It covers routine, inexpensive, and predictable costs. In fact, health insurance is mandated to cover those things (see: the Affordable Care Act). Routine doctor visits, laboratory services, preventative wellness visits, and vaccinations are mandated as Essential Health Benefits (EHBs) that all individual and small group health insurance plans must cover. Various preventative measures have no deductible to enrollees.

The unpopular truth is that health insurance in America covers too many things. Health insurance is largely about pre-payment of care. All health care shouldn’t go through health insurance. Premiums and deductibles are high because everything goes through insurance.

What would a health insurance system that looks like car or home insurance look like? I’d say one with much lower premiums, higher out-of-pocket cost-sharing, and everyday expenses like routine doctor visits, regular lab panels, vaccinations, and generic prescriptions (high blood pressure, statins) handled directly and not covered by insurance.

More health insurance would be catastrophic in nature. The above examples demonstrate a person going without health insurance and saving the money instead. How about instead of going without, they purchase catastrophic insurance, pay much lower premiums, and pay up to a higher out-of-pocket max?

By necessity, there would be less third party payment and much more direct billing to consumers. As scary as that sounds for people, it’s the way that would actually harness the tried-and-true competitive pressure that leads to lower prices and higher quality.

I know I’d rather pay for a Direct Primary Care membership, have catastrophic insurance that covers medical spending above a certain dollar value, and contribute to an HSA every year in the meantime while I’m healthy.

This sort of system requires a more permissive health insurance market that allows insurance companies to remove large parts of mandated coverage. After all, why mandate what type of coverage is needed? Why not just set allowable dollar values and let people get whatever coverage works for them that year?

When you sign up for car insurance, you get a menu from the insurer that allows you to change your coverage amount for various categories (comprehensive, collision, bodily injury) and see how it changes your premium in real time. I’d love to have much more control over health insurance options. And I’d have to think insurance companies would love to offer them.

In short, more sensible health insurance would:

• Cover less low level medical procedures, office visits, and prescriptions

• Function more like catastrophic insurance that kicks in above a high dollar threshold

• Have relatively low premiums and encourage dedicated saving for health expenses

• Be customizable to a much greater extent than current options

Nearing the Breaking Point

The numbers above are just for a single individual. The magnitudes are greater when running them for family plans, and they get sillier when you start to use the premiums charged to ACA individual market plans.

It’s not that health insurance should be a winning proposition for everyone. By definition insurance is on average net negative for people buying it. But when it’s extremely net negative for so many people, then there are big improvements to make.

Insurance should protect against risk, not guarantee consumption through pre-payment. It seems like we’re getting to a breaking point where health insurance, as it currently works in the United States, is due for a major overhaul.